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May 30, 2015

EPA Slashes Corn Ethanol Targets Under Proposed Renewable Fuel Standard

Renewable Diesel Takes Smaller Cut

Jim Lane

“EPA continues to assert authority under the general waiver provision to reduce biofuel volumes based on available infrastructure,” says BIO. “This is a point that will have to be litigated. It goes against Congressional intent.”
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In Washington, the EPA released its proposed standards for 2014, 2015, and 2016 and volumes for renewable fuels. The volumes, as widely expected, include substantial reductions from the statutory standards in the original 2007 Energy Independence & Security Act. The EPA also released a 2017 proposed standard for biomass-based diesel.

Yet, while attracting significant industry criticism on volumes, the EPA won some cautious praise for cautiously advancing renewable fuels targets for 2014-16.

In today’s Digest, we have a complete coverage of the volumes, round-up of industry reaction, plus a look at the EPA’s rationale, the infrastructure dilemma, the options to change EPA’s proposal in the comment period, and the industry’s short-term and long-term options should the rule be finalized as proposed.

At a glance: 2014, 2015, 2016 volumes

RFS-2015-2

* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.

Detail: Growing levels of renewable fuels

RFS-2015-4

RFS-2015-3

RFS-2015-1

Detail: The proposed rule for 2015

The proposed volumes are (in billons of US gallons):


Proposed Statutory volume for 2015
Cellulosic 0.106 3.000
Biomass-based diesel 1.700 1.000
Advanced biofuel 2.900 5.500
Renewable Fuel 16.300 20.500

* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.

The effective corn-ethanol mandate is (in billons of US gallons):


Proposed Statutory volume for 2015
Corn ethanol 13.400 15.000

Detail: The proposed rule for 2016

The proposed volumes are (in billons of US gallons):


Proposed Statutory volume for 2016
Cellulosic 0.206 4.250
Biomass-based diesel 1.800 1.000
Advanced biofuel 3.400 7.250
Renewable Fuel 17.400 22.250

* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.

The effective corn-ethanol mandate is (in billons of US gallons):

Corn ethanol 14.000 15.000

Detail: The proposed rule for 2014

The proposed volumes are (in billons of US gallons):


Proposed Statutory volume for 2014
Cellulosic 0.033 1.750
Biomass-based diesel 1.630 1.000
Advanced biofuel 2.680 3.750
Renewable Fuel 15.930 18.15

* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.

The effective corn-ethanol mandate is (in billons of US gallons):

Corn ethanol 13.250 14.400

The EPA says:

EPA writes: “EPA has evaluated the availability of qualifying renewable fuels and factors that in some cases constrain the supply of those fuels to the vehicles that can consume them. EPA has also considered the ability of the market to respond to the applicable standards by producing changes in production, infrastructure, and relative pricing to boost the use of renewable fuels.

“Based on these and other considerations, EPA is proposing volumes which, while be­ low the volumes originally set by Congress, would increase renewable fuel use in the U.S. above historical levels and provide for steady growth over time. In particular, the proposed volumes would ensure continued growth in advanced biofuels, which have a lower greenhouse gas emissions profile than conventional biofuels. EPA is also proposing to increase the required volume of biomass-based diesel in 2015, 2016, and 2017 while maintaining the opportunity for growth in other advanced biofuels that is needed over the long term.

“Due to constraints in the fuel market to accommodate increasing volumes of ethanol, along with limits on the availability of non-ethanol renewable fuels, the volume targets specified by Congress in the Clean Air Act for 2014, 2015 and 2016 cannot be achieved. However, EPA recognizes that the statutory volume targets were intended to be ambitious; Congress set targets that envisioned growth at a pace that far exceeded historical growth rates. Congress clearly intended the RFS program to incentivize changes that would be unlikely to occur absent the RFS program. Thus while EPA is proposing to use the tools provided by Congress to waive the annual volumes below the statutory levels, we are proposing standards that are directionally consistent with Congress’ clear goal of increasing renewable fuel production and use over time. The proposed volumes would require significant growth in renewable fuel production and use over historical levels. EPA believes the proposed standards to be ambitious but within reach of a responsive marketplace.”

The new EPA view, summarized

The EPA’s line of thinking is essentially this: they are considering that supply exists where that supply can find a market given existing infrastructure. So, if the market can only tolerate, say, 14 billion gallons of E10 ethanol, they do not consider capacity or production as “supply” rather, they look to alternative fuels (such as drop-ins) and, in that case, don’t see the production.

The practical goal for the EPA is not to use the RFS2 renewable fuels schedules as a driver to produce investment in capacity-building or infrastructure for distribution. Rather, the EPA opts for a more passive role of providing a market for those capacities that are built based on incremental, if any, changes in infrastructure.

Beyond the blendwall, the hidden issues

EPA wrote in 2013: “Although the production of renewable fuels has been increasing, overall gasoline consumption in the United States is less than anticipated when Congress established the program by law in 2007.”

In its own way, the EPA is signaling that it believes that the original mandates were set, as volumetric rather than percentage standards, at a time when it was believed that the overall gasoline market would be much larger. Lower gasoline volumes — which in their own way reduce emissions – in the EPA’s view bring on issues such as blend walls faster and more intensively, and require regulatory relief.

Options in the courts: Suing to enforce the 2015 statutory numbers

It’s going to be tough for the biofuels industry to sue to enforce the overall statutory volumes, given the shortfall in cellulosic biofuels — even though the EPA is wading into regions of doubtful legislative intent in using blendwall issues as a reason to cut the corn ethanol target. The authority of EPA to waive down cellulosic mandates in unquestioned, in the absence of production capacity — but their authority to waive down renewable fuel standard obligations in the absence of infrastructure being deployed is bound to suggest to incumbents that the best way to prevent renewable fuels is to ensure that there is no investment in distribution.

Why not balance less corn ethanol with more advanced biofuels?

The fear — rightly or wrongly — is that the advanced pool will be drowned in low-cost, imported ethanol that qualifies for the advanced biofuels pool — and exacerbates the blendwall issue that it sees in the marketplace. So, they have increased the advanced pool, but kept it quite close to the biobased diesel volumes.

At the end of the day, there’s not much production out there, outside of the biomass-based diesel capacity (representing renewable diesel and biodiesel) and the cellulosic fuels capacity. At scale, there are some providers such as Aemetis that can produce qualifying advanced ethanol at scale using the milo-biogas pathway, and there’s sugarcane ethanol.

Why is industry deeply disappointed?

RFS2 is based in production targeting, but it is ultimately about requiring distribution. The renewable fuels industry is taking the view that the E10 blendwall issue was well understood, at a technical level, by Congress when they passed the EISA Act — and that the law places the onus on the conventional fuel industry to develop distribution solutions, so long as the production is there.

Well, the production is there. The conventional fuels industry did not develop the distribution solutions, and the EPA is waiving the obligation. To the renewable fuels industry, it looks like rewarding the oil industry for doing nothing. And stranding renewable fuels capacity that was built in reliance on Congress and RFS2 to provide a market.

So, it’s a distribution war. Renewable fuels distributors haven’t built much to speak of — a few thousand outlets feature options for consumers to purchase high-blend renewable fuels. Congress gave every indication that they would expect rising RIN prices would compel obligated parties to find distribution solutions.

When RIN costs rose, the oil industry correctly foresaw that by waving the flag of “exploding prices at the pump,” they could count on the White House and Congress to cave in.

Industry reaction

Brent Erickson, executive vice president of BIO’s Industrial & Environmental Section

EPA has proven they still don’t understand the advanced biofuel industry’s need for policy stability. The RFS was designed by Congress to tear down the so-called blendwall by providing a market floor for biofuels that would enable us to attract capital for construction of new biorefineries and commercialization of advanced technologies. Instead, EPA is helping the oil industry build the blendwall to keep advanced biofuels out of the market.

Just as advanced biofuel companies began to successfully commercialize new technologies, EPA proposed to turn the RFS methodology upside down. That policy instability is responsible for chilling as much as $13.7 billion in investments that the advanced biofuel industry needed to build capacity to meet the RFS goals. Now EPA and the Obama administration claim to be scratching their heads as to why our industry hasn’t built more capacity.

And while the President took time on Thursday to warn that climate change will worsen storms in the future, EPA’s actions on the RFS have already resulted in 21 million metric tons of additional CO2 emissions — equal to putting 4.4 million more cars on the road or opening 5 new coal-fired power plants, which will only increase with today’s proposal.

EPA continues to assert authority under the general waiver provision to reduce biofuel volumes based on available infrastructure. This is a point that will have to be litigated. It goes against Congressional intent.

EPA has proposed higher volumes for advanced biofuels, still below the statutory volumes, but maintained a methodology that discourages investment in the industry. That will likely undercut future production, requiring additional cuts to volumes in future.

Michael McAdams, president, Advanced Biofuels Association

“The Advanced Biofuels Association looks forward to reviewing the complex, multi-year proposal unveiled today in detail and submitting our official comments on this important regulation. We are grateful for the EPA’s good-faith efforts to support this industry, today’s proposal is a step in the right direction and gives more growth potential to advanced and cellulosic biofuels relative to the original proposal. However, we continue to believe that the cellulosic waiver credit and other areas require legislative reform. We look forward to continuing to work with Congress and the Administration to reform and strengthen the RFS so it can deliver on the promise of next-generation renewable fuels.”

Bob Dinneen, president and CEO of the Renewable Fuels Association

“EPA has to be given some credit for attempting to get the RFS back on track by increasing the renewable volume obligations (RVOs) over time. But the frustrating fact is the Agency continues to misunderstand the clear intent of the statute — to drive innovation in both ethanol production and ethanol marketing. The Agency has eviscerated the program’s ability to incentivize investments in infrastructure that would break through the blend wall and encourage the commercialization of new technologies. By adopting the oil company narrative regarding the ability of the market to effectively distribute increasing volumes of renewable fuels, rather than putting the RFS back on track, the Agency has created its own slower, more costly, and ultimately diminished track for renewable fuels in this country.

“Today’s announcement represents a step backward for the RFS. EPA successfully enforced a 13.8 billion gallon RVO in 2013. The industry produced 14.3 billion gallons of ethanol last year. There is no reason to promulgate an RVO rule that takes us backward. All it will do is result in an ever-increasing supply of renewable fuel credits (RINs) that will further discourage private sector investment in infrastructure and technology. This doesn’t make sense.

“The EPA plan fundamentally places the potential growth in renewable fuels in the hands of the oil companies — empowering the incumbent industry to continue to thwart consumer choice at the pump with no fear of consequence for their bad behavior. That is not what the statute intended. And that is not what’s in the best interests of consumers — who will be denied greater access to the lowest cost liquid transportation fuel and octane source on the planet.”

Joe Jobe, CEO, National Biodiesel Board

“It is not perfect, but it will get the U.S. biodiesel industry growing again and put people back to work. I want to thank Administrator McCarthy and Secretary Vilsack for restoring growth to the program and for their commitment to renewable fuels.”

“Biodiesel has proven that Advanced Biofuels can do just what we said they would, which is create jobs and strengthen our energy security while significantly cutting harmful pollution from petroleum,” Jobe said. “Biodiesel has displaced more than 8 billion gallons of petroleum diesel in the U.S. over the last decade. That is an incredible achievement, and we will build on that success under the proposal the EPA released today.”

“However, more can be done, and we particularly look forward to working with the administration on strengthening biodiesel volumes for 2016 and 2017 during the comment period in the coming weeks.”

Brian Jennings, Executive Vice President, American Coalition for Ethanol

“Promises to get the RFS back on track and USDA funding for flex fuel pumps are appreciated, but EPA is yet again proposing to circumvent the RFS by limiting ethanol use to the amount oil companies are willing to blend with the gasoline they refine and not one gallon more. It’s like the NFL saying it’s ok for the New England Patriots to deflate footballs while everyone else must play by the rules.”

As expected, proposed volumes for the 2014 RFS largely reflect actual use. The Agency intends for renewable fuel use to increase from 2014 to 2016. But EPA’s proposed blending targets for 2015 and 2016 fall back on the E10 “blend wall” methodology which has disrupted RFS implementation for more than a year. Earlier this week the U.S. Department of Energy’s National Renewable Energy Laboratory released a report confirming that most retail infrastructure is already compatible with E15. The majority of cars on the road can use E15.

“EPA was forced to withdraw their original 2014 proposal because the law doesn’t allow them to use the blend wall to set levels and doing so undermines the integrity of the program. The good news is that there is still time to get the RFS back on track,” Jennings said. “We will provide ACE members and biofuel supporters a platform to once again blitz EPA with comments before the final rules are issued on November 30.”

Tom Buis, CEO, Growth Energy

“Today’s proposals are better than EPA’s initial proposed rule for 2014, but they still need significant improvement. We have sincere concerns that these proposed numbers are not moving forward to the degree that Congress had intended for the RFS.

“It is unfortunate that EPA chose to side with the obligated parties who have deliberately refused to live up to their obligation to provide consumers with a choice of fossil fuels or lower cost, higher performing, homegrown renewable energy at the pump. Everyone in Congress, as well as all parties in the renewables and oil industry, knew when this legislation was debated and passed into law that the only way the RFS goals could be met was by introducing higher blends into the market moving forward. Now the obligated parties, controlled primarily by Big Oil, have refused to live up to their obligation and the initial read on EPA’s proposal is they have simply acquiesced to the demands of Big Oil.

“One thing that everyone should keep in mind is that this a proposed rule. We will continue to analyze and review these proposals for 2014, 2015 and 2016. Furthermore, Growth Energy will file exhaustive comments with EPA. Just as we successfully commented on the original 2014 RVO proposal by EPA, which ultimately forced EPA to reconsider their initial flawed rule, we are confident that our forthcoming comments will highlight the changes that are necessary to meet the goals of the RFS.

Elizabeth Farina, President, UNICA (Brazilian sugar growers association)

“While UNICA is disappointed that today’s Renewable Fuels Standard proposal from the U.S. EPA significantly reduces target volumes for advanced biofuels below Congressionally mandated levels, we are pleased to see growing requirements for advanced biofuels in 2015 and 2016. This leaves the door open for continued American access to sugarcane ethanol, one of the cleanest and most commercially ready advanced biofuels available today.

“EPA identifies Brazilian sugarcane ethanol as an advanced biofuel because it reduces greenhouse gases by more than 60 percent compared to gasoline. This advanced biofuel from an American ally plays a modest but important role supplying the United States with clean renewable fuel. For the past three years, more than one billion gallons of sugarcane biofuel imported from Brazil flowed into American vehicles. During this time, sugarcane ethanol has comprised only 2 percent of all renewable fuel consumed by Americans, but has provided nearly 15 percent of the U.S. advanced biofuel supply.

“Our association looks forward to commenting on this proposal and will continue to play an active role in the RFS rulemaking process, serving as a source of credible information about the efficiency and sustainability of sugarcane ethanol. Likewise, Brazil will continue to be a strong, dependable partner helping America meet its clean energy goals.”

Jeff Lautt, CEO, POET

“Today’s proposal by the EPA puts the oil industry’s agenda ahead of farmers and rural America. While the EPA is correct in recognizing the intent of Congress to continue growth in biofuels, the targets announced today fall well short of rural America’s potential to produce low-cost, clean-burning ethanol.

“America’s farmers have answered the call laid out in the Renewable Fuel Standard to help wean our nation off of foreign oil. Agriculture has taken incredible strides in recent years, growing yields through efficient farming practices and technology improvements, and we have all reaped the benefits of that labor through greater availability of high-performance, domesticly produced ethanol. Rural America has upheld its end of the deal, and I ask that the EPA uphold Washington’s end.

“Some in Washington do understand what’s at stake and are still committed to rural America. The announcement by Sec. Vilsack today that UDSA would provide funds for flex pump infrastructure aims to increase consumer access to clean, high-performance fuel produced here at home. It is an effort obligated parties should have been driving since the RFS became law. We hope Sec. Vilsack’s commitment to clean fuels and rural America rubs off on some of his colleagues in the Administration.

“For the sake of consumer choice, rural jobs and strong markets for farmers, I hope the EPA fixes its mistakes in the proposed rule and recognizes our nation’s capability to power itself with clean, renewable fuel.”

Monte Shaw, executive director, Iowa Renewable Fuels Association

“Today’s RFS proposal gives in to Big Oil lies and turns its back on consumers, fuel choice, and the environment. The Obama Administration has no legal authority to reduce the ethanol numbers. For conventional biofuels, this is a path to nowhere. The proposed ethanol level for 2016 is less than what we already produced in 2014. This proposal will not crack the petroleum monopoly and will not allow consumers to benefit from the choice of lower-cost E15 and E85. As we’ve done over the past year, we’ll continue to work with all parties to fix this proposal.”

“It’s a positive that the proposal does allow for some growth in biodiesel. However, EPA inexplicably fast tracked Argentinian biodiesel imports earlier this year, and today’s proposed rule fails to take those imports into account. As this could actually lead to lower U.S. biodiesel production, we’ll be focused on working to improve the biodiesel targets for 2016 and 2017 during the comment period.”

“Last year Iowans swamped the EPA with negative comments on the previous RFS proposal. While this new proposal is better, it’s a far cry from good enough. We need Iowans to once again step up and tell the EPA to follow the law and to let the RFS crack the oil monopoly as Congress intended.”

Adam Monroe, President, Novozymes Americas

“Renewable fuels are a huge opportunity for the United States to achieve President Obama’s climate change goals, capture private investment, create jobs and save drivers money. Today’s proposal undermines all of that.

“We are disappointed that the agency is allowing Big Oil to maintain an artificial impediment like the so-called blend wall. While President Obama is pushing to reduce greenhouse gas emissions in other sectors, he is letting the oil industry attack climate-smart alternative energy.

“The only way the world will use more renewable energy is with bold leadership and bold policy. The EPA’s aspiration should not be a slow buildup in renewable fuel volumes, it should be an economy driven by clean technologies, supporting thousands of new jobs and billions in private investment. That all starts with aggressive goals for the RFS.

“During the comment period, we urge the Administration to rethink its approach and support an existing law that works: the Renewable Fuel Standard. Together, we can get this right. If America does not capitalize on the benefits of home-grown fuel, other countries will. In fact, they already are.”

Industry opponent reaction

Emily Cassidy, Research Analyst, Environmental Working Group

Using the Environmental Protection Agency’s own estimate, we calculate that the corn ethanol mandate has been worse for the climate than projected emissions from the controversial Keystone XL pipeline.

What makes matters worse is that the EPA is about to mandate that more corn ethanol must go into American gas tanks. Today the EPA proposed new minimum volumes of corn ethanol that refiners would be required to blend into gasoline this year and the next. Congress set this policy, called the Renewable Fuel Standard, in the Energy Independence and Security Act of 2007. At the time, lawmakers hoped that using ethanol and other renewable fuels would reduce carbon emissions and American dependence on foreign oil.

Last year, corn ethanol producers churned out 14 billion gallons, about 13.4 billion gallons of which were blended into the 135 billion gallons of gasoline the nation’s drivers used.

Extracting tar sands and turning them into oil is more energy-intensive than traditional drilling for petroleum. According to the Natural Resources Defense Council, dirty oil transmitted from Alberta, Canada, to the Gulf Coast by the Keystone Pipeline would emit 24 million tons of carbon per year. But our calculations show that last year’s production and use of 14 billion gallons of corn ethanol resulted in 27 million tons more carbon emissions than if Americans had used straight gasoline in their vehicles. That’s worse than Keystone’s projected emissions. It’s the equivalent of emissions from seven coal-fired power plants.

So far the federal corn ethanol mandate has resulted in a massive influx of dirty corn ethanol, which is bad for the climate and bad for consumers. The only interest it benefits is the ethanol industry. As we’ve said before, it’s time for Congress to correct course and reform the broken Renewable Fuels Standard to make way for truly green biofuels.

Comment period

Once the proposal is published in the Federal Register, it will be open to a 60 day public comment period through July 27.

What can industry do to change these outcomes?

The industry has two options, in general.

1. Demonstrate a stronger market for higher ethanol blends such as E15 or E85. This would contribute to restoring gallons lost in the overall renewable fuels pool — and, essentially, benefit corn ethanol producers.

2. Demonstrate a stronger biomass-based diesel production capacity, which should be a no-brainer, but also convince EPA that production capacity can and would translate into actual production.

Where can growth occur, outside of RFS2 rules and targets?

The RFS2 targets should incentivize all parties in renewable fuels to shift strategies more towards driving consumer demand over compliance-driven demand.

This means:

1. Build the higher-blend ethanol market based on price and positive community attributes as perceived by the consumer.

2. Build the biomass-based diesel market based on corporate demand for B5 blends based on social, and price-hedging opportunities — while limiting the practical impact of any differential in street prices of diesel vs biomass-based diesel by having low-level blends (that is, a $1.00 per gallon cent cost differential translates into a nickel a gallon at B5 blend levels).

3. Building markets in diesel and jet fuel based on overall price parity. That is, building a case that fuel price should include a) the cost of volatility and risk with fossil commodity fuels; b) the social costs, such as disappointing end-use customers who prefer renewable fuels, and c) differential in maintenance costs and engine replacement cycles.

4. Rely on the EPA to support long-term capacity building in cellulosic biofuels with appropriate market mandates.

The bottom line

Clearly the industry is apoplectic over the the strategic shift at EPA. As BIO’s Brent Erickson tipped, “EPA continues to assert authority under the general waiver provision to reduce biofuel volumes based on available infrastructure. This is a point that will have to be litigated. It goes against Congressional intent.”

For corn ethanol, there is going to be a strong push back based on hopes that persuading EPA to stick with a tough mandated number will prompt the conventional fuels industry to push through wider adoption of E15, which would be good not only for corn ethanol, but ultimately for advanced ethanol fuels when they are available in higher numbers.

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.


May 29, 2015

Saudis Confirm Switch from Oil to Solar

By Jeff Siegel

al-naimiYou probably wouldn't recognize him if you saw him on the street.

Heck, you probably don't even know his name.

But Ali Al-Naimi is one of the most powerful men in the world.

As the Saudi oil minister and chairman of Saudi Aramco, Al-Naimi is not particularly popular with U.S. oil producers, especially after telling the media he didn't care if oil prices crashed to $20 because it was not in the interest of OPEC producers to cut production — regardless of price.

Still, he remains the most influential oilman on the planet. Listed as one of Forbes' 50 most powerful people in the world, Ali Al-Naimi may not feel the love in Texas, but his influence is unquestionable.

So last week, when he made the following statement, the gatekeepers of the global energy economy blinked...

In Saudi Arabia, we recognize that eventually, one of these days, we’re not going to need fossil fuels. I don’t know when - 2040, 2050 or thereafter. So we have embarked on a program to develop solar energy. Hopefully, one of these days, instead of exporting fossil fuels, we will be exporting gigawatts of electric power.

Al-Naimi also added:

I believe solar will be even more economic than fossil fuels.

And he calls himself an oilman!

One of these days...

Sarcasm aside, Al-Naimi is right.

One of these days, we're not going to need fossil fuels.

We're not going to need gasoline or diesel to fuel our vehicles because in the future, our vehicles will not be reliant upon outdated internal combustion technology.

We're not going to need coal or natural gas to juice up our grid because those resources will simply be too expensive and environmentally burdensome to rely upon.

But let me assure you, dear reader, that this “one of these days” scenario is pretty far off.

Although I'm without a doubt one of the biggest advocates for transitioning our energy economy to one that is primarily built on cleaner energy, moving from a fossil fuel-dominated world to a renewable energy-dominated world will take more than 25 to 35 years.

Renewable Energy is the Future

Don't get me wrong; this transition is well underway. And those making the important investments in renewable energy today will be the dominant energy providers of tomorrow.

Don't think for a second that companies like Tesla (NASDAQ: TSLA), Google (NASDAQ: GOOG), and Apple (NASDAQ: AAPL) are embracing cleaner energy because they're run by a bunch of tree-huggers.

Renewable energy IS the future, and embracing it in its earliest stages is little more than a very smart investment decision.

By the end of this decade, solar will be competitive with all forms of fossil fuel power generation in nearly every city, town, and neighborhood on the planet. In some places, it's already there.

New developments in energy storage are not 50 years away — they're here today. In another 10 to 15 years, innovations like Tesla's Powerwall will be ubiquitous.

Electric cars — not even representing 1% of all the cars on the road today — will conquer 20% of the entire new car market in less than 15 years.

By 2030, we'll be moving people and freight at speeds in excess of 500 miles per hour using hyperloop technology. Centuries-old rail systems will find new homes in museums, and short-range air travel will become almost non-existent.

But here's the thing...

Even with all of these wonderful and exciting innovations that will move us forward as a global society, it's highly unlikely that all of the world's energy needs in 2050 will be met without the inclusion of fossil fuels.

That being said, the demand for fossil fuels is definitely going to decrease dramatically, and in a relatively short amount of time.

Your Grandkids Will Thank You

By 2030, 30% of the U.S. will be powered by renewables. And that's a conservative estimate.

By 2040, we'll be at 45%, and by 2050, we'll be well above 70%.

As far as transportation is concerned, I suspect that by 2050, they won't even be building internal combustion passenger vehicles anymore. Economically, environmentally, and socially, they just won't make sense.

Electric cars and high-speed travel (powered almost exclusively by renewable energy) will be the norm, new drivers won't even know how to put gas into a gas tank, and guys like Elon Musk and Jigar Shah will be in the history books as the most influential inventors and entrepreneurs of the 21st century.

As for you...

Well, if you approach investing as a long-term, sustainable avenue for wealth creation, do yourself a favor and commit at the very least a small portion of your portfolio to renewable energy. You'll be happy you did, and your grandkids will thank you — not just for the fat inheritance, but for the clean air and water, too!

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

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

May 26, 2015

My Yieldco Raised Its Dividend With This Weird Trick

Tom Konrad CFA

Clean energy yieldcos buck the general trend by paying out a large proportion of cash flow to investors, and rapidly increasing their dividends at the same time.  The key to this trick has been their rapidly appreciating stock prices.

High yield companies generally grow slowly, while high growth companies have low dividend yields.

Normal companies grow by investing some profits in new business opportunities.  Early stage growth companies typically retain all their earnings to invest in new business.  More mature companies have fewer opportunities, and so share a larger proportion of profits with their shareholders.  Mature companies tend to grow more slowly: they return more of their earnings to shareholders in the form of dividends, and the investments they do make tend to be less transformative and more incremental. 

New investments can also be financed by selling more shares to the public.  In this case, the company's overall income will grow because it has more investments, but income per share can only increase if the new investments produce more income per share issued than the company's existing investments. 

The Strange Case of Yieldcos

Yieldcos are subsidiaries of clean energy project developers.  They buy clean energy projects from their parent companies or other developers, and pay out nearly all of the income the projects produce as dividends to shareholders.

In finance jargon, the percentage of profits reinvested in the business is the "Retention Rate."  "Return on Investment" is a measure of how lucrative or transformative a business opportunity can be.  Financial theory says that, if all new investments come from retained earnings, its growth rate will be the product of Retention Rate and Return on new investments. 

By design, yieldcos' retention rates are very low, yet all have been regularly increasing dividends, and most have targets for continuing to increase dividends per share at an extremely rapid rate.

According to the financial theory outlined above, yieldcos should only be able to accomplish this if their new investments are much more lucrative than their existing investments.

Skipping the math for clarity, the following chart looks at the three oldest yieldcos, chosen because they have more data available than other yieldcos.  The three yieldcos shown are NRG Yield (NYSE:NYLD, NYLD-A), Pattern Energy Group (NASD: PEGI) and TransAlta Renewables (TSX:RNW, OTC:TRSWF).

The chart shows recent Retention Rates (amount of cash flow available for distribution which they do not pay out) in blue.  It also shows recent dividend growth (red) and dividend growth targets (yellow and green.)  The brown bars are return on investment from each company's most recent publicly announced acquisition, while the light blue bars show what each yieldco's calculated implied growth rate would be if the only source of growth were from investing retained earnings in the announced projects.  The data is derived from company financial statements and press releases.

Yieldco growth rates.png

The Mystery

Without retained earnings or great returns on investment, how are yieldcos raising their dividends?

As you can see, the implied growth rates (1% to 2%) are far below actual and target dividend growth rates.  This would normally lead us to the conclusion that yieldcos have extremely attractive opportunities for new investments.  We would guess that money raised from the sale of shares to the public is invested these extremely attractive opportunities, and all shares would see a cash flow and dividend boost because the very high returns on new investments more than compensates for the dilution of the new shares.

As you can see in the following chart the returns on the yieldcos' recent investments have been fairly low, and have not been rising significantly. 

Yeildco ROI
I show a rough measure return on investment for those acquisitions from the same three yieldcos where there was sufficient information disclosed for me to make the calculation.  The measure shown is estimated annual cash flow divided by the equity invested.  A more technically accurate measure would also take into account how annual cash flow changes over time, but that information is not available in the press releases. 

As an aside, since these returns are based on estimates from company management, inter-company comparisons may not be meaningful.  In particular, the fact that Pattern's returns on investment have been higher than those of NRG Yield or TransAlta Renewables may be a product of different management assumptions, rather than a true economic advantage.

The mystery remains: Without retained earnings or great returns on investment, how are yieldcos raising their dividends?

The Weird Trick

Although yieldcos are not getting better returns on dollars invested, they are getting more money for the shares they sell.

For example, NRG Yield raised $11 per split adjusted share in its July 2013 IPO.  In its July 2014 secondary offering, it sold shares at a split-adjusted $27 per share.  Every dollar invested in the Energy Systems Company acquisition in 2013 produces 6.7¢ of annual cash flow.  At $11 per share, that is 73¢ cash flow per share.   In contrast, NRG Yield's 2015 investment in the second group of Right of First Offer (ROFO) assets from its parent, NRG, produces a very similar 7.3¢ per dollar invested.  But the shares it sold in July produce $1.97 of cash flow per share when invested in the ROFO assets. 

While NRG Yield's return on invested cash has barely budged since 2013, its return on each new share sold has grown almost three-fold.
The key to NRG Yield's massive dividend per share growth is not better investment opportunities.  The key to its dividend per share growth is selling stock to the public at ever increasing prices.  Many other yeildcos are projecting per share dividend growth based on similar share price growth.

When Will It End?

As long as yieldcos can increase their invested capital per share by selling stock at higher prices, they should be able to continue increasing their per share dividends quickly.  But given many yieldcos' low current yields, the stock prices will only continue to rise as long as investors expect dividends to continue to grow rapidly.  

So far, most yieldcos have enjoyed the benefits of a virtuous cycle of rising share prices and rising dividends.  Rising share prices allow more cash flow per share sold, which in turn allows large dividend increases.  Large dividend increases excite investors, who drive up stock prices, and the cycle repeats.

To keep the cycle going, yieldcos are on a treadmill which requires them to make ever larger purchases of new assets. This growing demand for renewable energy assets, will raise the prices of such assets and lead to declining returns on investment.  This, in turn, is undermines future dividend growth, which in turn will undermine stock price growth. 

At some point, the virtuous cycle will turn vicious.  Failure to meet dividend growth expectations may lead to declining share prices, and lead to further declines in dividend growth, and so on.  Or flat stock prices may make increases in cash flow per share harder to achieve, and this will lead to low dividend growth rates, leading investors to sell the stock.

What Can Investors Do?

Yieldco investors who wish to avoid getting caught in this vicious cycle should focus on those yeildcos with prices that are based more on current dividends than on future dividend growth.  These are easy to identify: they are the yeildcos with the highest current yields.

TransAlta Renewables (TSX:RNW, OTC:TRSWF) currently tops the list, with a 6.6% yield at the current (Canadian dollar) share price of C$12.68 and 7¢ Canadian monthly dividend.  It also has the advantage of slightly higher retained earnings than the other yieldcos, which should allow it to produce a little more conventional dividend growth than the others.

Note: The author of this article will be an instructor at EUCI's "The Rise of The Yieldco" workshop on July 30th and 31st.

Disclosure: Long PEGI, TSX:RNW.  Short NYLD, NYLD-A

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.

May 24, 2015

Warren Buffett: Closet Tree-Hugging Billionaire

By Jeff Siegel

Is Warren Buffett sending mixed messages on green energy?

That's what the folks over at Bloomberg Business have suggested. But nothing could be further from the truth. After all, Buffett's making a fortune in the alternative energy space.

Yet here's what was reported in Bloomberg this week:

Warren Buffett highlights how his Berkshire Hathaway Inc. utilities make massive investments in renewable energy. Meanwhile, in Nevada, the company is fighting a plan that would encourage more residents to use green power.

Berkshire’s NV Energy, the state’s dominant utility, opposes the proposal to increase a cap on the amount of energy that can be generated with solar panels by residents who sell power back to the grid in a practice known as net metering.

While the billionaire’s famed holding company has reaped tax credits from investing in wind farms and solar arrays, net metering is often seen by utilities as a threat. Buffett wants his managers to protect competitive advantages, said Jeff Matthews, an investor and author of books about Berkshire.

“It always comes down to money,” he said.

Well, Duh!

Of course it always comes down to money!

You think you'd see billion-dollar growth in the solar space if it were only being facilitated by overzealous tree-huggers and wealthy eccentrics?

Not a chance!

The rapid growth in renewables — particularly in solar and wind — is the result of entrepreneurship, capitalism, and the basic fundamentals of supply and demand.

It blows my mind that folks are calling out Warren Buffett for lobbying against a proposal to increase the net metering cap. Buffett isn't in the alternative energy game because he likes to hug trees. He's in the alternative energy game because he's an incredibly smart investor.

Anyone who honestly believes there's no money to be made in the renewable energy space should go find a typewriter company to invest in. I've been screaming this from the rooftops for a decade now, and many of those who have listened — and invested accordingly — have made small fortunes.

Sipping Mai Tais in Kauai

Look, Buffett doesn't really have much skin in the residential solar space. Most of his renewable energy scratch comes from utility-scale development. So having to shell out more to individual homeowners who send solar-generated electrons to the grid isn't going to help Berkshire's NV Energy.

Of course, this actually illustrates a pretty interesting point.

When you step back and look at the big picture of renewable energy, it's really only the super wealthy that can even afford investing in these giant utility-scale renewable energy projects. And these deals are not for the risk-averse.

You can, however, invest in the public companies that build or invest in these projects. I'm talking about companies like First Solar (NASDAQ: FSLR) and SunPower (NASDAQ: SPWR), not to mention the financiers and developers.

Some of my favorites here include:

  • Brookfield Renewable Energy Partners (NYSE: BEP)
  • Pattern Energy Group (NASDAQ: PEGI)
  • Hannon Armstrong (NYSE: HASI)

The latter, by the way, is a company I told you about back in 2013, when it was trading around $11 a share. Today, it trades around $20, plus it boasts a nice little 5% dividend.

hasi chart

While I'll be the first to admit that I am, without a doubt, an unapologetic environmentalist, I sure as hell don't invest in renewable energy companies unless they're going to make me money. And HASI is among many that have helped me turn my passion for sustainability into an opportunity to create significant wealth.

No, my swagger doesn't even come close to that of Warren Buffett's. And truth be told, if I boasted just 0.5% of his net worth, I'd be sitting in my hammock in Kauai right now, sipping a Mai Tai and reading the newspaper.

But one thing's for certain...

Without the renewable energy space, many of my readers would have much thinner wallets right now. So yes, even if you couldn't care less about the toxicity of our air or the rapid erosion of our once-healthy soil, make no mistake — investing in renewable energy has more to do with profits than it has to do with tree-hugging.

And if you don't believe me, ask yourself why Warren Buffett owns more than $15 billion worth of wind and solar assets. That's billion — with a “B.”

It ain't rocket science, folks!

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

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

May 23, 2015

Yingli is Tanking, but the Solar Industry Remains Vibrant

By Jeff Siegel

Solar stocks are getting a thrashing today after Yingli Green Energy (NYSE: YGE) came clean about a possible bankruptcy.

The stock tanked at the open and is still trading below $1.00 – down from yesterday's closing price of $1.70.

ygetank

Of course, the writing was on the wall with this one.

Yingli's been struggling for a long time. And while I'm extremely bullish on solar, I've kept a safe distance from Yingli, as well as a lot of other China solar stocks.

That being said, even the solid, revenue-generating companies not operating out of China are in the red today, including SunPower (NASDAQ: SPWR), First Solar (NASDAQ: FSLR), SunEdison (NYSE: SUNE) and SolarCity (NASDAQ: SCTY).

Interestingly, I thought those particular stocks would get hit a bit harder today, potentially opening up an opportunity to pick up some cheap shares. That didn't happen, so those like me, who are long on these four stocks, are feeling pretty confident right now.

Still, I suspect we'll see plenty of anti-solar pieces over the next few days. This is pretty much an obligatory response anytime we see disruption in the solar space. And that's fine. At this point, none of that matters.

The growth trajectory for solar has not budged with this recent news out of the Yingli camp. The only thing that's changed is the space has rid itself of one more laggard. And that's a good thing!

Interestingly, while solar is down today, a number of our renewable energy yieldcos are up.

As of this writing, TransAlta Renewables (TSX: RNW) is up about 3 percent, Pattern Energy Group (NASDAQ: PEGI) is up just over 1 percent, and Hannon Armstrong (NASDAQ: HASI), which is technically a REIT, is up just over one percent, as well.

Man, I love renewable energy yieldcos!

Don't sleep on renewable energy ...

There's just too much money to be made here.


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

May 22, 2015

Darling Ingredients: At the Margin

by Debra Fiakas CFA

This week Darling Ingredients (DAR:  NYSE) reported earnings of $100,000 on net sales of $874.7 million in the first quarter ending March 2015.  Darling is a recycler of sorts, collecting by-products of the food production industry and recycling the left-overs and waste into proteins, fats and leathers.  Nothing goes to waste.  Every last chicken feather, hide, gallon of used cooking grease and cake crumb gets up-cycled to a usable material for feed, food, fuel or clothing.  Its customers include pet food producers, personal care manufacturers and textile users, among others.

Darling used to sell its non-edible oils to the biofuel industry until it entered into a joint venture called Diamond Green Diesel with oil and gas giant Valero Energy, Inc. (VLO:  NYSE).  The joint venture provides a good hedge for Darling against declines in the prices for its oil, which can weaken against other oils from corn, soy or palm crops.   Diamond Green produced 37 million gallons of renewable diesel in the quarter.

The commodities business is a tough one and Darling had been under some pressure in recently months from weakened selling prices.  Sales in the three months ending March 2015, slipped compared to the year-ago quarter on lower selling prices for fat products.  The strong dollar also trimmed reported sales.   Management seems to have righted the ship with a cost cutting program and restructuring in some divisions.  The company also has some protection if raw materials prices increase  through sales contract include provisions for selling price adjustments.    During the earnings conference call management characterized margins in the feed segment as ‘normalizing’ and in the food segment ‘stable’ following restructuring efforts.

The breakeven earnings results were better than analyst expectations for the quarter and offered encouraging evidence that management had regained control of margins.   On a non-GAAP basis Darling generated $0.09 in earnings per share after excluding acquisition and integration costs and amortization.  This compares to the consensus estimate of non-GAAP earnings of $0.06 per share.  The appearance of an upside surprise was enough to bring investors and traders back to DAR, which gapped higher in the first day of trading following the earnings release.

Crystal Equity Research has a Buy rating on DAR.  The stock appears overbought in the short term, but management’s efforts to regain profit margins have borne fruit and the stock looks interesting for investors with a long-term horizon.


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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has a Buy rating on DAR and Darling Ingredients is included in the Biofuel Group of the Beach Boys Index of alternative energy developers and producers.

May 21, 2015

Yingli’s New Deadline, Hanergy’s Plunging Value

Doug Young 

Bottom line: Yingli’s shares could rebound a bit as concerns ease about an imminent bankruptcy, while Hanergy’s shares are likely to continue sliding when trading resumes to correct from a massively speculative recent run-up.

This week has been a volatile time for solar company stocks, which have taken a beating after Yingli (NYSE: YGE) warned about its ability to stay in business due to its heavy debt load. Now Yingli has put out a new statement saying its earlier warning was misinterpreted, helping to reverse a huge sell-off of its shares as it laid out the next big deadline in the struggle to repay its debt.

At the same time, Hong Kong-listed solar equipment maker Hanergy (HKEx: 566) has also been in global headlines, after its shares lost nearly half their value in just a matter of minutes in Wednesday trade. Media are focusing on the huge price swing, which no one seems able to explain. But this really looks like a story of stock manipulation by speculators rather than one of any significant change in the company’s prospects, which once again underscores the dangers of dealing in this kind of thinly-traded stock.

Let’s start with Yingli, whose shares lost nearly half of their value in the first 2 trading days of this week after it said its heavy debt load could affect its ability to stay in business. (previous post) That sell-off pushed the shares to an all-time low, as investors worried about a bankruptcy that could have rendered the stock worthless.

Now Yingli has issued a new statement saying investors misinterpreted its earlier words, sparking a rally that saw the stock jump 25 percent in the latest trading session. But even with the rebound, the shares are still down more than 30 percent from where they began the week, showing that investors are still quite concerned about the company’s ability to service its debt.

In the new statement, Yingli said its earlier statement was taken out of context and it’s “optimistic and confident” about its ability to continuing serving the global solar market. (company statement) Of course it would have been much better if it could have said it was confident about its ability to service its debt, which totals more than $2 billion.

But it did note that its next big debt repayment of 1 billion yuan ($162 million) will come due on October 13, and that it believes it will be able to repay that amount on schedule. The amount isn’t really all that large, and Yingli previously sold off some of its land to pay off another debt obligation earlier this month. Still, using land and other asset sales to pay off debt isn’t a great long-term business strategy, and the money-losing Yingli will need to plot a path back to profitability soon if it really wants to survive.

Meantime, we’ll look very quickly at Hanergy, which makes equipment to produce thin film used to make solar energy. This company defied logic and saw its shares soar 6-fold since last September before the sell-off. That means that even after the sell-off that saw the shares plunge 47 percent in just 27 minutes of trade, the stock is still triple its price from last September. (English article)

Hanergy now has a market value of $20 billion, which is far larger than any other solar company, most of whose shares remain depressed due to stiff competition. And yet despite that huge market value, the plunge in price was based on a trading volume of just 175 million shares, which probably had a total value of around $120-$140 million.

That small figure reflects the fact that Hanergy’s share float is very small, and thus the company’s stock price is easily manipulated. The company may have good enough prospects, but it’s recent stock run-up was far out of proportion to its growth potential. Accordingly, this latest plunge looks like a much-needed correction, and the shares could continue to fall re-approach their earlier levels once trading resumes after a temporary halt.

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.

May 20, 2015

Yingli In Danger Of Default

by Doug Young

Bottom line: Yingli is in increasing danger of defaulting on its heavy debt load, which could result in a rapid and disorderly bankruptcy if its hometown government fails to provide support.

After sending out a steady series of distress signals over the last few weeks, solar panel maker Yingli Green Energy (NYSE: YGE) has sent out its strongest trouble sign yet as it struggles under a huge debt load. The most recent signal comes in a new filing with the US securities regulator, in which Yingli says its big debt could threaten its ability to survive, potentially making it the latest casualty in a clean-up of China’s bloated solar panel sector. Such an outcome would see Yingli follow in the footsteps of former high-flyers Suntech and LDK, and would raise the question of whether others may soon follow down a similar path.

First Suntech and LDK, and now Yingli have all struggled to service billions of dollars in bonds and bank loans they used to build plants for solar panel manufacturing at the height of an industry boom 7 years ago. Suntech’s inability to pay off a maturing bond was the trigger that finally forced it into bankruptcy 2 years ago, though it was already in deep financial trouble by then. Now the same thing could soon happen to Yingli, whose prospects are being clouded by recent weakness in the global solar panel market.

In its new filing with the US securities regulator, Yingli says it has nearly 15 billion yuan in debt ($2.4 billion), more than two-thirds of which is short term borrowings. (company announcement; English article) It said it is having difficulty servicing that debt, which could affect its competitiveness, its ability to get new financing and ultimately its ability to stay in business.

The announcement sparked a sell-off for Yingli shares, which tumbled 12.3 percent to $1.49 in the latest regular trading session in New York. The shares were down another 25 percent at $1.11 in after-hours trade, putting them in position to reach an all-time low if the declines hold in the next regular trading session. Shares of many other solar panel makers also dropped by smaller amounts, with Canadian Solar (Nasdaq: CSIQ) and ReneSola (NYSE: SOL) both down by more than 4 percent.

Yingli has yet to announce its first-quarter results, but reported net losses of nearly $90 and $210 million for last year’s fourth quarter and the full-year 2014, respectively. Its new announcement was its loudest signal yet that it may be the next to fail, following a recent string of similar signs.

YIngli was recently forced to sell some of its idle land in its hometown of Baoding to meet a debt payment due earlier this month, barely managing to avoid a default. (previous post) Another solar manufacturer named Tianwei, which also happens to be based in Yingli’s hometown of Baoding, last month made headlines when it became the first company to default on a domestic Chinese bond. (previous post)

It’s unclear if these 2 companies are related beyond the fact that both are based in the industrial northern city of Baoding. But what does seem clear is that the city of Baoding isn’t in any rush to bail out these local companies, which certainly isn’t a good sign for either. In the earlier Suntech bankruptcy, the company’s hometown of Wuxi was much more proactive in the bankruptcy process, even though Suntech’s management team was ultimately forced out.

In this latest case it’s probably still too early to say if Yingli will ultimately be forced into a similar bankruptcy, though the likelihood certainly looks high. The earlier bankruptcies 2 years ago were relatively orderly, thanks to strong support from local governments.

But now many of those governments are coming under economic distress as they struggle with their own big debt amid a slowing Chinese economy. Accordingly, first Tianwei and now Yingli probably can’t expect too much assistance from the local Baoding government, meaning a rapid fall and disorderly bankruptcy could come if and when the company fails to service its next upcoming debt obligation.

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.

May 19, 2015

Solar Stocks Bask In Hawaiian "Aloha"

By Jeff Siegel

hawaiisolarI’ve been all over the world, and without a doubt, there is no place more beautiful than Hawaii, particularly the island of Kauai.

The weather, the ocean, the rain forests, the food - it just doesn’t get any better.

Although if state lawmakers get their way, there could soon be a cherry on top for renewable energy supporters.

As recently reported in Greentech Media …

Lawmakers in Hawaii passed legislation last week (in a 74-2 vote) requiring the state to generate 100 percent of its electricity from renewable energy resources by 2045. If HB 623 is signed into law by Governor David Ige, Hawaii will become the first U.S. state to attempt complete decarbonization of the power sector.

Today, Hawaii’s energy mix is more than 80 percent fossil fuel, with oil providing the majority of electricity generation on the islands.

Now I’ll be the first to admit, I find free market solutions superior to mandates and legislation. In a real free market, the government wouldn’t even be necessary in this situation. The better mousetraps - in this case, solar, wind and energy efficiency, would quickly replace the islands’ heavy dependence on oil.

Of course, to assume there’s a free market in energy is not a safe assumption to make.

I won’t get into all of that here, but if you’re a regular reader of these pages, you know full well that the oil and gas industry has long enjoyed extremely generous subsidies - both direct and indirect. And it is for this reason that renewables in Hawaii have faced such a long, uphill battle.

But with renewables enjoying a rapid decrease in production costs, even the unleveled playing field that exists in the world of energy won’t be enough to stop this clean energy juggernaut.

A Great Opportunity

The fact is, Hawaii has access to some of the greatest renewable energy resources in the world - solar, wind, tidal, and geothermal. The fact that 80 percent of the state’s energy mix is more than 80 percent fossil fuel-based is despicable. It highlights a long-standing exercise in complacency that has been facilitated by lawmakers, corporate interests and the relationship between the two.

In any event, if this bill becomes law, we will see a great opportunity for a number of publicly-traded solar companies, including, but not limited to …

  • SolarCity (NASDAQ: SCTY)
  • SunPower Corp. (NASDAQ: SPWR)
  • First Solar (NASDAQ: FSLR)
  • SunEdison (NYSE: SUNE)
  • SolarEdge (NASDAQ: SEDG)

I suspect Tesla’s (NASDAQ: TSLA) new battery storage systems could also find a nice home here.

Invest accordingly.

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

May 14, 2015

Bears Are Sniffing At Clean Energy Fuels: Should You?

By Jeff Siegel

Clean Energy Fuels (NASDAQ: CLNE) has been having a pretty good year.

The stock reached a 2015 high of $10.48 on May 4. Up from $5.03 at the start of the year.

clneclne

But the natural gas fueling company co-founded by legendary oilman T. Boone Pickens took it on the chin today after missing analysts’ estimates for earnings and revenue in Q1.

When CLNE first came on the scene, I was a fan. I even recommended the company shortly after it went public. And we did pretty well, eventually clocking out with a gain in excess of 60 percent in less than a year.

Since then, I’ve commented here and there on the stock, but never bothered to get back in. Although I could’ve made a nice chunk of change this year on it, I remain skeptical about the big promises that often come from the “natural gas for fuel” camp.

I have no doubt that natural gas will continue to be a fuel of choice for a number of fleet operators - particularly those relying on buses and large trucks. However, there are still those who claim that natural gas can serve as the perfect bridge fuel for passenger vehicles - transitioning us from gas and diesel to natural gas, then ultimately to electric cars or fuel cells. The latter also being an unlikely occurrence.

In any event, this is an argument I’ve been hearing for years. The only problem is, such a bridge is unnecessary. We’re well on our way to transitioning away from the outdated internal combustion engine.

Yes, we’re still decades away from meaningful numbers, but certainly no natural gas bridge is required. And quite frankly, the only folks that keep harping on this illusion are those with a lot of skin in the natural gas game.

Don’t get me wrong. I’m not trying to knock their hustle. We’re all out here trying to make a buck. But I would remind investors that while Clean Energy Fuels will continue to be quite successful landing deals with fleets, any claims from the peddlers of this camp that natural-gas powered passenger vehicles are coming should be met with an enormous amount of skepticism.

Of course, I’m also a huge supporter of the electric vehicle movement, and have often been critical of natural gas-powered vehicles. But the bottom line is that on performance, design, range and infrastructure availability, natural gas just can’t compete with electric vehicles. And they certainly can’t compete with gasoline-powered cars.

Not looking good …

Getting back to Clean Energy Fuels, I know a lot of analysts still have pretty high price targets on this thing. But I’m skeptical. Here are a few things that bother me about CLNE:

It’s carrying nearly $600 million in debt, yet only has about $215 million in cash
Analysts at Piper Jaffray have suggest that the company will not have enough cash to pay off its convertible debt in 2016. I don’t know how accurate this analysis is, but it does have a $145 million convertible note coming due in August
With lower oil prices, interest in liquid natural gas is waning. Some companies, including Cummins Westport have put their LNG engine manufacturing operations on hold.

I just don’t think Clean Energy Fuels is ever going to be able to live up to the grand expectations its been pitching over the years. That’s not to say the company’s going to go belly up. But I wouldn’t be surprised to see management looking to do a capital raise sometime soon, possibly resulting in dilution of the stock.

All in all, I don’t like the prospects for CLNE. It might be good for a quick trade here and there, but long-term this one just isn’t for me. 

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

May 13, 2015

US Crawls Closer to Energy Policy

by Debra Fiakas CFA

Last week President Obama signed into law the Energy Efficiency Improvement Act of 2015.  The law is intended to reduce energy requirements in commercial buildings, manufacturing facilities and residential structures.  The law improves building codes, provides assistance to manufactures to achieve energy efficiency and paves the way for conservation activities by federal agencies.  It is the closest thing the United States has to an energy policy…..so far.


It took years to get this small piece of energy policy through Congress.  Indeed, at one point in its convoluted travels through the House of Representatives and Senate, several of the bill's Republican sponsors actually filibustered against it.  First, there was some sort of crazed attempt to protect the Keystone XL pipeline.  Then, additional delays resulted from attempts to add amendments that would enable exports of natural gas and others that would have reduced the U.S. Environmental Protection Agency authority to regulate future power plants.

The legislation was widely supported by the utility industry.  Both the Natural Resources Defense Council and the U.S. Chamber of Commerce were early advocates.  Such support bodes well for the success of the legislation.

Part of the reason the bill was well received is the voluntary and market-driven character.  Title I of the law providers for voluntary approach to reducing energy use in commercial buildings.  Title III of the act requires federally-leased building without Energy Star labels to benchmark and disclose energy usage data.

Senators Portman and Shaheen, who had sponsored the Energy Efficiency bill have also put forth the Energy Savings and Industrial Competitiveness Act.  It was sent to a congressional committee in early March 2015.  It would establish a national strategy for energy efficiency with a model building code.  It would also promote energy-efficient supply chains for companies with the federal government agencies leading the way and support energy efficiency in schools.  The legislation is projected to create 192,000 jobs and save $16 billion annually in energy use as well as reduce carbon dioxide emissions by 95 million tons within the next fifteen years.

For investors the legislation may not seem important.  However, an unexpected consequence of this law might be in creating a standards-based approach to energy efficiency.  With all business aiming at the same target, it creates some production and marketing efficiencies.  I expect more innovators to be encouraged to invest in products and processes that might otherwise have been thought uneconomic.  Interestingly, the legislation does not rely on penalties or punishments.  It simply promotes market forces and competition.  I also expect this to lubricate interest in bringing efficiency products to the market. 

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

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

May 12, 2015

The Value of Net Metered Electricity in New York

by Tom Konrad, Ph.D.

Net metering is unfair and is dangerous for the long term health of utilities, at least according to Raymond Wuslich, when he spoke at the 2015 Renewable Energy Conference in Poughkeepsie, NY.  Wustlich is an attorney and partner at Winston & Strawn, LLP., and advises clients across the electricity and natural gas industries on Federal Energy Regulatory Commission (FERC) matters.

To make his point, Wuslich used a simplified New York residential electric bill.  In this simplified bill, the customer was charged 12¢ per kWh for electricity.  Roughly 6¢ each go to the energy supplier and the transmission and distribution utility, which owns the wires, for the delivery of electricity.  (New York has a competitive power market, where power suppliers are separate from the utility companies.  Consumers are able to switch between suppliers at will.)  Of the 6¢ which pays for energy, he states that 4¢ is for capacity charges (keeping the power on) and 2¢ is the cost of energy delivered.

Using this simplified example, Wuslich argues that net metered customers are only providing 2¢ of value for each kWh they generate, but are receiving 12¢ of value.  If it were true, this would clearly make net metered solar unsustainable as it grows as a percentage of the electricity mix.  We can start to see why with a quick look at my most recent electricity bill, below.  The red explanatory text is mine.

Electric bill screenshot.png
We can ignore the fact that I actually paid an average of 23¢ per kWh for the net 886 kWh I used over two months; Wuslich's point related to percentages of the bill going to delivery, capacity, and energy, not the absolute numbers.  Much more important is that $48, or almost a quarter of the total bill, is not paid on a per kWh basis at all.  This money helps pay for delivery, and cannot be offset with net metering.  All else being equal, increases in net metering will cause electric delivery payments to fall, but not as much as Wustlich's example implies.

The other major oversimplification is that the price of both energy and capacity change with the time of day, the season, and weather conditions.  The cost of electric capacity and the cost of delivery are both highest when load peaks, and are much lower the rest of the time.  Capacity costs are lowest at night when most people are sleeping and electricity demand is low.  On average, solar photovoltaics (PV), are producing power when capacity prices are high. 

Electric capacity prices are highest when electric load peaks.  In New York, this peak is usually "Thursday or Friday afternoon at the 3rd or 4th day of an extended heatwave," according to Richard Barlette, who also spoke at the conference.   Barlette is the Senior Manager of External Affairs at The New York Independent System Operator (NYISO), the non-profit governing body which manages New York's transmission grid.

A look at NYISO's  2015 Load and Capacity Data Report or "Gold Book" shows that residential solar PV pulls its weight when it comes to meeting peak demand.  In fact, NYISO projects that behind-the-meter PV will more than carry its weight in 2025.   As the chart below shows, in 2015, retail PV will contribute slightly less to meeting statewide peak than it contributes to meeting annual energy demand, but that ratio is reversed in the most expensive capacity markets: New York City and Long Island. There it contributes more to peak demand than to annual energy use.

NYISO PV projections.png

NYISO's projections for 2025 show retail PV providing greater capacity benefits, not fewer, with capacity benefits felt statewide.

In short, the capacity value of net metered solar in New York is roughly proportional to the energy it provides for New York's electric grid, and it even delivers a bit more value in the most capacity constrained parts of the state. 

Although net metering policy was not intentionally designed to match the value of solar to its cost, the policy is currently doing a decent job of compensating homeowners fairly for the value their solar provides to the grid.  Contrary to the worries of industry representatives like Mr. Wustlich, in ten years, net metered customers will be delivering more value to the grid than they will be paid for, not the other way around.

Maureen Helmer led the New York State Public Service Commission (PSC) when the state created its competitive market for electricity in the 1990s.  At the time, she said utilities were very concerned about "stranded costs," and not getting paid enough for the generation assets they were being forced to sell.  But this worry turned out to be unfounded, since the assets all sold for good prices.

Now New York is again working to modernize its electricity market with the "REV" (Reforming the Energy Vision,)  and utilities are worried about net metering.  These worries also seem likely to be unfounded.

May 11, 2015

Alaska Airlines and Gevo to Demonstrate Alchohol-to-Jet Fuel

gevo logo

In Colorado, Gevo (GEVO) and Alaska Airlines announced a strategic alliance to purchase Gevo’s renewable jet fuel and fly the first-ever commercial flight on alcohol-to-jet fuel (ATJ).

The demonstration flight is expected to occur after Gevo receives ASTM International certification for its fuel, sometime in mid to late 2015. Gevo has been working through the rigorous ASTM process for six years, which includes extensive engine testing and data analysis by all of the major original equipment manufacturers to establish the specification for this drop in fuel. Once approved, this fuel can be seamlessly integrated into the existing distribution infrastructure and onto commercial aircraft.

“Developing a domestic, competitively priced, sustainable supply of biofuels is fundamental to the future of American aviation,” said Joe Sprague, senior vice president of external relations at Alaska Airlines. “The cost of fossil-based jet fuel is one of the largest expenses for airlines. This investment in Gevo’s ATJ will help reduce our exposure to high fuel prices, minimize our carbon footprint and demonstrate growing demand for fuel alternatives.”

“A sustainable biofuels industry would help insulate airlines from fuel price spikes, enabling them to offer economical air travel while remaining profitable, while helping meet their environmental goals, and spur economic growth within and outside of aviation,” said Gevo CEO Pat Gruber. “We greatly appreciate Alaska Airlines as a commercial partner as we move towards commercialization.”

Why alcohol-to-jet, anyways?

When most of us think of highly customized aviation alcohols, we probably think of the little bottles of Johnnie Walker. But a handful of companies such as Gevo, Butamax and LanzaTech could shake up the emerging aviation biofuels markets by developing renewable aviation fuels from ethanol and/or biobutanol.

“An alcohol molecule, looking at it one way, is really just a hydrocarbon carrying this extra OH [a hydroxyl group] on its back,” LanzaTech CEO Jennifer Holmgren told The Digest, explaining that chemically reforming alcohol into jet fuel is not a bizarre form of medieval alchemy.

In the process, you generally need two ethanol molecules to make a jet fuel molecule, so unless you are interested in trying to sell $3 jet fuel into a $2 market, you had better start with something that produces much better than $1.50 ethanol.

Isobutanol, such as made by Gevo and Butamax, is an alcohol with special applications in jet fuel because it is a four-carbon molecule to begin with. Back in 2009, Gevo opined that the first “Sasol Synthetic Jet was C12‐ centered isoparaffin mixture with similar properties” to Gevo’s jet fuel blend stock. Gevo said at the time that its jet fuel met all ASTM specifications except a slight miss on fuel density, and blended with 25% Jet A it met all specs. Gevo also indicated that it could make a jet fuel blend stock at an operating cost equivalent to $65 oil.

Gevo and aviation fuels

Gevo’s ATJ is produced at its demo biorefinery in Silsbee, TX, using isobutanol produced at its Luverne, MN, fermentation facility. Gevo is currently operating its Luverne plant in Side-by-Side operational mode, whereby isobutanol is being produced in one of the facility’s four fermenters, while the other three fermenters are dedicated to ethanol production. The isobutanol that Gevo is producing is meeting product specifications for direct drop-in applications, as well as for use as a feedstock for the Silsbee biorefinery to produce hydrocarbons such as ATJ.

In March, NASA purchased volumes Gevo’s renewable alcohol-to-jet fuel (ATJ) for aviation use at the NASA Glenn Research Center in Cleveland, Ohio. Gevo’s ATJ is manufactured at its demonstration biorefinery located in Silsbee, Texas, using renewable isobutanol produced at its Luverne, Minnesota, isobutanol plant. The biorefinery, where Gevo also produces bioparaxylene and bioisooctane, is operated in conjunction with South Hampton Resources.

In December 2014, the US Navy’s Naval Air Systems Command announced its first successful alcohol-to-jet supersonic flight, fueled by Gevo’s renewable isobutanol. This was the first aviation test program to comprehensively test and evaluate the performance of a 50/50 ATJ blend in supersonic (above Mach 1) afterburner operations – a critical test to successfully clear the F/A-18 for ATJ operations through its entire flight envelope. This military specification would allow for commercial supply of ATJ fuel to the Navy and Marines Corps.

In April 2014, Gevo announced an agreement with Lufthansa to evaluate Gevo’s renewable jet fuel with the goal of approving Gevo’s alcohol-to-jet fuel for commercial aviation use. Lufthansa’s testing is being supported through work with the European Commission.

Alaska Airlines and sustainable aviation fuel

The key takeaway for Alaska is that the airline has set a goal of using sustainable aviation biofuel at one or more of its airports by 2020.

Alaska Airlines was the first U.S. airline to fly multiple commercial passenger flights using a biofuel from used cooking oil. The carrier flew 75 flights between Seattle and Washington, D.C. and Seattle and Portland in November 2011.

The fuel was supplied by SkyNRG, an aviation biofuels broker, and made by Dynamic Fuels, a producer of next-generation renewable, synthetic fuels made from used cooking oil, now a division of Renewable Energy Group nown as REG Geismar.

At the time, Alaska Air Group estimated the 20 percent certified biofuel blend it is using for the 75 flights will reduce greenhouse gas emissions by an estimated 10 percent, or 134 metric tons, the equivalent of taking 26 cars off the road for a year. If the company powered all of its flights with a 20 percent biofuel blend for one year, the annual emissions savings would represent the equivalent of taking nearly 64,000 cars off the road or providing electricity to 28,000 homes.

In 2010, Alaska Airlines, Boeing, Portland International Airport, Seattle-Tacoma International Airport, Spokane International Airport and Washington State University announced a strategic initiative to promote aviation biofuel development in the Pacific Northwest, the first regional US assessment of its kind, dubbed the “Sustainable Aviation Fuels Northwest” project. The consortium examined biomass options “within a four-state area,” examining “all phases of developing a sustainable biofuel industry,” including ” an analysis of potential biomass sources that are indigenous to the Pacific Northwest.”

Since 2010, Alaska Air Group has been a partner in a strategic initiative called Sustainable Aviation Fuels Northwest (SAFN), a 10-month regional stakeholder effort to explore the feasibility, challenges and opportunities for creating an aviation biofuels industry in the U.S. Pacific Northwest. The study determined the region has the diverse stocks for biofuels, delivery infrastructure and political will needed to create a viable biofuels industry. There currently is no supply of aviation biofuels in the Pacific Northwest.

The Bottom Line

The Alaska / Gevo partnership is a solid step towards commercializing the fuels, which Gevo has the capability to produce at demonstration levels. It would need an equity infusion to take the Silsbee technology to the next level.

In that context, consider the March 2015 memorandum of understanding between Praj Industries and Gevo, in which Praj would undertake to license up to 250 million gallons of isobutanol capacity for sugar-based ethanol plants over the next ten years. Gevo will market the isobutanol produced by Praj’s sub-licensees — which could well include airline customers via a Silsbee-like commercial scale conversion facility.


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.


May 10, 2015

Tesla Just Killed Your Power Company

By Jeff Siegel

Last Thursday at around 11:00 p.m., the world changed.

I don't mean to sound so dramatic, but there's no other way to put it.

You see, that night, Tesla Motors (NASDAQ: TSLA)) CEO and super-genius Elon Musk unveiled something so monumentally game-changing, it's almost hard to put into words without sounding like a lunatic. But I'm going to try anyway...

Out of the Starting Gate

When I first started covering the renewable energy space in 2005, it was like pulling teeth to get investors to pay attention. After all, the renewable energy industry had a long history of great ideas but poor execution.

However, in the early 2000s, the once-niche industry that had long been suitable only to overzealous tree-huggers and wealthy eccentrics had finally inched out of the starting gate. And I wasted no time in capitalizing on the clean energy boom I knew was coming.

Over the years, we did quite well. In fact, after the effects of the recession subsided, the renewable energy industry has enjoyed some pretty impressive and consistent growth. And today, things like solar, wind, and electric cars have really become ubiquitous.

That being said, there's always been a hurdle for renewable energy technologies...

No matter how rapidly the technology develops and the costs of integration fall, when the sun doesn't shine and the wind doesn't blow, solar and wind are of little use.

Of course, there have also been plenty of arguments to support the idea of an energy economy heavily weighted in renewables, where only a small percentage of fossil fuel generation would be necessary. By utilizing intelligent energy systems, smart grids, and all kinds of wonderful technologies, this is doable.

But there's an easier way.

Energy Independence

Energy independence is a dream for many but a reality for just a few.

The truth is, energy independence has long been little more than theory because of the high costs of achieving such a thing — at least in the face of a heavily subsidized, centralized energy system that seems to reward complacency while penalizing innovation.

But thanks to Elon Musk, that's about to change.

Last week, Musk introduced Tesla's  latest game-changer: the Powerwall.

Tesla's Powerwall is a home battery that can be charged using electricity generated from solar panels on your roof. At night, after the sun goes down, you can use this battery to power your home. Or, if some of your electricity still comes from the grid, you can simply use it as a backup system against power outages.

Basically, what we're talking about here is the fact that most of us now have the opportunity to turn our homes into small power plants and fueling stations. That's right, fueling stations, too — because if you own an electric car, you'll now be able to fuel your car with domestically generated electrons in your own home.

This is not a lofty goal — this is reality.

powerwall

Of course, with Musk allowing this technology to be open-sourced, Tesla won't be the only game in town. And the way Musk sees it, this is a good thing, as it'll spark competition and enable a faster transition of our energy economy.

A New Energy Economy

One company that's actually looking to offer its own similar battery system is Sungevity.

Sungevity is one of the biggest solar financing and installation companies in the U.S. Not quite as big as SolarCity (NASDAQ: SCTY), but still a major player.

Last month, we learned that Sungevity had teamed up with German battery manufacturer Sonnenbatterie to supply storage systems to homeowners, too. However, the initial pricing we see on this is around $10,000, and these systems will mostly be marketed in Europe.

Of course, moving beyond Tesla (and SolarCity, which is run by Elon Musk's cousin and of which Musk is chairman), this will provide yet one more boost for the solar industry in general.

One of the reasons some folks have held back on going solar is because of the concern over solar being an intermittent power source. But with a competitively priced, reliable battery backup, this is no longer a concern. Every major solar manufacturer on the planet will benefit from this development.

Now, the rollout of these new batteries won't happen for another three or four months. And that rollout will be relatively slow until 2017, when more batteries will be pumped out of Tesla's new Gigafactory — which, by the way, will enjoy production levels in 2020 that will exceed all of 2013's global production.

gigawhatClick Image to Enlarge

As I've been preaching for years, we are at the dawn of a massive transition of our energy economy.

Going forward, it will be supported by new energy technologies that will be much more efficient and reliable than what we rely on today. As well, these technologies will allow us to enjoy all the conveniences and comforts we enjoy today — but do so without fouling up the planet. Not a bad deal!

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

 signature

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

May 08, 2015

Are Solar Stocks Cheap For A Reason?

by Debra Fiakas CFA

The last post “Meeting Solar Challenge in the Courtroom” discussed how European solar manufacturers are complaining about China’s exports.  A complaint made by industry association EU ProSun charges China manufacturers of solar cells and panels of circumventing Europe’s anti-dumping measures by channeling their products through Malaysia and other intermediaries in order to disguise the China origin.  A report by released last month by IHS (formerly SolarBuzz) makes clear there is much at stake in the solar industry.  IHS forecasts global solar photovoltaic capacity could reach 498 gigawatts by 2019.  That call is a whopping 177% higher than capacity reported in 2014.  IHS is also projecting a dramatic increase in demand to 75 gigawatts per year by 2019.   That level is 66% higher than demand registered in 2014. 

That sort of growth is usually a call to investors to BUY! BUY! BUY!  What is the best approach to the next stage in the solar power industry?  Bet on a single horse? The long shot or the favorite to win?  Take a position in the industry with an ETF or an indexed solar energy fund?

The China solar module producers that are listed in the U.S. and trade in U.S. dollars are available at bargain valuations.  China’s Trina Solar (TSL:  NYSE) is trading at 21.1 times trailing earnings, but an interesting multiple of 10.2 times the consensus estimate for Trina in 2015.  Another China company, JA Solar Holding (JASO:  Nasdaq), is an even better bargain with a stock that is priced at 7.4 times forward earnings.  The problem is JA Solar does not appear to be growing earnings so it probably deserves a lower valuation.  Renasola (SOL:  NYSE) might be the surprise among the China solar stocks.  The company is expected to return to profitability in 2015 and the stock is trading at 17.6 times projected earnings.  That is not such a compelling valuation metric, but it is interesting given the Rena Solar is on the mend.

Canadian Solar, Inc. (CSIQ:  Nasdaq) should not be overlooked.  This solar module producer is headquartered in Toronto, but has production facilities all over the world, including China.  It’s trailing and forward earnings multiples are 9.1 and 8.4, respectively.  I just cannot quite figure out the connection between solar power and the sheep on Canadian Solar’s corporate web site!

The U.S. is famously bereft of manufacturing talent and capacity, but there are two domestic solar module manufacturers.  First Solar, Inc. (FSLR:  Nasdaq) and Sun Power Corporation (SPWR:  Nasdaq) are both trading at multiples far higher than the rest of the pack.  This is probably due to higher operating profit margins than the profitable China solar module producers.  Only Canadian Solar has a higher operating profit margin.

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

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

May 07, 2015

Amyris Reaches Positive Cash Flow

Jim Lane amyris logo

In California, Amyris announced positive cash flow of $1.7 million in the first quarter despite negative currency effect of $1.2 million. Overall, Amyris recorded Q1 2015 non-GAAP cash revenue inflows of $30.3 million, compared with $17.9 million for Q1 2014. Total Q1 2015 revenues were $7.9 million, an increase of 30% compared with same quarter last year. Cash, cash equivalents and short-term investments of $44.9 million at March 31, 2015, an increase from $43.4 million at December 31, 2014.

“We’re pleased with our continued execution toward diversifying and growing our revenue base through an expanding number of collaborations and product commercialization efforts,” said John Melo, Amyris President & CEO. “During the quarter – and, more recently – we announced several key examples of these efforts, including several market opportunities in the cosmetics, biopharma and performance materials areas of our business. We are also seeing signs of increased end-user demand pull through in cosmetics for our squalane product as customer demand reported from our formulation partners is exceeding expectations.”

Continued Melo, “We’re experiencing strong early response and acceptance of our new product introductions and expect a strong second half in product revenue and collaboration inflows with strong support for delivering on our 2015 cash revenue inflows target of between $100 million to $110 million.”

Pavel Molchanov, Raymond James

After a period of retooling while in the “overpromise and underdeliver” penalty box, 2013-2014 were Amyris’ first years with operations truly in commercial mode, and 1Q15 marked the first quarter in the company’s history with operating cash flow in positive territory. That said, historical reliance on partner-based R&D payments makes quarterly financials choppy. In fact, this is a notable milestone for the overall bioindustrial space, since just about all the pure-plays (public and private) have historically been in cash-burn mode.

In addition to updates on the production ramp-up at the Brotas plant, the market wants to see more clarity on the pace at which Total will be scaling up its fuels JV with Amyris – a questionable prospect in the context of the oil and gas industry’s current period of austerity. Guidance for 2015 remained at $100-110 million of total cash revenue inflows, fairly balanced between product sales and R&D revenue. We maintain our Market Perform rating with a a DCF value of $2.71/share.

Jeffrey Osborne, Cowen & Company

Revenue and GM is expected to improve in the 2Q15 & 2H15 with the launch of two new products, Biossance and Muck Daddy. We see these products as important milestones in Amyris’s continued journey to commercialize its science. Looking further into 2015, Amyris will focus on growing top line sales through the expansion of its product portfolio, with focus on developing products to access greater downstream value and expanding its existing portfolio to new markets. Management expects revenue to accelerate in the 2Q15 and beyond, in line with the launch of the Biossance and Muck Daddy product lines as well as forecast improvement in the diesel sector. Revenue was impacted by the continued sluggishness in the diesel business. Marklet Perform, Price Target: $2.50

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.

May 06, 2015

Chinese Solar Companies Undermining EU Deal

Doug Young 

Bottom line: A deal designed to avoid punitive tariffs on Chinese solar panels exported to Europe is rapidly collapsing, with new anti-dumping tariffs likely to be imposed by the end of the year.

A looming clampdown on Chinese solar panels in Europe is rapidly accelerating, with word that the EU will review part of a landmark 2013 agreement that initially helped to prevent a trade war but is showing rapid signs of unraveling. The case centers on the prices of Chinese solar panels, which are typically much lower than their western counterparts due to a wide array of Beijing policies to support the sector.

The US levied punitive tariffs on Chinese panels to address the situation. The EU was set to do the same when several top politicians stepped in and pushed both sides to reach a compromise deal to avoid such action. That deal saw the Chinese manufacturers agree to raise their prices to levels comparable to products from the west. But no sooner did the deal take effect, then the Chinese companies began undermining the agreement by finding ways to secretly refund money to their European customers.

The European manufacturers saw what was happening, and have been complaining loudly to the European Commission to take action. The case now appears to be accelerating, and it looks likely that some kind of corrective action will be relaunched against the Chinese manufacturers in a matter of months.

The latest action looks a bit technical, and applies to a benchmark price for solar panels that is a key part of the agreement reached between the Chinese manufacturers and EU as part of their agreement to avoid punitive tariffs in 2013. Under that deal, the Chinese agreed to set their prices based on a benchmark that included panel prices from both Chinese and non-Chinese manufacturers.

But now the European panel makers are arguing that Chinese panel prices should be excluded from the benchmark calculation, because the Chinese products depress the benchmark to artificially low levels. (English article) The European Commission has agreed to review the case, meaning it could ultimately decide to exclude Chinese panel prices from the benchmark. That would almost certainly raise the benchmark, forcing Chinese panel makers to sell their products for higher prices.

This particular development is just the latest wrinkle in the protests from European manufacturers, who would really just prefer to see implementation of the originally proposed anti-dumping tariffs rather than this attempt to modify the earlier agreement. In a move in that direction, German panel maker Solarworld (SRWRF) last week filed a formal request for a probe into its Chinese rivals, saying they were violating the earlier agreement. (previous post)

I’ve personally heard and read about a number of methods the Chinese are using to undermine the agreement. Many involve finding ways to secretly rebate money to their customers, using vehicles like consulting fees to make such payments. This kind of behavior is relatively typical of Chinese companies, which often enter into agreements and then look for ways to undermine those same agreements in ways that will benefit themselves.

A changing of the benchmarking process won’t really address this central problem, namely that many of the Chinese companies will continue to look for ways to sell their panels at very low prices using tricks like backdoor rebates. When the EU comes to that realization, the result will almost certainly be a scrapping of the 2013 compromise deal, and I do expect we’ll see the original plan for punitive tariffs imposed by the end of this year.

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.

May 03, 2015

Value Trapped: Ten Clean Energy Stocks For 2015, April Update

Tom Konrad CFA

 My Ten Clean Energy Stocks for 2015 model portfolio held on to first quarter gains in April, despite a 29% fall for one of the stocks.  (For details on that decline, see the Power REIT (NYSE:PW) section below.)  The portfolio as a whole was rescued by the recovering Canadian Dollar and Euro, as well as mild advances for most of the other stocks across the board.  That includes a 4.9% gain for TransAlta Renewables (TSX:RNW, OTC:TRSWF), and a 5.8% gain for FutureFuel (NYSE:FF) which I singled out as having "fallen too far" in last month's update.

As a whole, the model portfolio fell 0.7% in April and is up 4.9% for the year to April 30th.  This compares to a 2.6% April decline for its broad market benchmark, IWM, which is down 3.7% year to date (YTD).

Income and Value Divergence

However, the overall averages are a product of the excellent performance of the six income stocks masking the miserable performance of the four value and growth stocks.  The income group was up 4.2% for April, and is up 14.6% YTD.  This compares to a 1.9% monthly gain and 3.7% year to date loss for its benchmark, JXI.  The fossil fuel free income portfolio I manage with Green Alpha Advisors, GAGEIP, is also doing well, with a 3.1% gain in April, and a YTD 8.6% gain.

In contrast, the four growth and value stocks lost 8.0% for the month, and are down 9.7% for the year.  This compares to their clean energy ETF benchmark (PBW), which rose 3.0% for the month and is up 9.3% for the year.

The chart below (click for larger version) gives details of individual stock performance, followed by a discussion of April news for each stock.

10 for 15 Performance
Chart

The low and high targets given below are my estimates of the range within which I expected each stock to finish 2015 when I compiled the list at the end of 2014.

Income Stocks

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/31/2014 Price: $14.23.  Annual Dividend: $1.04.  Beta: 0.81.  Low Target: $13.50.  High Target: $17. 
4/30/2015 Price: $19.00. YTD Dividend: $0.26  YTD Total Return: 35.3%.

The stock of sustainable infrastructure financier and Real Estate Investment Trust Hannon Armstrong added to previous gains in April, despite a secondary share offering of 4 million shares priced at $18.50 a share.  The strength is most likely due to a well timed earnings guidance update for the first quarter released on April 28th.

2. General Cable Corp. (NYSE:BGC)
12/31/2014 Price: $14.90.  Annual Dividend: $0.72.  Beta: 1.54.  Low Target: $10.  High Target: $30. 
4/30/2015 Price: $16.31. YTD Dividend: $0.  YTD Total Return: 9.5%.

International manufacturer of electrical and fiber optic cable General Cable Corp. gave back some of its previous gains.  The gains come because of buyout rumors, discussed in the last update.  Although the reasons for a possible buyout are just as good as they were in March, this is typical performance for a stock after buyout rumors: The stock declines slowly as traders lose interest and move on to the next item in the news cycle.  The company will discuss first quarter earnings with analysts on May 7th.  Management is sure to be asked about the rumors at that time, although I doubt they will say anything to feed renewed speculative frenzy.

3. TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/2014 Price: C$11.48.  Annual Dividend: C$0.77.   Low Target: C$10.  High Target: C$15. 
4/30/2015 Price: C$12.47. YTD Dividend: C$0.26  YTD Total C$ Return: 10.9%. YTD Total US$ Return: 6.6%.

I highlighted Canadian yieldco TransAlta Renewables as a good short-term buy last month because of what I believe to be a temporary sell-off following the announcement of a secondary offering of stock priced at C$12.65.  The stock initially advanced, but then fell back when the deal closed.  After its normal monthly C$0.06416 dividend, the stock was flat in local currency terms, but up 4.9% in US$ terms because of the appreciating Canadian dollar. 

If anything, now is an even better time to buy TransAlta Renewables given that it has not advanced in local currency terms, and it will soon increase its monthly dividend to C$0.07.  Analysts seem to agree: TD Securities upgraded the stock from "hold" to "buy" and raised its price target from C$13.50 to C$15.50. Macquarie maintained a neutral rating, but increased its price target from C$13 to C$14.

4. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF).
12/31/2014 Price: C$3.20. 
Annual Dividend C$0.30.  Low Target: C$3.  High Target: C$5.  
4/30/2015 Price: C$3.70. YTD Dividend: C$0.075  YTD Total C$ Return: 18.0%.  YTD Total US$ Return: 13.5%.

Canadian power producer and developer (yieldco) Capstone Infrastructure revealed that Ontario Electricity Financial Corporation had appealed the March 12th decision from the Ontario Superior Court discussed in the last update.  If the ruling is upheld, it will result in a C$25 million (C$0.26) retroactive payment and an ongoing revenue increase at two of Capstones hydropower facilities.  The stock continued to recover from previous lows.

5. New Flyer Industries (TSX:NFI, OTC:NFYEF).
12/31/2014 Price:
C$13.48.  Annual Dividend: C$0.585.  Low Target: C$10.  High Target: C$20. 
4/30/2015 Price: C$14.32. YTD Dividend: C$0.20  YTD Total C$ Return: 7.7%.  YTD Total US$ Return: 3.6%.

Leading North American bus manufacturer New Flyer announced its new orders and backlog for the first quarter.  Order activity remains brisk.  Although New Flyer delivered 572 EUs in the quarter, compared to 494 new firm orders and exercised options, backlog including options increased from 2,469 to 29,30 EUs.  The company's aftermarket business continues to grow as well.

For investors new to New Flyer, Livio Filice gave a good overview on Seeking Alpha.

6. Accell Group (XAMS:ACCEL, OTC:ACGPF).
12/31/2014 Price: €13.60. 
Annual Dividend: €0.61.  Low Target: 12.  High Target: €20.
4/30/2015 Price: €16.84. YTD Dividend: 0.61  YTD Total Return: 28.3%.  YTD Total US$ Return: 18.9%.

Bicycle manufacturer Accell Group reported record revenue and profits for 2014, on strong electric and sport bike sales and favorable weather in Europe this past winter.  The company also reported that 2015 had gotten off to a favorable start, despite the volatility of the Euro.  Shareholders approved a €0.61 dividend, up from €0.55 last year.  The stock went ex-dividend on April 27th.

Value Stocks

7. Future Fuel Corp. (NYSE:FF)
12/31/2014 Price: $13.02.  Annual Dividend: $0.24.   Beta 0.36.  Low Target: $10.  High Target: $20.
4/30/2015 Price: $10.87 YTD Dividend: $0.06.  YTD Total Return: -16.1%.

Last month, I highlighted specialty chemicals and biodiesel producer FutureFuel as one of two short term buys based on undervaluation.  Like TransAlta Renewables, FutureFuel's return was not particularly impressive, but it did advance 5.8%.  The advance was helped by the EPA's agreement to finalize volumes for 2014 and 2015 under the Renewable Fuel Standard by November 30th.  The Agency also intends to finalize the rule for 2016 before the end of the year.  Uncertainty over the repeated delays of the EPAs rule making have been undermining the biofuels markets and FutureFuel's profits since the EPA missed its deadline for the 2014 rules in November 2013.

8. Power REIT (NYSE:PW).
12/31/2014 Price: $8.35
Annual Dividend: $0.  Beta: 0.52.  Low Target: $5.  High Target: $20.
4/30/2015 Price: $6.14. YTD Total Return: -26.5%.

As mentioned above, the judge ruled against Power REIT in summary judgement on April 24th.  I wrote about the ruling and my new valuation for Power REIT ($5 to $7) here.  The judge also called a status conference with both parties for April 29th.  My hope is that Power REIT decided not to appeal and its lessees dropped the remaining minor claims, but the company has not yet released any information regarding the outcome of the conference.

Although the judge ruled against Power REIT on every count, there were two bright spots in the ruling.  First, the company can now drop the case without the expense of a prolonged trial. It was due to this savings in legal expenses that my current valuation exceeds my previously estimate ($5) of Power REIT's value in the case of a total loss.

The other upside comes from Power REIT's preferred stock (PW-PA,) which I have previously described as a hedge against the possibility of a loss in the civil case.  Although the preferred sold off briefly in the wake of its ruling, calmer heads soon prevailed. Prior to the ruling, the preferred had been trading in the $25.50 to $26 range, but it is now trading around $27.  The increase is due to the fact that the preferred dividends (like dividends on the common) should now be treated for tax purposes as return of capital, rather than as ordinary income.

9. Ameresco, Inc. (NASD:AMRC).
12/31/2014 Price: $7.00
Annual Dividend: $0.  Beta: 1.36.  Low Target: $6.  High Target: $16.
4/30/2015 Price: $6.72. YTD Total Return: -4.0%.

Energy service contractor Ameresco continues to announce both solar and energy efficiency contracts, but has yet to catch investor attention.  The stock drifted down after some excitement last month over the Obama administration's renewed push for energy efficiency in Federal agencies.

Growth Stock

10. MiX Telematics Limited (NASD:MIXT).
12/31/2014 Price: $
6.50Annual Dividend: $0.  Beta:  0.78.  Low Target: $5.  High Target: $20.
4/30/2015 Price: $7.00. YTD Dividend: $0.  YTD Total South African Rand Return: 11.0%.  YTD Total US$ Return: 7.7%.

Vehicle and fleet management software-as-a-service provider MiX Telematics was mostly flat with a slight decline in South African rand terms offset by appreciation of the rand against the dollar.  I find the lack of movement puzzling, given the likelihood that the company is currently negotiating a sale.  Readers can find an excellent in-depth look at MiX's current undervaluation and prospects for a buy-out here.

Final Thoughts

With my growing focus on income stocks and the launch of the Green Alpha Global Equity Income Portfolio strategy late last year, I had seriously considered placing only income stocks on this list for 2015.  Unfortunately, a colleague talked me out of the idea, saying that readers expect a broader focus for my lists of "Ten Clean Energy Stocks," which I have been publishing since 2007. 

If this year's results are anything to go by, I'm a lot better at picking income stocks than I am at picking value and growth stock.  I also suspect that a systematic review of previous years would lead to the same conclusion. Many of my biggest winners have been income stocks, and many my biggest losers have been value or growth stocks. 

It's hard to be good at all things, but it is possible to know your strengths.  I'm tired of getting caught in value traps.  I'm re-considering making the tenth annual "10 Clean Energy Stocks" list into "10 Clean Energy Income Stocks for 2016."

On the subject of a much more recent tradition, I've managed to pick two or three winners from this list for the coming month for two months running.  For May, I'm going to stick with TransAlta Renewables and bring MiX Telematics back from March, for the reasons discussed above.

Disclosure: Long HASI, CSE/MCQPF, ACCEL/ACGPF, NFI/NFYEF, AMRC, MIXT, PW, PW-PA, FF, BGC, RNW/TRSWF.  I am the co-manager of the GAGEIP strategy.

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.

May 01, 2015

Yingli Can Make Debt Payment, But It's Still Weak

Doug Young

Bottom line: Yingli appears to be in financial distress but will avoid defaulting on debt obligations coming due next week, while China’s broader solar panel sector is likely to face new anti-dumping tariffs in Europe later this year.

The solar panel sector has become quite a turbulent place these days, riding high one day on reports of major new plant construction, only to stumble the next on signs of conflict and financial distress. This kind of conflicting news reflects the fact that the industry is still in the midst of a major overhaul that could ultimately see a few more companies get closed down or purchased, leaving a smaller field of the biggest, best-run players to survive over the longer term.

The latest signs of distress are coming from Yingli Green Energy (NYSE: YGE), one of China’s largest players, which has just announced it has the necessary funds to pay off a bond that will mature next week. Some may see such an announcement as a sign of strength; but the fact that Yingli is taking the unusual step of making an announcement seems aimed at allaying market concerns that it might not make the payment. The other big distress sign is coming from reports that indicate Europe could soon re-launch an anti-dumping probe into Chinese solar panels, following complaints that the Chinese are violating an earlier agreement designed to avoid punitive import tariffs.

The field of remaining Chinese solar panel makers is rapidly dividing into 2 camps, one including names like Canadian Solar (Nasdaq: CSIQ) and Trina (NYSE: TSL), which are generally healthier and better run and thus more likely to emerge as future sector leaders. On the other side of the aisle are shakier companies like Yingli and ReneSola (NYSE: SOL), whose shares have both fallen into the $1 range amid concerns about their longer term prospects.

Yingli was almost certainly looking to allay some of those concerns with its new announcement that it has enough money to pay off 1.2 billion yuan ($200 million) in medium-term notes that will come due next week. (company announcement) Yingli added it has given the necessary funds to a third party as trustee, ensuring that the payment will be made on time.

Yingli’s move comes just a week after Tianwei, another solar products maker that is also from Yingli’s hometown of Baoding in northeast Hebei province, made an unprecedented default on an interest payment for a domestic bond. (English article) Last week, Yingli also announced that it sold some of its idle land in Baoding for 588 million yuan (company announcement), and I strongly suspect some or all of that money is now being used to pay off the bond that comes due next week.

Yingli’s stock was down 0.5 percent after its latest announcement this week, and now trades near a 52-week low that’s not much higher than the all-time lows it posted at the height of a major sector downturn 3 years ago. The company appears to have dodged a bullet for now, but its condition certainly doesn’t look that encouraging over the medium to longer term.

We’ll close out this post with a look at the bigger news that Germany’s Solarworld (SRWRF) has filed a formal request for a probe into Chinese panel makers, saying they are violating an earlier agreement aimed at ending a dispute over allegations of unfair state support. The 2 sides signed their landmark agreement in late 2013, with the Chinese panel makers agreeing to voluntarily raise prices in exchange for avoiding formal punitive tariffs.

Media first reported last month that many of the Chinese companies were violating the agreement by using a range of ways to negate their own price hikes (previous post), and Solarworld’s formal complaint means another formal probe is likely to follow soon. (English article) Solarworld is quite a powerful company, and was one of the main driving forces behind probes that ultimately saw the Chinese companies slapped with punitive tariffs in the US and face similar previous action in Europe. Accordingly, this latest complaint looks likely to launch a similar process that could ultimately see the Chinese manufacturers slapped with new punitive tariffs in Europe later this year.

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.

« April 2015 | Main | June 2015 »




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