Bill Paul

In the wake of the massive Gulf of Mexico oil spill, it’s clear the U.S. needs to end its crude-oil addiction as much to protect its economy as the environment.

To move the future forward, America needs one company in particular to come through on behalf of all Americans. In a cruel twist of fate, that company is ExxonMobil (XOM), which is working on arguably the most important energy-research project in the world today. Namely, a project to replace crude with genetically-modified algae that can be cost-effectively refined using existing refinery equipment.

A year ago when Exxon announced its algae project with biotech pioneer J. Craig Venter, the company said that it would take at least 5-10 years to produce commercial quantities of algae-based fuels. “My suspicion, and it’s just a suspicion, is that they still see it as five to 10 years away,” says Addison Wiggin, editorial director of The Daily Reckoning, who has been looking into the Exxon-Venter project for a forthcoming documentary on entrepreneurs in the post-crisis financial world.

Too long. As video of the black death pouring out of that ruptured pipeline gushes onto every American TV and computer screen, it's time for President Obama to declare a new Manhattan Project, a new man-to-moon space race. The goal must be to take America off its crude addiction in less than five years with a literally home-grown industry that will create tens of thousands of agricultural and other jobs without jeopardizing the existing oil industry’s trillion-dollar infrastructure.

Exxon shares would surge the moment this plan became publicly known; however, the President can’t allow the investor payoff to be too bountiful. There will have to be safeguards against Exxon controlling the applicable patents in order to prevent the company from controlling America’s energy future.

Algae oil is no panacea, the President will further need to say. Accelerated development of plug-in electric and all-electric vehicles is needed in order for the U.S. to have, by 2020 or sooner, a nationally-secure, environmentally-sound transportation infrastructure.

In a second twist of fate, not only would Exxon shares likely surge in price, so too might the shares of utilities that generate a lot of electricity from coal. Companies such as Duke Energy (DUK), Southern (SO) and FirstEnergy (FE) might lose their pariah image if part of the President’s strategy were to capture coal plants’ carbon dioxide and use it to accelerate algae growth.

For risk-inclined investors who believe that all this may be on the way, a company that might be worth a closer look right now is tiny OriginOil. (OOIL.OB). The company has started signing up customers as it begins commercializing a technology for producing biofuel from algae using CO2 emissions captured from smokestacks.

Disclosure: No positions

ED NOTE: Follow this link for a look at four algae oil companies, including OriginOil.

Posted by Bill Paul at 06:00 PM | Permalink | Comments (0)

Tom Konrad CFA

There are two types of solution to the liquid fuels scarcity caused by stagnating (and eventually falling) oil supplies combined with growing demand in emerging economies.  The most obvious is to find a substitute to replace oil.  These substitute have barriers to their use as a replacment petroleum based fuel.  Understanding those barriers also leads us to the investment opportunities that arise from these substitutes. 

As I wrote the first five parts of this series, looking into potential substitutes for gasoline and diesel, it was clear that many potential substitutes would need to overcome barriers to its adoption.  This article and the next will look at these barriers, and what they say about the potential for investments in substitutes for liquid fuels from petroleum.  Part VII will look at factors which constrain the supply of these substitutes.  Part VIII will combine the resulting understanding of these barriers and constraints to highlight the investment opportunities arising from them.

Barrier: Infrastructure

One great advantage gasoline and diesel have over most of the proposed alternatives is an extensive infrastructure.  In addition to an extensive pipeline network, we also have a large number of competing fueling stations.  If a new fuel requires new fueling stations, like natural gas and hydrogen, or charging points and (potentially) battery swapping stations (electricity) it may not be enough to make sure that enough filling stations exist for would-be drivers to make long trips.  If there is only one national network of filling stations, drivers will likely become concerned that the lack of competition will mean that they overpay for fuel.

Among the possible substitutes, the synthetic fuels discussed in part IV, as well as biogasoline are the best placed in that they can use existing infrastructure. 

In terms of having a nationwide transportation network, the best placed substitutes are natural gas and electricity.  In terms of point of sale delivery, electricity has an advantage in that it's safe and relatively cheap to place charging infrastructure in parking lots, and most homes already have the capability of charging an electric vehicle, although it takes a long time from the 120V outlets in most garages.  Most homes do not have natural gas in the garage, and even when they do, a compressor is necessary. 

Conventional biodiesel and ethanol can be dispensed from the same pumps used for fossil fuels, but both present some difficulties in transport and storage.  Biodiesel cannot be allowed to get too cold, because it begins to congeal, so in colder climates, storage tanks as well as transport tankers must be insulated and even heated.  Ethanol cannot be shipped through pipelines that are also used for gasoline, because it absorbs too much water.  Hence ethanol and biodiesel are mostly shipped in tanker trucks and rail cars.  But both can be blended with conventional fuels, meaning that little new dispensing infrastructure is needed.  The importance of a competitive fueling infrastructure can be seen in in this November 2009 statement from the Trucking industry to the US Senate [pdf] about the conversion of trucking from diesel to natural gas.  They say,

It is not sufficient to have a single LNG vendor with stations built at strategic locations along key freight corridors. Absent a competitive refueling infrastructure, trucking companies could face unreasonably high prices at individual retail LNG stations that have no competition in a particular geographic area. While competition exists in the natural gas industry, the high barriers to entry for retail LNG refueling stations may slow the development of a competitive refueling infrastructure. A competitive LNG refueling model would require the presence of multiple entities selling LNG in the same geographic area.

This objection applies to any potential alternative vehicle which locks the user into one fuel, and includes Electric Vehicles (EVs) such as the Nissan Leaf and Hydrogen Fuel Cell Vehicles, but not to flex fuel vehicles (E85 ethanol) or biodiesel (which can be used in any diesel engine.)  It also does not apply to Plug-in Hybrid Electric vehicles, such as the Chevy Volt, because while charging points and battery swapping stations may be limited, the existing fueling infrastructure provides supply competition.

The fuel with the weakest infrastructure is hydrogen.  Like natural gas, it needs specialized filling stations, but hydrogen lacks a national pipeline network.

Incomplete infrastructure can be either a barrier or an opportunity.  If a potential fuel is compelling for other reasons, firms well placed to provide the necessary infrastructure should be able to profit handsomely.  If, on the other hand, a fuel lacks an existing infrastructure and also faces significant other barriers, it will be unlikely to become a significant transportation fuel, and infrastructure investors are likely to lose their shirts along with everyone else interested in the fuel.

Barriers: Energy Density

When talking about energy density, it's important to consider not only the fuel, but the tank.  Both volume and weight are important.  Few fuels are as energy-dense as gasoline and diesel, both of which can be stored in simple, unpressurized fuel tanks.  In contrast, the fuel tank for electric vehicles is the battery, and batteries are not only large and heavy for the amount of energy they store, they are also extremely expensive and degrade over time.  Although the cost of driving an electric vehicle are very low compared to gas or diesel, the large up-front investment in batteries makes the total cost of owning an eelctric vehicle higher except for drivers who use the vehicle for frequent, short trips with time to recharge in between. 

The big winners for energy density are synthetic fuels, as well as conventional biofuels such as ethanol and biodiesel.  Although ethanol has been criticized because it only contains about 2/3 of the energy of the same volume of gasoline, it's close enough that people using ethanol don't have to completely change their behavior in order to use it in a conventional vehicle.  In contrast, electric vehicle manufacturers find that the range of their vehicles is constrained not only by the cost of batteries, but also by their size and weight.  Weight is particularly important, because as a vehicle gets heavier, more of the energy is used to move the vehicle rather than the occupants, which in turn requires even more batteries.

In between energy-dense biofuels and bulky batteries lie gaseous fuels: natural gas and hydrogen, which have good energy per gram, but require heavy pressurized tanks to pack them into a space small enough to fit in a vehicle.  Hydrogen requires a pressurized tank that takes up a lot of space, even if it is not very heavy.  Natural gas can either be used as Compressed natural gas (CNG) or Liquid Natural Gas (LNG.)  CNG is similar to hydrogen, although it is a little more energy dense.  LNG has the same energy density as diesel, but requires considerable energy to compress into that form, and is not available from a home fueling station.  Hence, natural gas vehicles present a tradeoff between energy density and fueling infrastructure.

Conclusion

Considering just the barriers of energy density and infrastructure, it is clear why the conventional biofuels ethanol and biodiesel gained an early lead over alternatives such as electricity and hydrogen.  The big questions about biofuels arise from constraints in their total supply, and the harm that many forms of biofuel agriculture do to the environment.  Synthetic fuels made from natural gas and coal (GTL and CTL) can also have excellent energy density and can take advantage of existing infrastructure and vehicle fleets, but so far have not been adopted in a large way becasue they have had to compete with cheap oil.  As oil prices rise, we will probably also see the rise of synthetic fuels, but, like biofuels, their long term prospects will be limited by total supply and possibly by concern about the environmental harm they do. 

Such supply constraints and environmental concerns will be the subject of Part VII.  Previous articles have been:

1. Biofuels
2. Hydrogen and Vehicle Eletrification
3. Natural Gas Vehicles
4. Synthetic fuels: GTL and CTL
5. Algae
   

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 10:14 AM | Permalink | Comments (7)

Tom Konrad CFA

There are many proposed solutions to the liquid fuels scarcity caused be stagnating (and eventually falling) oil supplies combined with growing demand in emerging economies.  Some will be good investments, others won't.  Here is where I'm putting my money, and why.  This fifth part takes a look at the growing consensus that our biofuels should come from non-food crops grown on land that is not otherwise productive, and the one crop that shows promise of delivering the high yields needed to satisfy our enormous thirst for fuel is algae.

In part I of this series on Peak Oil investments, I looked at Biofuels and Biochemicals as a substitute for petroleum based transportation fuels and chemicals.  I concluded that the best such investments were investments in biofuel feedstocks, but one such feedstock I didn't mention was algae.  

The Promise of Algae

If you need to own your own feedstock to be a profitable biofuel company, you can either grow it, or make use of the waste from some other economic activity.   The potential of biofuel from waste is inherently limited by the waste currently produced, and the amount of available waste is likely to fall over time as the economy becomes more resource-efficient because of rising commodity prices.  While I think compaines that control waste streams care good investment opportunities, waste is inherently limited when it comes to replacing oil.  It's the very limitation of waste as a resource that makes it a good investment.

If you grow your feedstock on good agricultural land, you will be giving up the opportunity to produce valuable food.  If you grow hardy non-food crops on marginal land, you will probably have very low yields.  For instance, Jatropha has long been heralded as a non-food crop that can produce oil for biodiesel on marginal land, but the best Jatropha yeilds are produced on well-drained soil with ample fertilizer and rainfall or irrigation.  Since most arable land and available water are already in use, the potential for additional biofuel production from conventional crops is limited.

Many observers herald biofuel from algae as a way to thread this needle.  Algae grown in open ponds is likely to produce 5,000-10,000 gallons of oil per acre per year, while companies using bioreactors have made claims approaching 10 million gallons per acre.   The higher-end claims for algae in bioreactors are either pure fantasy, or would require vertical farms with artificial light, but a 100,000 gallons per acre per year (1/100th of the high-end claims) is generally considered achievable.  For comparison, Zeachem is aiming for 2,000 gallons of ethanol per acre of sugarcane per year, one of the most productive conventional biofuel crops.  Corn produces less than 500 gallons of ethanol per acre per year.

The potential of a hundred times improvement in fuel yields over conventional crops keeps people excited about algae.  On paper, such yeilds would allow algae to replace oil in our economy.  Actually achieving these yields is tricky.  Open ponds have problems with contamination by wild algae, and evaporate enormous amounts of water into the atmosphere.  They also need to be fed with carbon dioxide and nutrients to achieve good yields, without so much stirring that the algae (which prefer still water) are disturbed.  Bioreactors help solve the contamination and water evaporation problems, and can allow more surface area for light absorption and algal growth.  But bioreactors cost much more than open ponds, and require more maintainance and attention to keep them at the proper temperatures and light levels.  Like open ponds, they need to be fed CO2 and micronutrients to achieve optimal growth without creating too much turbulence for the algae to grow.

Yes, But

One of the greatest dangers for Alternative Energy investors is confusing great technological potential with great investment potential.  I recently argued that solar stocks are not a good long term investment because of extreme competition and a rapidly evolving technology.  The same arguments apply to algae companies, most importantly the the point about rapidly evolving technology.  While solar technology got its start in the 60s and 70s, algae research began only in the 1990s.  We still don't know what sort of bioreactors will end up being economic, which types of algae will work best, and what the best ways to extract the oil from the algae will be.  This is an extremely immature technology, and as such, it is unlikely to be a profitable sector for investors in public companies.  With over 200 startups working on algae, only four of which are public (see below), the most likely winners are private companies.   Many of the winners have not even been incoprorated yet. 

That said, I think that bioreactor companies will probably dominate the industry over the long term.  In the short term, open ponds probably have an advantage, because they require less technological development and lower capital cost, but their long term potential is limited compared to bioreactors.  Open ponds are only practical in areas with abundant water, and these locations will likely be suitable for other forms of farming.   High-productivity algae farms will need to be located near a source of carbon dioxide, such as a power plant, and be in sunny locations.  These conditions will probably favor the bioreactors, which can be located in dry, sunny locations. 

Stocks

Here's a quick list of the publicly traded companies I know of that are working on algae, and what they do:

Green Star Products, Inc. (GSPI.PK).  Green Star's primary business seems to be selling continuous flow biodiesel reactor technology.  This is not a great business because it's currently hard to sell biodiesel for more than the cost of the inputs needed to make it.  They have also developed a formulation of micronutrients that they think are excellent for increasing the productivity of certain algae strains.

OriginOil, Inc. (OOIL.OB). Origin has developed a process using electromagnetic fields to extract oil from living algae without killing the cell.  If they can make it work at reasonable cost, this technology should be a real boon to the industry.  Unfortunately, the company is losing money hand over fist, and does not have revenues or cash to speak of.  Since the company will have to keep raising new money from investors for the foreseeable future, the stock will almost certainly continue to fall until it can begin to fund its operations internally.

PetroAlgae, (PALG.OB). PetroAlgae is attempting to commercialize an open pond "microcrop" technology (they are working with other small aquatic plants such as duckweed as well as algae.)  Yields will likely be relatively low for algae because they do not add carbon dioxide to the process, and they will have to cope with large water losses from evaporation.  Like OriginOil, PetroAlgae has no revenues and will need to raise money soon to continue operations.  On March 5, the company privately sold stock at $8 per share, despite the fact that its shares are currently trading for around $22 on the open market.  I can't imagine why the stock has climbed since it went public in 2008 at around $3.  If you can find shares to borrow, this looks like a stock to short.

PetroSun Inc. (PSUD.PK).  Back in September 2007, PetroSun made a splash as the first public company to try to commercialize algae for biofuel.    I was skeptical at the time, and said so in March 2008.  My skepticism now seems justified, since now their website has a couple mentions of algae, but the catfish farms they converted into algae farms in 2009 are not mentioned, and their only projects and prospects are traditional oil and gas projects.  The stock is down to $0.045 from $0.16 since I panned it in 2008.

Conclusion

Algae has great promise for producing liquid fuels in sufficient quantity to replace petroleum, and it can do so without using excessive water or farmland.  That potential, however, is fairly far off.  The technology is capital intensive and far from commercialization, a combination almost certain to make investors in the public stocks poorer rather than richer.  If and when fuel made from algae is available in significant quantity to make a dent in our thirst for fossil fuels, it will probably have been developed by companies that public investors cannot currently buy.  Stock market investors should wait until this industry matures from its current infancy to something closer to adolescence.  Buyers of the current batch of infant companies are likely to suffer the fate of other new parents: many sleepless nights.

Other articles in this series on Peak Oil investments:

1. Biofuels
2. Vehicle electrification and hydrogen
3. Natural Gas Vehicles
4. Biomass-to-Liquids, Gas-to-Liquids, and Coal-to-Liquids.
   

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 08:31 AM | Permalink | Comments (0)

Tom Konrad CFA

There are many proposed solutions to the liquid fuels scarcity caused by stagnating (and eventually falling) oil supplies combined with growing demand in emerging economies.  Some will be good investments, others won't.  Here is where I'm putting my money, and why.  This first part looks at biofuel strategies for replacing oil.

World oil supplies are stagnant, and in the not-so-distant future will begin to decline.  If economic growth continues, demand for oil will increase as well.  This will lead to a long term rise in oil prices, which will only stop if 1) high oil prices or other factors stop or reverse economic growth, or 2) we find some way to use much less oil for the same amount of economic activity.  Each of these scenarios will have winners and losers.  In other words, investment opportunities. 

Substitution

The most obvious strategy for dealing with peak oil is substitution.  If we can find another form of energy in place of oil, then our economy can grow without more painful adjustments.  These strategies are among the most popular, because they hold out the hope that we'll be able to transition with a minimum of pain.  That is wishful thinking.  There will be a market for petroleum substitutes, but those substitutes are likely to be more expensive and supply-limited than oil currently is.  We will have to adapt in other ways as well as using substitutes.

The leading substitutes include

1. Biofuels and Biochemicals
   
2. Electric vehicles
3. Hydrogen
4. Natural Gas
   

Biofuels and Bioplastics include a whole range of technologies which convert plant and animal matter into useful substances similar to the extremely useful transportation fuels, chemicals, and plastics that we currently get from oil. 

Only some biomass is easy to convert into fuels, like sugars and starches into ethanol, and oils into biodiesel.  But it is no coincidence that such biomass is also useful as food.  We eat these things because our bodies can easily convert them into useful energy.  We don't eat wood chips or grass because they are difficult to digest and convert into energy.   Biofuels substitution strategies all essentially involve diverting biomass from somewhere else in the economy (or land on which to grow the biomass from other forms of agriculture) to producing oil substitutes.  The more inputs we divert, the more expensive the products we might have used those inputs for become.  This produces a commodity squeeze, when the inputs become more expensive but the price for the output is set by the oil price.  Such a commodity squeeze led to the current problems in the corn ethanol and biodiesel industries.

Fortunately, we currently have a lot of biomass in our economy that is currently wasted.  Waste oil can be easily converted into biodiesel, and companies are looking at ways to convert the various components of Municipal Solid Waste into ethanol or other biofuels.  Municipal solid waste has a lot of biomass in it, but its uneven nature means that it's hard to convert into ethanol.  Some of the best such waste is industrial food waste because it is othen quite uniform, and homogeneity makes it easier to convert into fuels. 

Although we are an extremely wasteful society, the amount of waste that can usefully be converted into oil substitutes is small relative to the amount of oil we currently use.  That means that as conversion technologies are developed, there will be a scramble for useful feedstock to convert to biofuels.  Since the limiting factor for biofuels is likely to be feedstock, the companies most likely to benefit from a trend towards biofuels are the people who own the feedstock.  For example, corn farmers have done much better out of the ethanol boom than the ethanol producers.  Although many ethanol firms have filed for bankruptcy, and the ones that survived are barely profitable, corn acreage and prices are still high compared to 5 years ago.

Monthly corn price chart from tradingcharts.com

Conclusion

The best biofuels investments are likely to be the companies that own or can produce the feedstocks.  I particularly like the companies that own or control municipal waste, since it's currently free or even has a negative price (i.e. people will pay you to take it off their hands.)  That's why Waste Management (WM) was one of my Ten Clean Energy Stocks for 2010.  I also like forestry companies, since they currently produce forestry waste that could become a valuable feedstock for cellulosic ethanol, or simply be co-fired in existing coal plants to generate electricity without net carbon emissions.

I'll take up some of the other substitution strategies in the next part of this series.

DISCLOSURE: Long WM.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 12:09 AM | Permalink | Comments (5)

Portfolio theory can lend insights into which carbon abatement strategies policymakers should pursue.  If policymakers listen, what will it mean for green investors?

Tom Konrad, Ph.D., CFA

Good Info, Not Enough Analysis

I've now read most of my review copy of Investment Opportunities for a Low Carbon World.  The quality of the information is generally excellent, as Charles has described in his reviews of the Wind and Solar and Efficiency and Geothermal chapters.  As a resource on the state of Cleantech industries, it's generally excellent.  As an investing resource, however, it leaves something to be desired.  Each chapter is written by a different expert in a particular field, which means that the information is up to date, and comprehensive, but this approach means that there is little attempt to compare the potential of the different investment opportunities presented.  What is the point of in-depth research into carbon abatement technologies if we do not then take the next logical step and emphasize the technologies with the greatest potential for carbon abatement and investment returns?

A Portfolio Approach

The most useful attempt at investment decision-making is buried in the otherwise uninspiring last part of the book. A summary of a 2007 report from the London Accord, A Portfolio Approach to Climate Change Investment and Policy is buried among self-promoting chapters from companies such as Nissan (NSANY)and BP (BP) promoting their (real) investments in clean technology,   The report uses a Monte Carlo implementation of Modern Portfolio Theory to determine low-risk mixes (portfolios) of carbon-mitigation strategies, and was written by Professor Michael Mainelli of Z/Yen Group, and James Palmer.

While intended primarily for policy decision-makers, A Portfolio Approach attempts to determine which portfolio of carbon reduction technologies is likely to produce a desired level of climate change at the lowest cost (or highest investment returns) at the lowest risk of failing to achieve the reduction goal.  Phrased this way, it is easy to see why portfolio theory is an appropriate tool, since it is designed to minimize systematic (overall) risk even when all individual strategies in the portfolio have significant risks of achieving the expected returns and carbon reductions.

Data

The data on various carbon reduction strategies came mainly from the 2007 IPCC Working Group report, "Mitigation of Climate Change."  This report is not complete, omitting some technologies with significant CO₂ reduction potential, in particular solar thermal collectors such as solar hot water heaters and larger installations for process heat in industrial processes.  "Solar," as referred to in the report, refers solely to solar Photovoltaic and Concentrating Solar Power (CSP.)

One decision I found questionable was to ignore the carbon reduction potential of investments with "negative abatement costs on the basis that these investments should be undertaken under any business-as-usual scenario, and are not strictly investment measures as a response to climate change." (p5/22)  This is circular logic.  For an investment with negative cot to exist, there must be a market failure.  Almost by definition, in a well functioning market, all investments with negative cost will have already been made.  Simply saying that these investments "should" be made assumes that these market failures will correct themselves without any effort on the part of policymakers.  Why should energy market failures correct themselves in the future if they have not already?  

In the authors' defense, they run one scenario (#3) in which investments with negative abatement costs are allowed, and they state "Further examination of negative abatement proposals seems in order, as it should be important to understand why these investments fail to be made under current financial conditions.  Neglected negative abatement may justify regulatory intervention by policymakers, e.g. imposing minimum building or transportation efficiency requirements." (pp.17/22 and 18/22)  

From the hedging in this statement, and the fact that they spend less time discussing scenario 3 than either of their other two, I conclude that something prevents the authors from giving market failures the attention they are due.  I find this an extremely common failing among financial practitioners, and believe it is an unfortunate and common consequence of in-depth training in financial modeling.  Most financial models contain an assumption of market efficiency, and do not produce meaningful results in cases of large and persistent market inefficiencies.  Without tools to model market inefficiencies, practitioners are prone to ignore them, convincing themselves that the inefficiencies are unimportant or will cure themselves.  Most of the critiques of "Green Jobs" programs are based on this fallacy.

Put another way, if you have a hammer (a modeling technique which assumes market efficiency, such as modern portfolio theory), you tend to see all problems as if they are nails (efficient markets.)

Results

Since the authors only look at scenarios 1 and 2 (those which ignore negative cost investments) in depth, these are the scenarios I will focus on.  I believe the results of these scenarios are still relevant answers to the question, "After negative cost investments in energy efficiency have been made, which positive cost investments should we pursue?"  Even if all the necessary carbon reductions could be achieved with negative cost investments, it would most likely be unwise to pursue such an approach to mitigate climate change: like all investments, there is no assurance that the expected reductions/returns will be achieved.  Pursuing a wide variety of carbon-reduction strategies provides the greatest chance that some such strategies will achieve the expected reductions, and others will exceed expectations, thus making up for any investments in the mitigation portfolio which do not achieve the expected reductions.

The chart below shows a series of "frontier portfolios": That is, portfolios of carbon abatement investments which achieve specified levels of carbon abatement at minimal cost.  The vertical axis is gigatons (Gt) of equivalent CO₂ emissions (CO₂e) reduced annually, and the horizontal axis is the annual investment needed to achieve this level of reduction.

 

There are diminishing returns for carbon abatement, with the cost of incremental abatement increasing significantly above 15 Gt CO₂e per year, and no practical increase in abatement beyond 20 15 Gt CO₂e and $400B expenditure per year.  

For comparison, to stabilize the atmospheric concentration of CO₂ at 350 ppm, a goal which, according to Joe Romm, will require 8 Gt CO₂e (approximately portfolio 2) of reduction by 2030, and another 10 Gt CO₂e (for a total of 18 Gt CO₂e, or portfolio 4) by 2060.  Since the model does not include negative cost investments in energy efficiency or solar thermal collectors, it is likely that these levels of abatement could be achieved at considerably lower cost by incorporating these opportunities.

The pie charts in the first column show the fraction of carbon abatement expected from each investment in the selected frontier portfolios, while the second column shows the cost of each investment.  The two columns differ because different investments produce different levels of abatement per dollar of investment.  For instance, the cost wedge for Biofuels in portfolios 3 and 4 are much larger than the corresponding abatement wedges.  This indicates that abatement with biofuels is more expensive on a per-ton basis than for the other investments in those portfolios.

I will focus on portfolios 2, 3, and 4, since those are the portfolios which deliver the necessary levels of abatement, which we will need to ramp up to over the coming years and decades.

Forestry

The most striking thing about these portfolios is that Forestry dominates CO₂ abatement, as well as cost in portfolios 2 and 3.  The more aggressive portfolio 4 has three relatively large cost wedges: Building Efficiency, Forestry, and Biofuels.

Unfortunately, according to the report's authors, the carbon abatement from Forestry is very uncertain.  To make matters worse, the methodology used in the report is extremely sensitive to the expected returns (or abatement, in this case) of particular investment classes.  Small errors in the expected returns can lead to frontier portfolios which are dominated by a single investment class, in this case Forestry.  The report notes that "forestry abatement potential is highly uncertain." (p.8/22)  While we can conclude that forestry is likely to be a significant part of our carbon abatement strategy, there is a good chance that forestry will not dominate the mix as it does in the model.

For stock market investors who want to allocate part of their portfolio to forestry, I recently wrote about investing in forestry stocks and forestry exchange traded funds (ETFs). While I was focusing on the potential for forestry to benefit from biofuels and bio-electricity in the article, any marginal demand for forestry services (including carbon sequestration) should benefit this sector.

Hydropower

Hydropower is also a significant investment in these portfolios.  Much of this investment will probably take place in the developing world, but there are also significant opportunities for upgrades to facilities at existing dams in the developed world.  I looked at the potential for hydropower stock market investments last year.

Biofuels

Biofuels also contribute significantly to all the portfolios, especially in the higher abatement scenarios, although the costs are high relative to other investments.  I don't believe that this is very realistic if we are also going to have large contributions to carbon abatement from forestry.  My guess here is that the authors did not take into account the negative interactions between forestry and biofuels, where an increase in one will drive up the costs of the other because of competing land and water use.  Land used for forestry cannot also be used for biofuels, and vice versa.

Wind

We see significant contributions from wind in portfolios 3 and 4, and the costs and potential for wind are much better understood than for many of the other scenarios.  Better yet for stock market investors, investments in wind are simple, with two wind energy ETFs allowing a simple investment in the sector.  Of the two, I have a slight preference for FAN (you can see my reasoning here.)

Efficiency, in all its Forms

Finally, port folio 4 shows considerable investment in Building Efficiency and Industrial Efficiency (which we usually refer to as just Energy Efficiency), while portfolio 2 has a good slice of Transport efficiency (what we usually call Clean Transportation.)  Keep in mind that these slices are only investments that do not have "negative cost," that is they do not cost less than new investments in conventional generation.  Since efficiency dominates investments with negative cost, the total investments in all forms of efficiency are likely to be many times what we see in these graphs.  While there is not yet an energy efficiency ETF available, there is one focused on clean transportation, the Global Progressive Transport ETF (PTRP).  I also have a few stock picks in clean transport.

For industrial and building efficiency, there is no ETF, but here are five of my favorite efficiency stocks, and you can find a much larger list of energy efficiency stocks here.  It's also important to note that smart grid stocks will fall into this category as well, at least for the purposes of the report.   Here are five of my favorite smart grid stocks.

Geothermal

Geothermal also has a small slice of portfolios 2 and 4.  This is significant given the small current size of the industry: even these small slices imply rapid growth for an underappreciated sector.  I mentioned three geothermal stocks to consider here, but I have since sold my stake in Raser Technologies (RZ), and will probably not repurchase it.  Our Twitter followers saw that first.  Charles did a good run-down of the public geothermal stocks in June.   

Other Thoughts

It's also worth looking at what is not in the efficient portfolios, but since this entry is already quite a thesis, I'll save that for later.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 12:52 PM | Permalink | Comments (6) | TrackBacks (0)

Tom Konrad, Ph.D., CFA

Dyadic International hopes to use proprietary gene discovery to revolutionize cellulosic biofuel and pharmaceuticals.  Investors should stay away.

Dyadic International (DYAI.PK) says they are applying their "proprietary enabling biotechnologies for multi-billion dollar markets in industrial enzymes, biofuels and biotherapeutics."  A very exciting prospect, and just the sort of thing I've long warned investors to avoid.  In short, they are a company with gigantic claims and not a lot of track record to back them up.

Why I Care (I don't, really)

In our survey of readers, one respondent asked that I write more about stocks to avoid.  Dyadic added me to their press list a couple months ago, probably in response to my popular article on investing in advanced and cellulosic biofuels.  If so, it's ironic. If anyone at Dyadic had read the article and thought about it a little, they would have known that I would not recommend anyone buy the stock, just based on their business plan, let alone the disturbing information I found in their press releases (see below.)

Recently, Dyadic sent me an email starting with the line "As you have shown a prior interest in Dyadic International..." (I didn't.) I decided to take a look at the company.  Here is what I found:

Out of Date Filings, Possible Previous Securities Laws Violations

• The company has not filed an annual or quarterly report since 2006, at which time they were losing money.  Lacking more recent information, we can only assume that the financial situation has worsened.  Because of this, Dyadic does not even meet the minimal requirements to be on our stock list.
• The company has recently reached an agreement with the SEC in which they agreed to cease and desist from violating certain securities laws.
• They recently hired an auditor and they "plan" to begin filing financial reports on PinkSheets.  This would be good news, to someone who believes those plans are credible.  

Conclusion

At this point, I stopped looking.  Why would anyone buy stock in a company that is not providing current information, and whose promises sound too good to be true?  Given limited cash, why not invest it in a company that provides current information and promises to do something useful but believable?  Here are 39 green companies which do just that.

UPDATE: Dyadic has now published audited financial statements for 2007 and 2008.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

Posted by Tom Konrad at 11:26 PM | Permalink | Comments (4) | TrackBacks (0)

Biochar is still mostly a research and cottage industry, yet it has the potential to impact returns for a broad range of investors.

Tom Konrad, Ph.D., CFA

Biochar, or amending soil with biomass-derived carbon, shows great potential to improve the productivity of soils, as well as to increase the utilization of fertilizers by plants, while sequestering carbon to reduce the drivers of climate change.  On August 10, I went to the 2009 North American Biochar Conference to look at the potential for investors. 

Before I went, I took a look at the publicly traded companies involved in biochar.  I did not learn of  any new public companies at the conference, but I have nevertheless become increasingly convinced that biochar has a large role to play in moving to a sustainable economy, not just for energy, but for agriculture.

While the biochar industry is still too early stage for most stock market investors, understanding the economics of biochar will give investors insight into the effects the broad use of biochar will have on the overall economy, and their other investments.  Many types of public companies are likely to be impacted.  Some industries likely to be affected are  

• Agricultural and forestry companies, which may benefit from increased yields and an additional market for their products,
• Advanced biofuel companies which may have to compete with biochar companies for feedstock, as well as for a place in low carbon fuel standards with a biofuel with a much lower carbon footprint, 
• Any participants in environmental markets for carbon offsets, since biochar is likely to be a source of carbon credits.

Carbon Sequestration

Long-term carbon sequestration in the soil is the headline benefit of biochar.  Depending on how the biochar is made, it may stay in the soil for thousands of years.  Biochar has both volatile and fixed or "recalcitrant" carbon fractions.  The volatile fraction decays relatively rapidly, over a few years or decades, while the recalcitrant fraction stays in the soil for centuries or millennia.  The relative fractions depend on the feedstock and how the char is made, but debate continues about the best conditions and feedstocks for a high recalcitrant fraction, which can be the vast majority of the char.

As a potentially vast source of carbon offsets, biochar has the potential to reshape offset markets for carbon dioxide.  Although biochar is not currently accepted as an offset in any climate trading regime, many expect that it will soon qualify.  Peter Weisberg, an Offset Project Analyst at The Climate Trust not only expects that biochar will qualify as carbon sequestration, but says that The Climate Trust is interested in purchasing offsets from biochar projects.

If biochar does qualify for carbon finance, it will place downward pressure on the price of carbon offsets... to a point.  As anyone who has grilled a hamburger knows, char can also be burned to produce useful heat.  Anyone who buries char gives up the use of that energy.  I asked a couple experts what they thought might be the value of the forgone energy.  David Laird, a Research Soil Scientist at the US Department of Agriculture thinks the break even point would be about $10/ton of CO₂, or about $30-$40/ton of carbon.  Dr. Joel Swisher,  Chief Technology Officer at carbon-offset provider Camco International, thinks the number is somewhere between $10 and $20 per ton of CO₂, or about $50/ton carbon.

While these prices are higher than offsets currently trade on most exchanges, they also assume that the only benefit of incorporating biochar into the soil is the carbon sequestration aspect.  That is not the case.

Improved Soil

In all but the most optimal growing conditions, biochar increases plant productivity.   Although the mechanisms are not completely understood, most studies show that biochar allows plants to more effectively use Nitrogen and Phosphorus, as well as other nutrients that either occur naturally in the soil, or are added with either organic or inorganic fertilizers.  It also aids water retention.

The effects of this are significant increases in plant growth, especially in poorer soils or with limited fertilizer or water; heavily fertilized and higher quality soils show lesser effects.  In poor conditions, some studies have seen boosts to plant productivity by as much as 40%, although 15-25% is a more normal range, to judge by the studies presented at the conference.

This improved soil fertility has several benefits, each of which could serve as an added enticement for farmers to use char.  Because plants can use the available nutrients more effectively, a farmer should be able to use less fertilizer and still achieve a high rate of growth from his plants.  Not only does this save the farmer money, but because less fertilizer is used, and a greater fraction of it is taken up by plants, there is less resulting pollution in the form of fertilizer runoff and nitrous oxide formation. Nitrous oxide is a potent greenhouse gas and also depletes the ozone layer.

The cost savings from reduced fertilizer use, lowered irrigation costs from improved water retention, as well as any reduced costs of meeting environmental regulations may all have value to farmers which might induce them to sell biochar based offsets at prices below that dictated purely by the cost of the energy forgone.  

These reduced costs for farmers, as well as the potential new revenue streams from offsets and increased crop productivity add weight to my previous conclusion that investing in farms and other sources of biomass feedstocks is one of the best ways to benefit from bio-energy (biofuels, as well as biomass based electricity and biomass cofiring.)

Other Commodities

Increased plant productivity with bichar may eventually increase the supply of available biomass for bio-energy applications and food.  This may benefit the economics of any biofuel technology, but I expect the gains to only be marginal, since most biofuels are commodity businesses, and an increase in feedstock supply may increase volume, but is unlikely to improve long term margins.

Reduced fertilizer use might also be expected to reduce prices in fertilizer markets, but to the extent that fertilizer is made from commodities such as natural gas (which have a wide variety of other uses,) the effect on fertilizer prices can also be expected to be marginal.

Renewable Energy

The whole story, however, is not just the char.  During pyrolysis, a whole range of volatile organic compounds are emitted from the biomass feedstock, and these can be used to 

1. Produce bio-oil, which can be upgraded into liquid fuel.  The company Dynamotive (DYMTF.OB) is working to commercialize this process, as I discussed in my investing in biochar article.
2. Fuel a generator to produce electricity.
3. Produce heat for some other process.

The choice between these options depends on a range of factors, most importantly scale and if there is a local need for heat.  

Some biomass feedstocks, such as poultry litter are available in massive quantities in a single location.  This allows the use of a larger scale plant, and hence will most likely lend itself to the production of higher value energy which requires more processing, such as bio-oil based liquid fuel.  Hence, if a liquid fuel production process is widely adopted, it may not only help the company which commercializes it, but it may also produce significant added value and clean up a pollution problem for producers of concentrated biowaste, such as poultry producer Tyson Foods (TSN).

The specific type of biomass also affects the use of the volatile organics.  Some sorts of biomass, such as corn stover, contain large amounts of silica or other impurities which can cause buildup in electric generators and add to maintenance costs.  In such cases it may make more sense to produce bio-oil or heat, rather than electricity.

Heat can be produced by directly burning the volatile organics, or recovered in a combined heat and power operation when generating electricity. Generating heat is the simplest process, and hence will lend itself most readily to distributed biochar facilities.  The catch is that, in order to capture the economic value, there has to be a local use for the heat.

One practical variation is the use of specially designed efficient cookstoves in the third world.  These are optimized to both improve cooking efficiency, indoor air quality, and biochar production.  Biochar advocates hope this approach could impact developing nations in a number of significant ways including improved health of woman and children, improved nutrition from the garden amendment, and decrease the need for biomass in cooking due to improved cook stove efficiency.

Even if the heat is not used, however, it is important to flare the gasses released when creating biochar, since volatile organics are pollutants in their own right.

Conclusion

Biochar, although a simple technology, is still at a very early stage of commercial development.  Nevertheless, stock market investors would be wise to be aware of the broad ranging effects the industry might have on carbon trading, biofuel, fertilizer, and agricultural markets.  Even these industries may not be a complete list: There is ongoing research into using biochar for remediation of mine tailings.  Backyard gardeners may also be able to improve their productivity and reduce fertilizer use by incorporating biochar into their soil.  

It is important to note that not all biochars are created equal.  Most biochars are slightly basic, and will produce greater benefits in acidic soils.  It's worth knowing the properties of what you plan to be putting in your soil before you incorporate it.  It's also worth noting that biochar has its greatest effects when combined with small to moderate amounts of conventional or organic fertilizers, since biochar is not a fertilizer in and of itself, but rather helps plants make better use of the nutrients in fertilizer.

Mantria sells a commercial biochar called EternaGreen from a biochar plant in Tennessee, with a distribution center in Georgia. I hope this is just the first of many, so most of us will be able to use biochar without having to worry about the carbon footprint of shipping.  Or, rather than waiting, we can make (probably lower quality/less recalcitrant) biochar ourselves.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

Posted by Tom Konrad at 10:55 AM | Permalink | Comments (3) | TrackBacks (0)

There's much excitement about second generation biofuels made from cellulosic feedstocks and algae, be they cellulosic ethanol, biodiesel, biocrude, or electricity from biomass.  There will be winners, but they may not be the technology companies.

Tom Konrad, Ph.D., CFA

At the 2009 Advanced Biofuels Workshop, there were two major themes: developing new feedstocks, especially algae, and the development of new pathways to take biomass into products such as biocrude, which can be used in exiting oil refineries.  

Big Market, Many Competitors

The current federal Renewable Fuel Standard requires the use of 36 million gallons of biofuels, including at least 21 billion gallons of advanced biofuels by 2022.  Advanced biofuels are defined as fuels other than corn-based ethanol and with greenhouse gas (GHG) emissions half that of the fuel they replace.  This creates a gigantic market, so large that some industry observers doubt if it can be met.

Many of these fuels will not be ethanol, a fuel which poses problems with the current fuel transport and distribution infrastructure.  Even for cellulosic ethanol, there are several different processes that different companies are pursuing: Acid hydrolysis, Thermochemical conversion, Biochemical conversion, and Consolidated Bioprocessing, and combinations of these three used in various combinations by various companies.  

Potential products not only include fuels such as ethanol, butanol and higher-carbon alcohols, but biocrude which can be fed into existing refineries.  Other potential products include plastics, and many other products currently produced by the petroleum based energy industry.  

The bewildering array of potential pathways and products make for a very challenging investment landscape.  An investor in any company would need a lot of confidence that the company they are investing in will be able to take their chosen feedstocks to a potential salable product at lower cost than all the competitors out there.  Unsurprisingly, nearly every company feels it has the best process.

Lessons From the First Generation

With so many variables, I find it's often better to take a step back to see what impact the development of the advanced biofuels market will have on the larger economy.  Will there be impacts on the broader economy which will be independent of the eventual mix of products and processes in the advanced biofuels market?

We can learn from the experience of first generation biofuels.  

Below is a chart from William Thurmond, President of Emerging Markets Online and author of Algae 2020: Biofuels Commercialization Outlook, and Biodiesel 2020: A Global Market Survey:

It shows how biodiesel feedstocks (Palm oil, rapeseed oil, and soybean oil) are increasingly following diesel prices.  There is a massive overcapacity for biodiesel production in the EU, as shown in the shown in the following graph, also from Thurmond:

With this excess capacity, if biodiesel feedstock prices were to fall relative to diesel prices, biodiesel producers would purchase feedstock either until they fill their excess capacity, or until feedstock prices rise again to a point where it is no longer profitable to run additional biodiesel capacity.  Put another way, biodiesel producers cannot be more than marginally profitable (and may be unprofitable) so long as there is significant excess capacity.  Excess capacity can only be filled if additional feedstock can be found, or plants permanently shut down.

What does this mean for advanced biofuels?  As advanced biofuel technologies advance, feedstocks prices are likely to rise.

Why Advanced Biofuels are Different

Unlike with biodiesel and starch based ethanol, many second generation feedstocks are not generally internationally traded; many are actually waste streams from other processes, such as yellow and brown grease (the restaurant industry), corn stover, forest trimmings (the lumber industry,) and even municipal waste.  The more that these feedstocks are internationally traded and easy to transport (such as yellow and brown grease), the more likely they are to follow the patterns seen in the feedstocks for first generation biofuels.  According to Thurmond, this has already happened with yellow grease, and the rise in price was a surprise to most biodiesel industry participants.

Many emerging biofuels companies have learned this lesson.  ZeaChem's strategy specifically includes setting up a long term contract to purchase feedstock from dedicated energy plantations because "the availability of sustainable, cost effective raw materials is essential for an economically viable cellulosic biofuel facility," according to Andy Vietor, ZeaChem's CFO, who spoke at the workshop.  BioFuelBox Corporation is tackling the same problem from a different direction: by developing a biorefinery that they expect can produce biodiesel from a zero-cost waste stream (trap grease), but I'm not sure that they have completely absorbed the lesson.  Even trap grease will acquire some value if they can consistently make fuel from it.  I think they could improve their business model by selling their technology as a turnkey solution to the waste stream owner.

Investments and the "Everything vs. Fuel" debate

Investors who expect advanced biofuels to be successful should pay close attention to feedstocks.  Just as supply constraints for batteries will shape the electric and hybrid electric auto market, limited supplies of biomass will shape the advance biofuels industry.  

If an advanced biofuel company expects to make biofuel from an easily shippable commodity, such as wood chips, they'd be advised to stay away, unless that company also plans to contract for their supply of feedstock well ahead of time, and such agreements will probably constrain a company's ability to react to changing conditions.  Lack of flexibility can be fatal to start-up companies.

Companies which produce easily transportable feedstocks being considered by advanced biofuel companies stand to benefit from new markets for their products.  These include forestry companies (wood chips), waste management companies, and most owners of arable or marginal land.  Wood chips are likely to see price escalation even without the advent of advanced biofuels based on them.  Wood chips and pellets can be cofired in many existing coal power plants with only relatively inexpensive modifications, a process which offsets large amounts of carbon emissions at very low cost.  Biomass cofiring was the cheapest renewable energy opportunity identified in California's RETI study last year.  For an apples-to-apples comparison, the greater efficiency of electric motors means that electricity produced from biomass can propel an electric vehicle 81% farther than an otherwise comparable ethanol-fueled vehicle running on cellulosic ethanol produced from the same amount of biomass.

Furthermore, the existing biofuel industry may also find better uses for cellulosic feedstocks than turning them into biofuels.  I attended a session at the 2009 Fuel Ethanol Workshop the following day where gasification of cellulosic waste streams such as corn cobs or stover was presented as an economical way to reduce the carbon footprint of corn ethanol by displacing natural gas used in the production process.

The flip side of the feedstock equation is that industries which compete for feedstock with the biofuels industry are likely to be hurt by rising prices.  Advanced Biofuels may resolve the "Food vs. Fuel" debate, but they will be doing so by, at least in part, replacing it with a new "Everything vs. Fuel" debate.  For instance, the paper industry (especially those companies which do not own forestry assets) will likely be hurt by rising pulp prices, like Mexicans who found they could not buy tortillas.  Recycled paper pulp is an excellent cellulosic feedstock as well.  On the other hand, businesses which produce or collect paper waste may find more robust markets for their products.

This line of reasoning might also give you pause if you're considering warming your home with a wood pellet stove.  The advent of biofuels from wood chips will mean that the price of your wood pellets will start to track the price of petroleum, just like the price of vegetable oils are already doing.   From an economic perspective, heating with wood pellets may become not much different than using heating oil.  We saw the start of this trend last year with wood pellet factories starting to price dairy farmers out of the market for sawdust in the Pacific Northwest.

Algae to the Rescue?

Algae is the only feedstock that has the potential to be productive enough to supply most of our current liquid fuel demand, but it is still unproven.  Most current algae to biofuel production methods cost an order of magnitude more than the fossil fuels they hope to displace.  This is why most algae biofuel companies are currently targeting higher-value synthetic bioproducts, such as animal feed additives.  But Will Thurmond believes that some algae companies may be cost competitive with fossil fuels as early as 2012, but only in his most optimistic scenario; the process of bringing down costs could take much longer.

There are now three publicly traded Algae companies.  I've previously written skeptically about PetroSun (PSUD.PK,) and Thurmond told me, "Petrosun appears to doing well in the news, but if you examine their financial statements, it's a different story."   More recently OriginOil (OOIL.OB) and PetroAlgae, (PALG.OB) have also gone public.  PetroAlgae is the industry high flyer, and is doing some interesting work growing duckweed, at least according to a hallway conversation.  Unfortunately, the stock is so thinly traded that it would be difficult for even a small investor to get in without significant price impact.  OriginOil shows better volumes, but they, too, are early in their technological development.

Algae has great promise, but the only investments currently available to the retail investor are very early stage.  Even if we were to assume that the algae industry will quickly meet its potential, these three companies only amount to a tenth of the current players, and the rigors of being a public company are not the best environment in which to develop an emerging technology.  Algae could well be a monumental success story, but that does not mean that any of these three companies will participate in that success.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 03:01 PM | Permalink | Comments (3) | TrackBacks (0)

by Tom Konrad

Celluslosic Ethanol is all the rage.  A less noticed, but significant "Biofuel 2.0" is biofuel based on algae.

Follow the Biomass

As I have consistently argued (see these recent articles on John Deere, Biogas, Cellulosic Ethanol vs Biomass Electricity, and Renewable or Green Diesel)  the people most likely to make money from biofuel are not the processors and distributors (who compete directly with petroleum or other fossil fuel-based products, and so have little pricing power), but the producers of feedstock, which, like oil, is in very limited supply, and so they will have pricing power.

When it comes to converting sunlight into biomass, algae is the most productive type of plant.  According to this chart from Five Star Consultants , Biodiesel from algae has the potential to produce enough fuel to drive a Prius-type car 370,000 miles per acre per year (MAY), compared to 2,000 to 31,000 MAY for conventional biodiesel crops, while ethanol from switchgrass could produce 32,500 MAY.  Furthermore, some strains of algae are as much as 40% oil by weight, leading to the hope of a large supply of oil which is much easier to convert into biodiesel than it is to ferment even corn (let alone cellulosic biomass) into ethanol.

With an order-of magnitude advantage, it would seem that algae is the green wave of the future, and actually so productive that it could produce enough biomass feedstock for us to continue to drive our SUVs with our current reckless abandon. 

Theoretically, biodiesel produced from algae appears to be the only feasible solution today for replacing petro-diesel completely... In practice however, biodiesel has not yet been produced on a wide scale from algae, though large scale algae cultivation and biodiesel production appear likely in the near future (4-5 years). - Oilgae.com.

Ponds or Reactors?

There are two basic approaches to growing algae: open pond and closed reactor.  The open pond method, which is what Petrosun Drilling (OTC:PSUD) recently announced they are pursuing, involves growing the algae in open ponds of water, much like it grows in nature.  Open ponds are clearly quite cheap, but they require a reliable supply of water to replenish that lost from evaporation (making them impractical in all but the wettest parts of the country (Petrosun's first farm will be on the Texas coast, and use saltwater, which helps with this problem.)  The lack of temperature and weather control can further decrease yields from the theoretical potential.

The other problem with open ponds is that it is impossible to keep other types of algae (a.k.a. weeds) out, meaning that high percentages of oil in the final crop will be impossible to attain. This means that biofuel produced from pond algae will require much more extensive processing to be turned into fuel.  It's easy to grow pond scum, but turning it into something useful is harder.

The other option is the algae bioreactor, one type of which (from Solix biofuels) was referenced in the chart above.  The Solix technology uses closed plastic bags agitated by rollers, has climate control with the use of controlled radiative cooling, and uses concentrated carbon dioxide emissions to enhance algal growth.  (The best description of the technology is at Algae @ Work, a company which was started by Solix's former CTO seeking to apply the technology to carbon capture.)  

To me the bioreactor approach (Solix's technology is only one version) seems most likely to achieve the promise of extremely high yields, and even that is not without problems.  Large scale bioreactors are complex systems.  As such, they will be expensive and take great efforts to move from the lab to commercial scale.

Ken Regelson, the author of the chart above, and he believes that Solix does not have "a prayer of achieving their expected yields per acre" but that he used the number from Solix because he has yet to get authoritative numbers from anyone else.  

What about Petrosun?

I wrote this article because readers wanted to know about Petrosun Drilling (OTC:PSUD), an oil exploration company that has been promoting their algae biodiesel efforts since September.  Other than Petrosun, the only public companies I know of which are seriously looking into algae based biodiesel are large conglomerates: Boeing (BA), Chevron (CVX), Royal Dutch Shell (RDS-A) and Honeywell (HON), which can take the long view and have large research budgets to finance their efforts for as long as it takes.  If you click through the company names to the news stories, you will note the common theme: These are all research stage projects.  

Petrosun has not filed even an unaudited quarterly report since March 2007.  Given that it is also promoting exciting technology, I detect the whiff of snake oil salesmen.  Although readers are clearly interested in this company, until they begin to file current information, I don't consider it worth my time to investigate further.  Petrosun's main product is much more likely to be snake oil than algae oil.

Even if Petrosun does execute on its algae farms, will there be any first mover advantage?  It seems unlikely to me; growing algae in open saltwater ponds will depend on access to suitable land near coastlines... later entrants who can acquire suitable land should be able to produce algae just as efficiently as Petrosun, since they do not seem to have any special technology or expertise.  After all, the company is simply an unsuccessful oil exploration company with a algae farm division.

DISCLOSURE: Tom Konrad and/or his clients have positions in these stocks mentioned here: HON.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

Posted by Tom Konrad at 03:06 PM | Permalink | Comments (11) | TrackBacks (0)

The first and last word in any discussion of biofuels should always be "Feedstock."  Feedstock is the "Bio" out of which biofuels will eventually be made, whether it be corn, sugar, jatropha, algae, palm oil, switchgrass, forestry waste, or municipal solid waste.  

Before the era of peak oil, we lived in a world of plenty, which meant that we could squander energy, not only by driving Hummers, but by feeding energy intensive products such as corn crops to livestock, and by dumping "free" sources of energy such as garden waste and used cooking oil into landfills.

The era of cheap energy is over.  The signs are all around, and even peak oil deniers point to expensive-to-extract reserves such as deep water drilling, Canadian tar sands, and even Colorado's Oil Shale.   These sources of oil are not only more expensive to extract, they are are also more carbon-intensive, meaning that regulation of greenhouse gas emissions will raise their price further.

Commodity Squeezes

In terms of biofuels, I've long argued that there is simply not enough feedstock available, and that even if there were enough feedstock to replace all the oil products we use today, there are many other potential uses which will compete for the output of scarce land and water, such as a replacement for coal in electrical generation, and fodder for livestock.  Biodiesel producers may find that the best quality oil is bought up by refineries to make green diesel instead.  In fact, it seems that almost any form of biomass can be converted to Bio-crude and processed in a conventional refinery.  We'll even have to decide if municipal waste should be recycled, burned for electricity, or turned into cellulosic ethanol.

I'm unconvinced that anyone knows exactly how the limited feedstocks we have available will be used, or what process will be most efficient in converting them into their final form.  This makes it difficult to find a biofuel investment that I can be confident will succeed.  One biofuel technology after another has been caught by a commodity squeeze, first corn ethanol and now biodiesel makers.  Polyannaish investors expecting limitless supplies of feedstock for cellulosic ethanol should take note.  Higher commodity prices do not always lead to more supply.  Sometimes higher prices lead to lower demand, and the next boom could easily become the next bust.

The Sure Winner

The only sure winners from limited and increasingly valuable biomass will be the people who produce it: farmers, foresters, and (perhaps) trash haulers and recyclers.  What do farmers do when they have spare cash?  They buy farm equipment, quite often from Deere & Co. (NYSE:DE)  Few stock have ridden the biofuel boom as well as Deere, with the stock rising 400% in the last four years in a nearly uninterrupted uptrend, without the thrills and spills that have turned so many investors off of corn ethanol.  

The beauty of Deere as a biofuel investment is that there is no need to know what the biomass will be used for, or what form it will come in.  In nearly every scenario I can envision, Deere is likely to be a major supplier to the industry which grows it.  From algae to Jatropha, if Deere does not yet sell equipment to plant, tend, and harvest it, it seems a good bet that they will design one.  This technology agnosticism, combined with their wide dealer network in agricultural areas, makes the company seem to me the safest way to bet on biofuels as a trend.

Deere's close relationship with farmers also gives them an opportunity to profit from another up-and-coming crop: Wind.

Even with a 9-year run up, the stock currently trades at a trailing P/E of 22, and despite its construction arm, has not yet been hit hard by the turbulence in the housing market.  Since I expect the housing situation to only get worse over the coming months, a sharp decline in construction income or a continued broad market decline may be just what prospective investors need to pick up this solid biofuel play on the cheap.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in DE.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 10:46 PM | Permalink | Comments (1) | TrackBacks (0)

Biopact reports that Salzburg AG has opened its first biomethane gas station, allowing owners of Compressed Natural Gas vehicles to use their blend of 20%.  This is the first retail station I have heard of selling a cellulosic-derived fuel to retail customers (are there others?)

Prospective Cellulosic Ethanol investors should take note... while cellulosic feedstocks are likely to supply much of our liquid fuels in the future (although not as much as we currently use), cellulosic ethanol is unlikely to have the field (so to speak) to itself.  Ethanol's low energy density and difficulty of transport will be continuing barriers to its adoption as the cellulosic fuel of choice.  Also, biogas from anaerobic digesters and landfills is already used to generate electricity and fed into pipelines.  There are other contenders to displace ethanol as the heir-apparent to gasoline as well, such as 2,5-dimethylfuran (DMF), and ETBE as a substitute fuel additive.

While conventional gas vehicles can easily be modified to accept ethanol, that advantage may be outweighed (at least in some areas) by the advantage that biogas (after purification) is chemically identical to natural gas, and so there is no difficulty in shipping it through the existing pipeline infrastructure.  A vehicle conversion to compressed natural gas (CNG) costs approximately $2,000 to $4,000, although Salzburg AG is offering it for less than $1000, at which price the lower running costs for CNG should give a payback of only a few years.

While the 10,000-15,000 passenger vehicle miles per acre quoted are lower than those expected from switchgrass derived ethanol and even ethanol from corn (see this link for great graphic comparison), the lack of inputs makes grass-derived biogas much more sustainable than ethanol from corn, and the established market and infrastructure for natural gas will make biogas producers much less vulnerable (but not immune) to local fuel gluts.

This article at After Gutenberg makes much more detailed examination of the benefits of Bio-CNG.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 08:10 PM | Permalink | Comments (0) | TrackBacks (0)

I've recently agreed to do a of couple presentations on "Investing In Green Energy" at conferences this October, and so I've decided it's time to update and expand on some graphs I constructed this spring: I created a pair of graphs which give an overview of how different electricity generation technologies compare.  These are not precise graphs with anything resembling scientific accuracy, but I think they're a useful too for understanding the strengths and weaknesses of various technologies.  

This is my attempt to do the same for transportation fuels.  Note that I'm really only talking about cars and trucks here.  In a discussion with a group of private equity investors, we came up with six to eight metrics that we thought would be useful for characterizing transportation fuels, and I then distilled them into three groups of similar metrics so that I could display them in graphic form.  Here they are:

Quantity

    How much of this fuel is available?  How much capacity is there to replace the oil used to run our current transportation fleet with this fuel?  (This is a measure of how much can be produced in a given year, not the ultimate size of the resource.) This is represented in the graphs below by the size of the spheres.

Availability

Represented on the horizontal axis; farther to the right is better.

Components:

1. Infrastructure:  How easily can we get this fuel to our vehicles?
2. Density: Is the fuel both compact and light weight?    How much will we have to change our existing infrastructure to use this fuel well?  Is the energy storage medium sufficiently compact and light to fit into vehicles similar to the ones we use today. 
3. Safety: Is it safe enough to use in vehicles similar to those we use today?

MPC (Miles per Cost)

Represented on the vertical axis.  Fuels that will take you farther for less cost (economic and social/environmental) are above more costly/damaging fuels.

Components:

1. Mileage: How far can you go for $1?
2. Social/Emissions/Environmental benefits: How far can you go on fixed level of emissions?

The scale is relative, and assumes vehicles of comparable weight and aerodynamics.

The Graphs

Taking it all together, the fuels I expect to be used the most will be the ones which are farther to the right (they are easier to use.)  The first graph represents my understanding of the current transportation fuels landscape, while the second represents what I expect to be the case in 20-30 years.  

Click on the graphs for larger versions with titles and key.

Current Fuels Comparison

Future Fuels Comparison

If you don't like my assumptions, you can also download the Excel Spreadsheet I used to generate them, and see how it looks with your changes.

Note that all these metrics involve a lot of qualitative judgment, and just plain guesswork when we're talking about the future fuels graph.   For an investor, refining your own view of where each potential fuel is headed will be the key to achieving the returns you hope for.  The trick will be to invest in companies that will benefit as a fuel moves towards the upper right hand corner of the graphs, as it becomes more available and easier to use, or as it becomes less expensive to produce the same amount of travel relative to the other alternatives.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 06:28 AM | Permalink | Comments (0) | TrackBacks (0)

Ernst & Young recently came out with its quarterly rankings of the investment attractiveness of the main national biofuel markets (PDF file). The report contains three indices: the All Biofuels Index, the Ethanol Index and the Biodiesel Index. No big surprise with most of the results.

The report also outlines some of main deals to have occured in the global biofuels space in Q2, and notes two worrying developments. First, the German biodiesel market appears less than healthy at the moment, with many refiners operating at below 50% capacity. Second, Chinese authorities recently placed a moratorium on granting new permits for the production of cereal-crop-based ethanol on concerns over food price inflation in the country.

On the positive side, the report notes growing interest in the use of jatropha as a feedstock for the production of biodiesel. Jatropha does indeed have a number of qualities that make it ideal for biodiesel production, and some money is starting to change hands in that sector. It may, however, be a tad early for investors to be able to play this.

The biofuels space is an interesting beast, standing at the confluence Western governments' efforts to protect their farmers and emerging markets' attempts to find a in. I remain skeptical about the long-term prospects of the industry as a whole, and outright bearish on corn-based ethanol. Nevertheless, many governments are pushing so hard to make this happen that there are bound to be some opportunities in the near and medium terms.

Posted by Charles Morand at 12:29 PM | Permalink | Comments (0)

September is starting out as the month of speculation about a massive three day air strike on Iran. 

Is Bush ready to attack Iran while our troops are still trying to stabilize both Afghanistan and Iraq?  In February, administration officials were denying it.   The preparations now going on could simply be the stick part of a negotiating strategy; the bad cop to Russia's good cop.  But Bush's chances of successful cooperation with Putin could be better.

What if?

If Bush does launch a massive three day air strike on Iran, what will that mean for alternative energy stocks?  I think it would have to be favorable.  We can certainly expect the oil price to rise sharply, which tends to be good for alternative energy.  Because a war with Iran would almost certainly disrupt world oil supplies, not only from Iran but from neighboring states such as Saudi Arabia.

Of Alternative Energy stocks, the ones likely to see the greatest appreciation from a war induced oil price spike are the ones most aligned with energy security, with a lesser advantage seen by the rest.  If the region remains in turmoil for a long time (and the wars in Iraq and Afghanistan certainly point to that as a possibility) then the rest of alternative energy will probably follow.

Here is my list of the alternative energy stocks I think would benefit most from short and long term increases in the price of oil:

Batteries/Hybrids: 

Short term: Hybrid car makers such as Toyota (NYSE: TM) and Honda (NYSE: HMC) will benefit as people spooked by high gas prices buy hybrids.

Longer Term: All carmakers will be introducing efficient cars, so component makers with an advantage in efficiency such as Magna International (NYSE: MGA), as well as battery and capacitor manufacturers will benefit.  A war with Iran might cause car makers to stop waiting for better Lithium Ion batteries and just go with the tried and true NiMH batteries in a big way.

Biofuels

Short term: Ethanol from corn is lousy on the environment, but almost all the energy that goes into it is domestic.  So most corn ethanol producers will benefit.  I have mixed feelings about biofuels, but ADM is my favorite, because they have a dominant position, and produce their own feedstock. Biodiesel producers will also get a boost, for the same reason, but try to find ones which don't rely too much on the commodity oil markets.

Longer Term: Look to cellulosic ethanol companies, such as BlueFire Ethanol Inc. (OTCPK: BFRE), and ethanol from sugar companies such as Brazil's Cosan (NYSE: CZZ.)  

Coal-to-Liquids

Short term: Coal to Liquids (CTL) firms are likely to get a big short term boost because coal is domestic.

Long term: CTL may have trouble due to constraints in the domestic supply of coal.

In general technologies that can be used for transportation fuels will see big benefits, with lesser benefits being felt by electricity generation technologies.  I've declined to list hydrogen here, because I think it's not a very good transportation fuel due to its low density, the additional energy costs of compression, as well as the high cost of fuel cells.

DISCLOSURE: Tom Konrad and/or his clients have positions in MGA, ADM.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

Posted by Tom Konrad at 04:52 PM | Permalink | Comments (0) | TrackBacks (0)

In the most recent two installments of Energy Tech Stocks' interview with me cover my views on transmission stocks, and biofuel stocks.  Readers of AltEnergyStocks know that I am a big fan of electricity transmission, a theme I keep coming back to.  You also know that I have a very ambivalent relationship with both ethanol and biodiesel.  So I liked Bill's transmission article, but I just wasn't able to convey to him the subtleties of how I feel about biofuels.  But he got one thing right: the owners of biofuel feedstock are likely going to be the biggest winners.

Relevant articles on Biofuels

Competition in Ethanol

An Insider's View of the Ethanol Industry

Let Them Eat Grass

Blue Sun Biodiesel

Biodiesel's Competition

My Biodiesel Jeep

The Answer is Trading in the Wind

While you're on the Energy Tech Stocks site, read a little about trading of wind power futures (here and here.nbsp; While I personally have no interest in speculating in wind futures, I predict this will be a great boon to wind farm owners and climate scientists everywhere.  I also predict hedge funds which will use strategies based on emerging inverse correlations between wind power futures and natural gas futures, probably sooner than anyone might guess. 

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 02:17 AM | Permalink | Comments (0) | TrackBacks (0)

Intrepid Technology and Resources, Inc. (IESV) a renewable energy company announced today that they have begun to evaluate various proposals to purchase their gold property at Garnet, Montana. [ full release ]

The sale of this gold property will give Intrepid additional capital to concentrate fully on its biofuel business.

Posted by Mark Anderson at 07:42 AM | Permalink | Comments (0)