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Taking a study break, I happened to see an article in the Denver Post bringing together two of my favorite clean energy themes: Efficient transport, and wind power. Rail transport has become essential to delivering windpower across the country.
The full article is here: Rolling With the Wind.
Tom Konrad
I'm more than a little obsessed with finding investments which will increase with the price of oil, but not contribute to global warming. This is quite tricky, because most forms of renewable energy produce electricity, which we cannot use in our current fleet of cars. Biofuels ( even cellulosic) can be used in cars, but are limited by supply of feedstock, and by the environmental degradation that growing and collecting biofuel feedstocks can cause. Not to mention the impact on food prices (despite the fact that this may help poor farmers even as it hurts poor city-dwellers.)
A Drastic Peak Oil Scenario
When the supply of oil cannot grow to meet increasing demand, the price must increase to keep demand in check. However, the fastest growing consumers of oil are countries where the government subsidizes oil as an attempt to avoid civil unrest or political discontent. That means that demand destruction in developed markets must make up the difference for markets where demand destruction will not occur due to the lack of price signals.
How elastic is gasoline demand in North America? While there is some evidence that we are already responding to the long term rise of gas prices, demand is almost always much more elastic in the long term. Most people are more willing to skip going out to eat once a month than they are to start riding the bus. That means that a slow, gradual rise in the price of oil might be accommodated through a shift to more efficient vehicles, the construction of light rail systems, and people choosing to live more densely. On the other hand, it will take a much more drastic oil price spike (say $10 per gallon within 3 years) to pry Americans' white knucklrideres from the steering wheels of their SUVs.
That is precisely what I expect to happen.
$10 Gas Would Mean...
People who have been cutting back on other things in order to keep up with the increasing cost of driving will not be able to afford a new Volt or Prius Plug-in Hybrid Electric Vehicle, or even my favorite, the Aptera. For people forced out of their cars by pure economics, the only options will be those that cost no more than a few thousand dollars, or even no down-payment at all.
Of all the options, mass transit has the lowest up-front cost for the user, and the only option which can be expanded quickly is bus rapid transit. Busses can typically be ordered and delivered within a year, the upfront cost is fairly low (the largest component cost of bus operation is the driver, not the cost of capital), and new routes can quickly be added by converting lanes of existing roads to dedicated bus lanes.
Long haul bus operations are already taking off in the United States. Mass transit ridership reached a new 50 year high in 2006 (I have not been able to find 2007 numbers yet.) Bus mass transit is additionally likely to be a response of municipalities to peak oil because 80% Federal funding for bus purchases to meet increased ridership or replace old busses has been available since 2005.
New Flyer
New Flyer Industries (NFI-UN.TO, NFYIF.PK) is the largest supplier of heavy duty busses in North America (42% delivered market share in 2007, and a 50%+ market share in terms of new orders in the last year.) They have a broad product offering, and including a wide variety of alternative fuel options, including LNG, CNG, Hybrid, and Electric options. They even have an exclusive agreement with Ballard (NASD:BLDP) to develop Hydrogen Fuel Cell busses.
The Company has a strong position in the North American market, a market which has high barriers to entry due to the need for many US buyers to "Buy American" (New Flyer qualifies), and the fact that US fleet operators are interested in an established brand with good local service. Since many American buyers only pay 20% of the capital cost (but all the service costs), service and maintenance is likely to be more important in the buying decision than the initial purchase price. This should also help push purchasers towards cleaner running busses such as New Flyer's natural gas and hybrid versions, despite the increased capital costs.
Securities Details
New Flyer's available securities are Income Deposit Securities (IDS), an approximate 50-50 hybrid between high yielding (but not well secured) debt and equity. Because of Canadian withholding (I have not been able to determine if this applies, but I suspect it does,) these may not be the best choice for US based tax-advantaged investors, but for Canadian and US-based taxable investors, these income deposit securities should be an excellent hedge against the rising price of gasoline. Unlike most gas price hedges available, the income from the security can directly be used to buy gas without selling even part of your original position. (Although it does have the slight disadvantage as a hedge because the mechanism is not direct, and higher gas prices may take 1-3 years to flow through to higher earnings at New Flyer.
On the subject of hedging, the company runs a very sophisticated financial operation. The unusual nature of the securities arises from their sophisticated use of the US tax code to allow deductibility of the interest part of the monthly distributions. They have fully hedged their exposure to exchange rate changes between the Canadian and US dollar (something I wish another favorite, Carmanah Technologies (CMH.TO, CMHXF) had done in recent years.) They are also taking advantage of the strong loonie (C$) to buy back some previously issued securities using excess cash and the proceeds of a new offering of additional IDS in Canada. Because of the exchange rate terms of the class B and C shares they are redeeming, this will have an immediate positive impact on cash flow.
Conclusion
From listening to the most recent conference call, I get the impression that management is very conservative, and has not built a rising oil price into their projections for market growth. None of the analysts on the call asked about the effects of rising oil prices either. In fact, management had expected the current strong market for bus orders to slack off towards the end of the year, and they were surprised that they see no signs of slackening growth.
Since management and most analysts have not incorporated peak oil into their projections, we can expect unpleasant surprises at the pump to lead to pleasant surprises during earnings announcements.
Note
Since I wrote the above, one of my New Years Speculations, Capstone Microturbine (CPST), received an order for 150 turbines for use in a fleet of hybrid busses. Although this is not a new application for their microturbines, it was one I had forgotten when looking for bus stocks.
DISCLOSURE: Tom Konrad and/or his clients have long positions in NFYIF, CMHXF, CPST.
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.
Over the weekend, EnergyTechStocks published two articles based on an interview with me.
The first was about my conviction that Peak Oil induced rising gas prices is going to lead to a rush into mass transit building by cities, or investing in mode-shifting last September. I've since written about opportunities in rail transit stocks, (P.TO, TRN, PRPX, and WAB), and more recently Hedging your peak oil risk with your lifestyle. However, I have been frustrated until now that the only pure play bus stock I've been able to find is Firstgroup PLC (FGP.L, FGROF.PK), the British based owner of Greyhound and owner or operator of many other UK and North American transit services (both bus and rail.) Back in September, Firstgroup seemed very expensive after a prolonged run-up, but it is now looking more reasonably valued.
Two weeks ago, however, I found a pure-play North American Bus stock, which I will be writing about this weekend. I'm not ready to reveal the name, because I still have an account which has not yet bought the stock. This is the company I was not ready to reveal in the EnergyTechStocks interview.
The second part of the interview referred to my conviction that lean economic times will benefit Energy Efficiency over other forms of clean energy. I highlighted two of the stocks from the 10 Solid Clean Energy Companies to Buy in a Downturn series.
DISCLOSURE: Tom Konrad and/or his clients have long positions in TRN, PRPX, WAB.
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.
Investors act in irrational, but predictably irrational, ways.
That is the basic tenet of Behavioral
Economics. (Looking for references, I came across an interesting book by that title
For me, these predictable irrationalities provide ways to profit from the mistakes of others in the market, so long as I do not fall into the same (or other) cognitive traps which cause the market opportunities in the first place. I describe one such technique in this article.
Applications to Policy Design
In addition to those of us who use it to make a slow buck (it's the people trying to make a quick buck who are often most responsible for many of the opportunities) in the stock market, Behavioural Economics also has useful application to policy. Richard Thaler and Shlomo Benartzi, two of the foremost researchers of Behavioural Finance (Behavioural Economics as applied to investment decisions) used insights into why people procrastinate to design the Save More Tomorrow (SMarT) design for 401(k) defined contribution schemes to help employees who want to save more but lack the willpower to do so. This design is now incorporated into commercial products, such as Vanguard's Autopilot 401(k) program.
In the researchers' words (links mine):
[Save More Tomorrow] has the following ingredients: First, employees are approached about increasing their contribution rates a considerable time before their scheduled pay increase. Because of hyperbolic discounting, the lag between the sign-up and the start-up date should be as long as feasible. Second, if employees join, their contribution to the plan is increased beginning with the first paycheck after a raise. This feature mitigates the perceived loss aversion of a cut in take-home pay. Third, the contribution rate continues to increase on each scheduled raise until the contribution rate reaches a preset maximum. In this way, inertia and status quo bias work toward keeping people in the plan. Fourth, the employee can opt out of the plan at any time. Although we expect few employees to be unhappy with the plan, it is important that they can always opt out. Knowledge of this feature will also make employees more comfortable about joining.
Behavioral Gas Tax
Fellow energy blogger Jeff Vail at rhizome inadvertently reminded me of Save More Tomorrow by his assertion that "assuming rational consumer behavior is pretty silly, but any other basis of assumption is even more silly."
This begs the question, "How can a policy to reduce gas use be based on the fact that consumers are irrational?" Classical economics teaches us that we need to raise the marginal cost of behaviors which we don't like, but behavioral economics tells us that we'll get a lot more bang for our buck if we work with people's irrational tendencies rather than against them.
Jeff has a clever idea for making a gas tax work better. If it were implemented, I expect it would be effective. However, the most important feature of any policy to reduce gas use is implementation. Voters must be willing to accept the policy, and while voters generally think that it's a great idea to punish others for harming the environment, they're still unwilling to actually make changes themselves... especially if it will effect their pocketbook.
Since it's more effective to reduce driving than to attempt to increase the efficiency of the cars on the road, I used SMarT as a model to help people make the decision to use their cars less:
The Department of Motor Vehicles could offer drivers a discount on their annual auto registration if they agreed to buy an annual transit pass within the next 6 months. The instant incentive of savings would lure people to buy the more expensive pass, and because it's the Department of Motor Vehicles, the car owner could be charged and the pass mailed to them on the date they specified at vehicle registration.
Some of the money from the transit pass would go to make up for the discount to the Vehicle Registration Fee, but since all these pass holders would by definition own cars, they would likely be relatively light transit users, meaning that the transit authority would still be getting enough money to cover their costs.
This scheme might not do much to reduce driving. Nothing is forcing anyone to opt in, and those who do might not end up using their passes... just like all the people who buy annual gym memberships and only show up once. But just like those "wasted" gym memberships, the extra funds could be used to improve the city's transit system, over time making it more attractive and usable, and thus improving ridership.
On the other hand, because the scheme is voluntary, there would likely be little political opposition to enacting it, and the best way to reduce gas consumption is the method that actually gets passed.
Room for Improvement
I note that I'm not the only one thinking about behavioral economics and energy use. My idea is far from perfect... mainly because it would likely not do too much to reduce driving. If you have a suggestion, the comments are open.
by Tom Konrad
Lifestyle Risks from Peak Oil
In the US, we all have a large exposure to the risk of rising energy prices. In addition to the cost of gasoline, the whole US economy runs on oil, so a rise in the oil price is likely to affect our jobs, and the prices of all our assets, including our homes. If other people have less money to spend and invest because of high oil prices, there will be a fall in demand for anything they were buying or investing in.
House prices in exurbs and suburbs where the car is the only available transport option are likely to be most affected because living there entails relatively high car use. If you live far from where you work, your expenses will not only go up with the price of oil, but the value of your home is likely to fall, leaving you doubly exposed. In contrast, real estate which is centrally located or which is well-served by mass transit may show positive correlation with the price of gas, and hence serve as a against the gas price.
This oil price exposure can be (imperfectly) hedged with investments in clean energy or oil price futures, but a more effective way to reduce your risk is to live close to your work. If you already live far away from most jobs and own your home, you can reduce your personal expenses by finding ways to telecommute or use mass transit, but the value of your home is still linked to the oil price. Since this is a long term trend, you may be able to protect the value of your home by advocating for better public transit in your area, but given the time and effort this entails, a large allocation of your portfolio to clean energy stocks or oil futures is probably the best you can do. In addition to my own blog, Jim Kingsdale's Energy Investment Strategies is an excellent place to learn about investments available to the retail investor.
However, you should not underestimate the magnitude of oil's direct impact on your expenses. If you drive 30 miles round trip, five days a week, that's about 300 gallons a year, even in a 30 MPG vehicle. Each $1 increase in the price of gas requires $300 of extra income a year to hedge your exposure.
Driving an alternative fuel vehicle is not a hedge for oil price risk, since the prices of alternative fuels are highly correlated with the prices of petroleum based fuels, although a more efficient vehicle is a partial hedge.
Investments as a Peak Oil Hedge
For investments to hedge that expense, you will need investments that increase $6,000 to $8,000 for each $1 increase in the price of gasoline to produce $300 of extra income annually. Assuming you have found a portfolio which increases 10% for every $1 increase in the price of gas, you will need approximately $70,000 invested to hedge your commuting costs, and possibly as much again to hedge the price of your home.
Even with $70,000 to invest, most stocks or portfolios of stocks are an imperfect hedge against the price of gas. The best hedge in terms of correlation with gas prices are oil or gasoline futures, but trading futures is considerably less accessible than trading stocks, and does not produce income. Trading oil futures is a zero-sum game: for everyone who makes money, a counterparty loses money. In stockmarket investing, the internal profits of companies can provide a basis for a positive net return for all investors. That extra benefit and the opportunity to invest with my beliefs, make me willing to accept the much weaker correlation clean energy stocks have with energy prices.
Better Than a Hedge, Reduce Your Risk
If you don't have $70,000 in your portfolio to neutralize your gas-price risk, or are uncertain of your portfolio's correlation to the gas price (most stocks will actually fall as the price of gas goes up,) it makes sense to find less gas-intensive options to your normal commute. Then, if fuel rises to a painful level, it will be easier for you to switch quickly to less fuel-intensive options.
Even though I live near my work, I've been doing just that, ever since I became convinced that better cars are not an effective solution (or investment response) to peak oil.
An EV You Can Carry in One Hand
A couple weeks ago I mentioned that I was cutting my driving with a Motorboard. The motorboard is an electric scooter which is so compact that you can fold it up in a few seconds and carry it in one hand (it weighs about 16 lbs.) I think of it as a much cheaper and cooler Segway which I can carry. Since it has a low range, it is best seen as a supplement to mass transit, not a stand-alone transit option. The combination of motorboard plus transit allows distance travel without the limitation of start and end points within walking distance of transit stops.
I wrote a review of the Motorboard for Carectomy.com, which you can read here.
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.
Here is an interesting article on the Carbon Tax Blog about dropping gas usage in the US due to sustained high prices. As I've said before, now that peaking oil supply has made gasoline supply inelastic, price will have to be set by marginal demand... we're beginning to get a look at what the demand elasticity for gasoline is.
But gas prices are not dropping. US demand may actually be elastic, but world demand is not yet showing elasticity. In large part, this is because most emerging economies and oil producing company consumers enjoy fixed price oil, courtesy of subsidies. Those subsidies may turn out to be elastic, when it breaks the bank, but it will take a long time.
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My new Wheels |
I've personally been cutting my driving with a Motorboard, which I tried for the first time on Saturday (after which it snowed... weather may be a factor for a month or two.) I'll write something about it after I've had a chance to use it more.
Johnson Controls
(NYSE:JCI) has long been one of
my favorite energy efficiency picks, with an added bonus coming from their joint
venture with Saft
to produce batteries for hybrid and electric vehicles.
They have also shown some energy saving innovation making parts for auto
interiors.
Building Efficiency
Efficient buildings are much more complex than simply replacing inefficient HVAC and lighting with more efficient versions. Quite often, the most cost effective measures come from using systems more efficiently. As an analogy to the home, look at any list of quick tips for energy saving around the home. This list of ten steps on Squidoo includes five tips for using existing equipment more wisely (programming your thermostat, cleaning air filters, loading your dishwasher fully, and only using the dryer when you can't air-dry.) Considering Squidoo is quite clearly trying to make money by referring people to Amazon to buy products, it's all the more significant that half of the steps need not involve buying anything.
In commercial and industrial buildings, the most economical gains also involve using existing equipment more wisely. They offer a full suite of products focused on automation and integration to businesses and residential (with the recent York acquisition) customers alike.
Building efficiency systems comprise about one third of 2007 revenues.
Batteries and Automotive Power Systems
Johnson Controls' joint venture with Saft has been making headlines recently, no doubt in large part due to Johnson Controls automotive industry network. The partnership has won contracts to supply batteries to Chinese auto manufacturers Chery and SIAC for their Hybrid electric vehicles, and a battery development contract from GM to develop Li-ion batteries for GM's Saturn Vue Green Line Plug-in Hybrid.
I'm extremely enthusiastic about the growth prospects of the automotive battery industry, the reasons for which I detailed in this article about another battery company, and this one about the long term prospects for cellulosic biofuels. The power systems division comprises about one third of 2007 revenues.
JCI also supplies automotive battery management systems and power systems, with a focus on energy savings, as part of their automotive division described below.
Auto interiors
Energy savings can come from unexpected places... like car seats. Johnson Controls' EcoClimate seat provides much higher heat absorption and moisture absorption than conventional seating, which in turn provides for passenger comfort with less use of the vehicle's air conditioner. New bio based materials may also appeal to automotive consumers concerned about environmental health effects and fossil fuel usage. About half of JCI's 2007 sales were in this division, but most of the company's growth comes from the other two divisions.
Conclusions
With half of the companies 2007 revenues coming from two of my favorite alternative energy sectors (efficient buildings and automotive batteries), and these parts of the company growing much more rapidly than the auto parts division (which is likely to be a great competitive advantage in selling batteries and power systems to automakers,) JCI is a must for alternative energy investors attracted by the superior economics of energy efficiency.
The stock has declined significantly since the start of the year, but it currently seems only fairly valued to me at the current price of around $34. However, a decline in auto sales caused by a slowing economy, along with an increased debt burden due to recent acquisitions could easily hurt short-term profits. With continued stock market weakness, patient investors could easily see some excellent buying opportunities in the next 6-12 months. If we do, I will be buying more.
Click here for other articles in this series.
DISCLOSURE: Tom Konrad and/or his clients have long positions in JCI.
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.
Peak oil is likely to have everyone re-examining their transportation options over the next few years. Rail will likely be one of those options given special attention because rail transportation is inherently much more fuel efficient than road based transport.
I first mentioned Trinity Industries (NYSE:TRN)
in November as a rail transit related stock.
I didn't give it an in-depth look because rail transit is only a tiny part of
its business, but investors interested in the broader rail sector will be very interested.
Not only is Trinity focused on the most energy efficient form of land transport, its fundamentals should appeal to the value investor. A forward and trailing P/E of around 8.5, and a price to book ratio of less than 1.5 are so low they make you wonder if something is seriously wrong with the company. The company has been investing aggressively over the last few years (something I consider prudent given the prospects of the rail industry.) The aggressive investment program has resulted in consistently negative free cash flow, and has been primarily financed by new debt. However, their debt to equity ratio is still a comfortable 0.86.
Trinity's businesses include railcar manufacture, railcar leasing, inland barge manufacture, construction materials (mostly concrete and highway crash cushions), liquefied gas canister manufacture, and Wind tower manufacture. Investors interested in efficient transport and clean energy will be keenly interested in all these businesses with the exception of construction materials and LPG canisters, which constitute[.pdf] less than 30% of revenues and less than 20% of operating profits. Interestingly, the manufacture of LPG canisters and wind towers share facilities, which allows them to buffer the wild swings in wind tower demand driven by changes in the production tax credit by shifting manufacturing between these products.
Trinity is a group of related growth businesses, mostly focused on efficient modes of transport, priced like a value company. To me, the company seems too good to be true, so I went looking for dirt in their SEC Filings. Their corporate governance seems comprehensive and robust.
The firm shows a talent for financial engineering, but only to an extent that seems appropriate to a rapidly growing company in several capital-intensive industries. This talent seems to have allowed them to secure a large quantity of low cost debt. Company insiders have been net buyers of the stock since it dropped below $40 last July, a factor which enhances my confidence of a lack of skeletons in the closet.
Trinity will release 4th quarter earnings after the close on February 20. I expect a positive earnings surprise, although given the current mood of the market, that's not a guarantee of a jump in the stock price. The 13.7% positive earnings surprise in November lead to a price drop, since the surprise wasn't as big as in previous quarters. I don't see any reason to chase this one. $29 seems like a good price to me, but the economic slowdown and a slowdown in Trinity's earning growth may provide opportunities to pick up this solid company at even lower prices.
Click here for other articles in this series.
DISCLOSURE: Tom Konrad and/or his clients have long positions in TRN.
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.
On January 13th, I posted some speculations about how many people really want an Electric Vehicle that can go 400 miles without having to recharge. It was only a little over a week ago, but in the few days since then we've learned that what I used to call a "Plug-in (Series) Hybrid Electric Vehicle" (PHEV) is now called a "Range Exteneded Electric Vehicle" (REEV.) How quickly times change.
I also posted a poll to test my speculations at the end of the article. I asked about the Aptera, which will be offered in both EV and "REEV" versions: Would be willing to pay the extra $3,000 it is likely to cost for the REEV, and would they have another vehicle as well? The results are in, and they contain a number of surprises, but also some confirmation.
Ignoring respondents who weren't sure, wouldn't buy either version, or didn't know what I was talking about), here is a summary of the results:
| I'd buy an... |
How many vehicles would you own? |
||
| 1 | 2 or more | Any number of vehicles | |
| EV | 29% | 41% | 38% |
| REEV | 71% | 59% | 62% |
|
Either Version |
23% | 77% | 100% |
In the original article, I hypothesized that:
What can we conclude?
All of which leaves me with more questions than answers:
Comments are open.
Romm v. Kholsa
In a persuasive series of articles, entitled "Pragmatists vs. Environmentalists" (Parts I, II, and III) on Gristmill, Vinod Khosla provides the reasoning behind his "dissing" of plug-in hybrids, which drew the ire of Joeseph Romm. Neither seems to think the argument is settled, and Joeseph Romm returns fire here.
As someone who knows as much about investing as Joe Romm and has written as much about Climate Change and Energy Policy as Vinod Khosla, I feel the need to jump into the debate and settle the matter. (Will either of them will notice?)
To summarize, Khosla argues that cellulosic ethanol shows more promise for reducing carbon emissions than plug-in hybrids because he sees the barriers to plug-ins (the need to improve batteries and clean up the grid) as harder to surmount than the barriers to cellulosic ethanol (the improvement of conversion technology.) In his words,
I consider replacing coal-based electricity plants (50-year typical life) a much longer, tougher slog than replacing oil with biofuels (15-year car life).
Romm blasts back reiterating the multiple problems of corn ethanol in response to the first of Khosla's series, but has not yet responded to his point about cellulosic. I thought I'd tackle the point about cellulosic myself.
There Isn't Enough Biomass
According to the National Renewable Energy Laboratory's From Biomass to Biofuels [.pdf] study, given all the available biomass in the United States, we will only be able to displace a little less than 2 billion barrels of oil equivalent a year. But we currently use about 7 billion barrels of oil a year, so to displace all our oil usage, we would need nearly a 4x increase in fuel efficiency (not the 1.5x increase in internal combustion engines Khosla talks about.)
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| Image source: NREL (From Biomass to Biofuels) |
If the problem we're trying to solve is the need to displace petroleum as the transport fuel of choice (because of both climate change and peak oil), Khosla's "solution" can at best only tackle about 40% of the problem.
A Third Way: Cellulosic Electricity
Now let's return to Khosla's belief that it is simpler to replace the fuel
(petroleum) in vehicles than the fuel (coal) in the grid, because of the longer
lifetimes of coal plants than cars. If you take a moment to review my
article Ten
Insights into Carbon Policy, you will note (insight #2), co-firing biomass
in existing coal plants is more effective for reducing carbon emissions than
turning it into liquid fuels. You will also note (insight #9) that
electric drivetrains are inherently more (5x) efficient than gasoline
drivetrains.
Khosla may be right that we are not going to shut down old coal plants quickly (although my own utility, Xcel Energy, is planning to do just that.) But even given an existing fleet of coal plant some biomass can be cofired with coal in existing plants with relatively easy retrofits. Cofiring biomass is part of the Arizona Renewable Energy Assessment, which Black and Veatch predict would cost about 6-7 cents per kWh, and the limited amount included in the assessment is mostly due to Arizona's limited biomass resource.
According to the NREL report referenced above, converting biomass into cellulosic ethanol can be done at about a 45% efficiency (i.e. 45% of the energy of the biomass makes it into the fuel.) In contrast, biomass can be converted at 33-37% efficiency [pdf] when cofired. Combining this with the 5x improvement of drivetrain efficiency that comes with electric propulsion, and the same amount of biomass converted to what I'll call "cellulosic electricity" will take a vehicle 3.8x as far as it would in the form of cellulosic ethanol. In a more recent article on Biomass, Vinod Khosla states "we consider [Energy Return on Investment] a less important variable than carbon emissions per mile driven." If carbon emissions per mile driven are the most important variable, a 3.8x increase in miles driven on the same energy source will lead to a less than 27% of the carbon emissions per mile driven.
While cellulosic electricity is still not sufficient to displace all of our current petroleum use, it comes much closer than cellulosic ethanol. Biomass cofiring with coal also tends to reduce SOx and NOx emissions.
Direct Combustion of Biomass
Biomass is a distributed resource, seldom available in large quantities in any one place. This will be a problem for the cellulosic ethanol and cellulosic electricity industries. Only a fraction of the available biomass will be close enough to existing coal plants that it will be practical to transport for cofiring. Cellulosic visionaries see a system of distributed ethanol plants, yet that still leaves the problem of getting the fuel to market, since the current pipeline system for petroleum products has difficulty accommodating ethanol.
On the other hand, while distributed direct- fired biomass generation of electricity is probably twice as expensive as cofiring with coal, distributed generation leads to opportunities for Combined Heat and Power (CHP), or cogeneration. CHP can displace heating fuels such as natural gas, propane, or electricity, and often have combined efficiency from 50% to 80%. In addition to the potential of displacing additional fossil heating fuel, cellulosic electricity is identical to the fossil fuel derived kind. Therefore, unlike cellulosic ethanol, cellulosic electricity is completely compatible with the existing electric grid, leading to far fewer difficulties in transport.
A Cellulosic Sideshow
While I'm sure that economic techniques to convert various forms of biomass into ethanol and other liquid fuels will be developed, including by some of the companies in Khosla's portfolio, I think it is unlikely that a large fraction of what is likely to become an increasingly valuable and scarce resource, biomass, will be used for ethanol. As a scarce resource with relatively inelastic supply, the price will rise to the point where only the most efficient uses will be profitable. In most cases, cellulosic ethanol is unlikely to be one of the most efficient uses of biomass.
Khosla's dichotomy of replacing cars versus replacing coal plants is a false dichotomy. While it is easy to retrofit gas cars to burn ethanol, it is also easy to retrofit coal plants to burn some biomass. Given the dispersed and varied nature of the feedstock, both solutions are likely to coexist for a long time, but biomass cofiring has a little-heralded head start (unlike cellulosic ethanol, it is already progressing beyond the experimental stage), and cofiring's superior efficiency should allow it to keep, and widen its lead.
But Vinod Khosla will have little reason to weep. His Concentrating Solar Power investments will also be fueling our cars, and his "clean coal" technology has the potential to produce carbon-negative cellulosic electricity.
The logic behind Plug-in hybrid vehicles (PHEVs) is that they combine the best characteristics of a Electric Vehicles (EVs), most importantly efficiency, which brings with it much lower operating costs and lower net emissions and no tailpipe emissions, with the benefits of a liquid fuel vehicle, mainly the range available with energy-dense liquid fuels.
But how important is range to car buyers? PHEV advocates say that 80% of all daily car use is less than 50 miles, which is easily achievable with today's electric vehicle (EV) technology. The freeway-capable EVs being developed today have a range between 100 and 200 miles, as you can see from the following comparison, which is edited down from a helpful comparison by Robert Green at DIY Electric Car (follow the link for an expanded table and sources.)
| Chevy Volt | Mitsubishi MiEV | MiEV Sport | Tesla Roadster | Opel Flextreme | Aptera | |
| Estimated Production Date | 2010 | 2010 | 2010 | 2008 | 2010 | 2008 |
| Estimated Price | 30000 | 98000 | 26900 for EV, 29900 for Hybrid | |||
| Vehicle Class | Compact Car | Sub-Compact Car | Sub-Compact Car |
Compact Car | Compact Car | Micro Car |
| Full EV Range | 40 miles | 99 miles | 124 miles | 245 miles | 34.17 miles | 120 miles |
| Extended Range | 640 miles | n/a | n/a | n/a | 444 miles | 600 - 700 miles |
Still, I wondered how much do people value range in a vehicle? It finally occurred to me to ask.
On January 1st, I posted a poll. In the hope of getting less biased results, I didn't want people to know why I was asking. My question was, "At what price would you stop filling up your gas tank all the way?" When someone does not fill their tank all the way, they are implicitly saying that they have better uses for their money than extending the range of their car. I asked about a car that had a 400 mile range, so I found out what the last miles were worth to people on a per-mile basis.
A Demand Curve for Range
Here is a graph of my results (blue line), which we can take to be an approximation of the demand curve for range. I was surprised at how little gas prices had to rise before people stopped filling up all the way (ignore the green supply curves for now.)
A person who only fills up a 400 mile gas tank halfway is not saving much money, only delaying when the money is spent, as the tank must then be refilled sooner. 75% of my respondents said they would not fill up all the way if fuel cost $0.40 per mile. If these people on average only fill up the tank 1/2 of the way at $.40/mile, they're essentially giving up the last 200 miles of range for $80 loans, which they must repay if they ever decide to fill it up all the way. Only if they never fill it past half a tank would they get to keep that $80.
Even for someone who doesn't fill up his tank all the way, there is still the option of doing so, and options are valuable, so that same person who hardly ever filled up his tank past half way would be unwilling to give up the option of ever filling it up past half way. But most people in a two-vehicle household do have the option of using the other car, so they would likely be willing to give up that option for much less than someone in a one car household.
The Bottom Line: What's Another 200 Miles Worth?
Admittedly, the above contains many untested assumptions. That said, here's my stab at the extra value a person in a two (or more) car household would put on a vehicle with a 400 mile range over a 200 mile range.
Since buying a car with a 200 mile range means never being able to use that extra 200 miles, and having to use the other car in the household, I'll multiply the $80 calculated above by 10 to account for the value of the option of increased range. This puts a value of only $800 on the last 200 miles of range.
Only Eight Hundred Bucks?
$800 seems awfully low to me, considering we are talking about the price of a car. Yet a factor of 10 still seems generous for the option value, so I've also shown the calculation for 5x and 20x multipliers in the graph; this seems like a good range for two car households. I would assume that single car households would pay more for the extra range of a PHEV, leading to higher PHEV adoption than in multiple car households.
The high expected adoption of EVs may be due to how I phrased my poll, since I now realize I should have asked "At what price would you start only filling up the tank halfway?" rather than "Would you stop filling it up all the way?"
In any case we'll soon be able to test the demand curve for range much more rigorously. The vertical supply curves in the graph show the per-mile cost of the extra range of a PHEV Aptera over an EV Aptera ($6), divided by 5, 10, or 20 which I'm using as estimates for the multiplier on what the option of extra range is worth to a 2+ car household (for single car households, this line would probably be farther to the left than the 20x line.
As you can see from the graph, if the option of increased range for a single car household is 10x the cost of the extra fuel to fill up, only 22% of multiple car households would buy the PHEV over the EV. Most likely at least half of Apteras will be bought by households with another car, and a few single-car households will also buy the EV version, so I estimate that no more than 70% of Apteras sold will be PHEVs (at least 30% EVs), if they stick to the announced pricing structure.
Time (and, I hope, Aptera) will tell. You can say what you'd do below:
Investing in Renewable Energy Stocks seldom fails to be exciting, although it can lead to crushing losses as well as mouthwatering gains (Think Ethanol stocks and Thin Film Solar in 2007.) With this in mind, I usually emphasize that the majority of most investors portfolios should be targeted towards larger, profitable companies, especially those focused on Energy Efficiency rather than the more sexy Renewable Energy technologies. This is the philosophy behind Alternative Energy Stocks' Blue Chip Portfolio: companies which aren't sexy, but which still are well positioned to take advantage of rising oil prices and increasing efforts to reduce and regulation of Greenhouse Gas Emissions.
That said, a small exposure to even extremely volatile stocks can, if kept small, improve the risk-return profile of a portfolios, so long as those stocks are not overly correlated to the portfolio as a whole.
Other people just like to gamble. Given the vertiginous returns we have seen in the alternative energy sector recently (First Solar, NYSE:FSLR is up by a factor of ten in 2007,) it's a safe bet that this Alternative Energy has drawn more than our share of gamblers.
This article is for the gamblers (and a little bit for the cautious diversifiers.) If you're a gambler, these are the gambles I would be taking. If you're a cautious diversifier, you can consider using a few of these bets as a way to diversify your portfolio of bonds and energy efficiency companies, just keep it small (no more than a few percent your portfolio.)
In either case, be prepared to have any of these bets go wildly wrong, or succeed well beyond your expectations.
Some Educated Hunches
Many people who see themselves as cautious diversifiers like to set aside a small part of their portfolio as "play money," which they can use without their normal portfolio discipline, to invest in something that makes them feel good. I feel this is the wrong approach. Emotional investing is a sure-fire way to stack the odds against yourself. Even in risky assets, there are good bets and bad ones.
Especially when it comes to highly risky and emotive companies, I'm a great believer in Behavioral Finance, the theory that investors make the same mistakes over and over again because of the way our emotions are wired. Roughly, this means that we all tend to invest in the same stocks at the same time because it feels good to do so (which means we buy precisely when the price is irrationally high) and sell the same stocks precisely when they're screaming bargains.
My favorite gambles therefore are stocks I think have the potential to be tomorrows feel-good fad, that is currently being ignored. I call this gambling because it has very little or nothing to do with the underlying fundamentals, an a lot more to do with wild emotional swings of the retail investor. While it is gambling, it has more in common with card-counting, than with slot machines.
Ten Gambles for 2008
I personally am more a cautious diversifier than a gambler, but I do have some gambler in me. All the speculations below are ones I am taking with my own money, and some of them are also positions in client portfolios. I don't see this as play money, but at the same time, I know that any of these gambles cold turn against us unexpectedly, and I keep the positions accordingly small. In reverse order of my guess at their riskiness, here is the first installment detailing ten bets I'm currently making, and which I expect to pay off as a whole in 2008 (although individual stocks will undoubtedly be losers.)
#10 and #9: Cree, Inc. (NasdaqGS:CREE) $23.50, and Lighting Science Group (LSGP.OB) $0.32.
[Note: Ticker has been changed to LSCG.OB with a 20 for 1 reverse stock split.]I've been invested in both of these for a long time, and last wrote about these LED stocks in June. I sold half the holdings of many of my managed accounts soon after that article when CREE was around $27-$30, about double the price at which I'd bought them. Smaller positions in Lighting Science Group have followed a similar pattern, mostly due to buyout speculation in LED stocks, with only modest gains over the last year as speculation has died down.
Yet the fundamental reasons to be bullish about LEDs are stronger than ever. This Christmas season was the Season of LEDs in more ways than one. In my personal experience, I went to Target on December 15 to get another string to add to the ones I'd bought last spring, and found that they were totally sold out (although conventional lights were well in stock.) I left empty handed, but I expect that Philips (NYSE:PHG - another holding), will report LED sales well above expectations this quarter.
Also, while solar stocks may suffer with tax incentives removed from the recently signed Energy Bill, the bill did contain a "Ban the Bulb" provision, phasing out incandescent lights by 2014. Lighting Science saw a 20% jump the day it was signed, but it's still way down from its highs last summer, and Cree didn't budge. It's true that most incandescent bulbs will probably be replaced with CFLs, but LEDs work better in several sorts of applications: they are dimmable, work better at low temperatures (such as in freezers), and are more tolerant of vibration. Thus, the new law provides a practically guaranteed, large market.
I'll be surprised if both these stocks don't see significant run-ups sometime in 2008, and Lighting Science could easily see one soon after the New Year, due to the publicity they'll be getting in Time Square on New Year's Eve. Most likely, we'll have to wait a little longer than that, but even without a run-up or buyout, I see these two as good long-term bets.
For hard-core speculators, one LED penny stock that you might look at is Cyberlux (CYBL.OB.) Cyberlux was brought to my attention by a reader the last time I wrote about LEDs. I looked into it again last week, but decided not to invest because of the large overhang of convertible debt. In my analysis, it will be virtually impossible for long-term shareholders to profit because of the expected dilution due to the convertibles. That does not mean that short term traders might not make a killing (or lose their shirts.) For more on Cyberlux, go to this message board (run by the reader who brought the stock to my attention.) There's a lot of information there, although I don't know if its accurate.
#8 Maxwell Technologies (NasdaqGM: MXWL) $8.10
Maxwell is a developer of ultracapacitors, which are currently used in wind turbines, utility power quality applications, and other industrial applications. Wind should continue to see strong growth throughout the world, which should continue to help turbine component suppliers.
They also have the potential to be an important component for energy storage in Hybrid Electric and Electric vehicles. Maxwell has recently announced a partnership with China's Tianjin Lishen Battery to manufacture hybrid powerpacks, which will combine the speed, long cycle life, and low temperature performance of ultracapacitors with the large energy storage capacity of lithium-ion batteries. Readers and anyone who has seen one of my presentations already knows that I see energy storage as the best way to take advantage of the adoption of hybrid, plug-in-hybrid and electric vehicles.
The downside here is that Maxwell is currently in a large patent-infringement suit with private ultracapacitor company NessCap. I find patent-infringement suits to be very unpredictable. Maxwell filed the initial complaint in October 2006, and NessCap countersued in December. A large negative earnings surprise last June and subsequent analyst downgrades further depressed the stock, possibly aggravated by tax-loss selling. I see a good chance of a quick rebound in 2008, especially if the courts start ruling in favor of Maxwell, or the two companies reach a settlement. While negative ruling would hurt, they would be unlikely to destroy the company.
Maxwell's top-line revenue has been flat for over a year, so a large part of the recent price drop has likely been due to investor fatigue. Nevertheless, insiders have been buying the stock on the open market, which I find reassuring with regard to internal confidence at the company. Any significant uptick in sales volumes would likely bring with it a strong increase in the stock price.
Picks 4-7 are here, and Picks #1-3 are available here.
I decided to split this article into parts because the stocks I'm picking seem to be rising even as I write... I was clearly not the only person who has been thinking along these lines over Christmas...
Here's what has already happened to picks #8,9, and 10 on December 26, as I was writing:.
Cree jumps on American Technology Research Comments (up 10.7%); Lighting Science up 25%; Maxwell Technologies up 6%.
DISCLOSURE: Tom Konrad and/or his clients have long positions
in CREE, LSGP, PHG, MXWL, and a short position in FSLR.
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.
Last month, I wrote that investors concerned about peak oil should invest in suppliers of alternatives to driving. One of the sectors I highlighted was public transit: busses and rail, although I did not provide any stock picks at the time.
Here, I will focus just on rail transit. It's a bit tricky to invest in rail transit systems as they are operated by cities, not by private companies, so I took a step up the value chain and started looking for companies which supply transit operators. I focused not on rail line operators, but suppliers, since these companies are most likely to participate in a boom in urban mass transit.
Here's what I found (in order of the strength of their exposure to mass transit.)
Rail Stock #4: A Speculative Hybrid Locomotive Stock
Charles first brought Railpower Technologies to your attention in January. Railpower (RLPPF.pk, P.TO) is maker of hybrid diesel-electric yard-switching locomotives. We like the technology, but the Railpower story is typical of a lot of cleantech stocks: they're having trouble turning cool technology into sales and profits.
With a recent investment from one of Canada's largest pension funds, a two-bit stock price, and a recent order from Union Pacific (NYSE:UNP), Railpower's long stock price slide may be over, but despite the investment by Ontario's Teacher's Investment Plan, this is hardy a widows-and-orphans stock.
This company does not have direct exposure to rail transit, and its success or failure is more likely to be driven by company specific factors such as execution and the ability to enter into profitable contracts (their record has been poor in the past, but they have likely learned from painful mistakes.)
Nevertheless, a growing concern about climate change and rising fuel prices create an environment which should make their products much easier to sell than in the past. This is clear from the fact that both Union Pacific and the pension fund cited global warming in their decisions.
Rail Stock #3: Diversified Rail, with a Little Wind
Trinity Industries, Inc. (NYSE: TRN) is a conglomerate, with a strong presence in rail. They also have an inland barge division, another form of highly efficient transport, and an arm which constructs (among other things) structural wind towers. This closely held company has been seeing significant purchases by insiders, but has been recently downgraded by two of the seven analysts following the stock, despite higher 3rd quarter profits.
The recent price drop following the downgrades has me watching for opportunities to buy this stock on the cheap. I always hate it when this happens, but I find myself agreeing with Jim Cramer.
Rail Stock #2: Railway Maintenance
Portec Rail Products (NasdaqGM: PRPX) supplies rail joints, anchors and spikes; railway friction management products; railway wayside data collection and data management systems; and load securement systems. Regular readers know that I love boring stocks, and railway maintenance fits the bill nicely. Protec is solidly profitable, and the lone analyst following the stock has recently raised his estimate for future earnings. Revenue is growing at 15% yoy, and they have no debt.
Portec serves both railway and transit customers in North American, Canadian,
and British markets, and are positioned to benefit not only from any industry
growth, but also from a growing need for efficient operations, which should also
increase the interest in good track maintenance. 
Rail Stock #1: Global Diversification, Strong Mass Transit Exposure
Wabtec Corporation (NYSE:WAB) is a global rail services firm, with business on five continents. The company has been growing both earnings and margins. Of all these companies, Wabtec has the largest current exposure to mass transit, serving virtually every major intercity passenger transit system in North America.
However, insiders have been selling the stock, despite the fact that analysts have been raising their estimates of future earnings. This one bears watching, but I trust insider actions more than analyst estimates, so I would not be surprised if we see some disappointing news in the next couple quarters. If bad news does emerge, that may be a good time to get some excellent exposure to an industry poised to benefit from rising oil prices.
DISCLOSURE: Tom Konrad and/or his clients did not have positions in any of the stocks mentioned at the time of this writing.
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.
Is General Motors (NYSE: GM), with their plans for as many as 100,000 Volts in 2009, or Toyota (NYSE:TM), with their long term lead (and behind-the-scenes research) in hybrid technology, or some other carmaker going to win the race to bring consumers the first commercial Plug-In Hybrid Vehicle (PHEV)? More importantly, will it matter?
The All-Electric Dark Horse
Ballard's (NASD:BLDP) recent confirmation that they are in talks with big automakers left many wondering if the Fuel Cell Vehicle is finally dead. The consensus is now that the next generation of propulsion system will be the PHEV, which combines the range of liquid fuels with the efficiency of an electric vehicle. One reason I thought hydrogen was a non-starter as a fuel was that it could not supply much range due to its low density (except at high pressure, which increases the cost of an already expensive hydrogen still further) leaving it to compete with pure electric vehicles on efficiency, a battle it was doomed to lose because of the inherent inefficiencies of producing hydrogen, and the high cost of Fuel Cells.
So is the road ahead clear for the triumph of the PHEV? I doubt it. I do expect many PHEVs to be built sold, but I think they are likely to be a gateway drug to real efficiency: the pure Electric Vehicle (EV.)
The internal combustion engine (ICE) is a complex machine, with over a century of research and development designed into it. This complexity makes it extremely difficult and expensive for new carmakers to break in to the market without substantial state support. I'm not an expert on the car industry, but I have read constant news stories about countries massively subsidizing their carmakers, always with the goal (not always matched with success) of nurturing a national car maker.
On the other hand, there are at least 22 Electric car startups (not counting aspiring makers of electric bikes, electric motorcycles, and stranger contraptions) today, each competing to break in as a new manufacturer. I expect that some of them will succeed, and that the traditional car manufacturer who are currently pursuing the PHEV will be relctant to forsake their highly refined ICE technology. Existing carmakers could thus fail to head off outside competition, leaving a niche open for EV-only manufacturers.
I'm not trying to say that the internal combustion engine is dead, long live the electric motor (although I wish I were), but I do expect that a growing proportion of the vehicle fleet will be all electric, even as Plug-In Hybrids are gaining ground.
Advantages of the EV
Along with the much lower complexity, the primary advantage of EVs is
cost. PHEV advocates
say that 80% of all daily car use is less than 50 miles, which means that,
most of the time, a PHEV will be operating as an electric vehicle. Now
suppose that Matt Simmons is
right, and oil will soon hit $300 a barrel, along with $10
gas. While people
will be clamoring for public transport, many suburban dwellers will not have
that option for a long time. 
A time-tested American solution to most problems is to
buy something, but money is likely to be tight (because of those same high gas
prices.)
Will that something be a PHEV or an EV? Most people will already own a conventional car, which they can use when they need the range that energy-dense gasoline can provide, for the vast majority of trips. The rest of the time, a true electric vehicle will suffice. So why pay an extra $10,000 or so for a new ICE in your electric vehicle, when you already have one in the old car? (Estimated from the fact that the Zap Xebra MSRP is $10,500, while the cheapest hybrid today has a sticker price of $20,950. The Xebra has a top speed of only 40 MPH, but the Prius I'm comparing it to is not a full PHEV, either.) EVs may get a greater price advantage if the batteries are leased instead of owned.
In addition to the extra cost, an ICE and its fuel add weight to the vehicle, reducing the vehicle's efficiency. In other words, PHEV buyers will not only be paying extra to add an ICE to their electric vehicle, they will be paying again in terms of lower performance and higher operating costs in all-electric mode. This leads to an interesting thought: if the big automakers are confronted with EV upstarts cannibalizing their PHEV sales, might they just start selling cars in both PHEV and EV versions, perhaps with the engine and fuel tank of the PHEV replaced by more batteries?
Investing in Electric Vehicles
I think it's still too early to start trying to pick winners in electric vehicles. This is a disruptive technology, which puts everything up for grabs. I can say, however, that investing in traditional car-makers is probably more risky than most people Th!nk.
That said, here are the two public EV companies I know about (most are private.) Zap (ZAAP.OB) and Zenn (ZNNMF.PK). A much safer bet however, is an industry that's likely to be supercharged by the adoption of either EV and PHEV technology: Batteries.
DISCLOSURE: Tom Konrad and/or his clients did not have positions in any of the stocks mentioned at the time of this writing.
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.
Technology cannot save us
Technology will not save us from peak oil, but the invisible hand of economics will. It's easy to get excited about all the amazing new vehicles the world's car-makers are
