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April 25, 2014

Tribulations of a Meter Reader

by Debra Fiakas CFA

Last week Badger Meter (BMI:  NYSE) joined a building fraternity:  companies reporting strong year-over-year sales growth, but delivering weaker than expected earnings.  However, the Badger Meter actually increased earnings by a greater magnitude than it grew sales.  The Company reported $83.5 million in net sales, representing 16.3% growth over the same quarter last year.  Net income grew by 59.3% year-over-year to $4.6 million or $0.32 per share.  As impressive as these results appear to be, the consensus had been for earnings per share of $0.41.  The stock declined sharply as investor registered their displeasure with the short-fall.

Badger Meter supplies flow measurement and control technologies products to industrial, commercial and utility customers around the world.  The company is so much more than a simple meter reader supplier.  Anybody who has a system through which fluids flow can benefit from Badger’s wide range of flow control and metering products.  The company is included in our Mothers of Invention Index of developers of energy efficiency and conservation technologies.  The alternative energy and water industries are key beneficiaries of Badger’s products.

Like its peers in the water metering industry the Badger Meter struggled during the recent recession, but has managed to recover.  In 2013, the Company reported record sales of $334 million, on which it earned $24.6 million in net income.  Importantly, operations generated $34.8 million in cash.  That represents a sales-to-cash conversion rate of 10.4% that helps support future growth and dividends for shareholders.

BMI has been a part of the Crystal Equity Research coverage universe for some months.  In our view, the sell-off of the stock was unjustified given the Company’s actual performance.  However, it is also the responsibility of management to provide sufficient guidance to publishing analysts so as to avoid egregiously high expectations.

A new and clearly bearish sentiment began building in the shares several days before the earnings announcement.  Most likely this bearish sentiment is company-specific and beyond the weakness observed in the broader U.S. equity market in recent weeks.  A review of recent trading patterns in BMI reveals a so-called “double bottom breakdown” that occurred the week of April 14th.  This chart pattern portends future weakness in the stock and investors should be concerned that stock could fall even further.

Earlier this week we warned our research subscribers that although we were maintaining our Hold rating on BMI shares, even though the stock has declined into the a range in our trading guide where we would be whipping up new positions.  Indeed, the stock appears to be oversold at the current price level.  However, we noted that it would be a more prudent trading strategy to wait for  some recovery in upward momentum before adding to positions.  Unfortunately, our analysis suggests investors might have to wait a bit.  One very helpful indicator is Moving Average Convergence/Divergence (MACD), which at this time suggests the stock could continue its march southward for several more trading sessions.

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

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

December 26, 2013

When Will Solar Microinverters Reach Commercial Scale?

James Montgomery

Back in mid-August, Vine Fresh Produce in Ontario unveiled a 2.3-MW solar rooftop array on its greenhouse, the largest commercial rooftop project under the province's feed-in tariff (FIT). This system notably incorporates a technology that's been more familiar in the U.S. residential solar market: microinverters. (The devices, made in Enphase Energy's [ENPH] Ontario plant, helped the project qualify for that FIT.) Weeks ago Enphase followed that up with another large-sized project using microinverters, 3.1-MW of distributed solar across 125 buildings for the San Diego Unified School District.

Vine Fresh solar

Vine Fresh Produce’s 2.3-MW (2-MW AC) solar project in Ontario, Canada. Credit: Enphase.

Those announcements were meant as stakes in the ground. "We've proven [microinverter technology] in residential, we're proving ourselves in small commercial... but our ambitions are much bigger than that," said Raghu Belur, Enphase co-founder and VP of products and strategic initiatives. "We're seeing people deploy [microinverters] in significantly larger systems."

The technology is rapidly gaining traction, according to Cormac Gilligan, IHS senior PV market analyst. Microinverter shipments will reach 580 MW this year, with sales topping $283 million, and average global prices sinking 16 percent to $0.49/Watt, he projects. By 2017 he sees shipments soaring to 2.1 GW with revenues of about $700 million, and expansion beyond the U.S. into several regional markets, especially those in early stages of development that might be more open to newer technologies: Australia, France, the U.K., Switzerland, and even Hawaii. Japan's big residential solar market is especially attractive, but poses certification challenges and strong domestic competition.

But as those two Enphase projects illustrate, there's another growth area for microinverters that's emerging alongside regional expansion — up into commercial-sized rooftop solar installations. The same reasons residential customers like microinverters apply to small-scale commercial projects as well: offset partial shading, more precise monitoring at the individual module level, provide a more holistic readout of what the system is producing, and improve safety because they typically use a lot lower voltage. Just nine percent of microinverter shipments in 2012 were to commercial-scale use, noted Gilligan — but he sees those surging to nearly a third of shipments by 2017.

Who’s Making Microinverters

The microinverter space is getting crowded (see table below), if not yet a model of parity. Enphase continues to dominate with more than half of the sector's revenues in 2012, four million units cumulatively shipped and four product generations. "We are a high-tech company that happens to be in the solar sector," Belur explained. Compared with what he called the "big iron, big copper guys" who are now broadening their inverter portfolios with microinverters, "we're all about semiconductors, communications, and software." The company designs its own chips for its microinverters, and outsources manufacturing to Flextronics.

SMA got its entry into the game with the 2009 acquisition of Dutch firm OKE. "In the residential market it became clear to us that customers were interested in the microinverter architecture," said Bates Marshall, VP of SMA America's medium-power solutions group. SMA also sells the string inverters that have gained favor over big centralized inverters, so SMA's simply broadening its portfolio. With the emergence of the U.S. solar end-market, SMA is more willing to push some R&D and product development over here; "we get to drive the bus to a greater extent," he said. SMA recently started shipping microinverters to the U.S. from its German inventories, but a production line is now being qualified at the company's Denver facility.

Similarly to SMA, Power-One (recently bought by ABB) aims to supply whatever type of power conversion capability customers need, noted Chavonne Yee, Power-One's director of product management for North America. So far demand for microinverters has come in the U.S. residential market, offering high granularity and maximum power point tracking (MPPT), but she sees most of the commercial-scale demand switching from traditional central inverters to three-phase string inverters, not microinverters.

Module supplier ReneSola sells a standalone microinverter, touting the typical features with some higher (208-240) voltage options for small light commercial, but at a 15-20 percent lower price point, explained Brian Armentrout, marketing director for ReneSola America. "We are seeing some demand" in small light commercial applications ranging from 50-kW up to 500-kW at which points there's "the breaking point where string inverters make more sense."  Down the road the company wants to take the end-around route of integrating microinverters directly onto panels; its gen-2 microinverter should be available in the spring of 2014. Armentrout projects ReneSola will be "in the top three" next year for microinverter sales, while simultaneously aiming high for the top spot in module shipments.

Others are looking to integrate microinverters directly into the modules. SolarBridge has worked closely with SunPower and BenQ to design its microinverters to eliminate several components that typically fail, notably the electrolytic capacitors and opto-isolators, explained Craig Lawrence, VP of marketing. They also minimize other typical costs such as cabling, grounding wires and even tailoring the microinverter for a specific module type to optimize the microinverter's firmware, he explained. He sees the trend to bring microinverters into the commercial-scale environment, particularly with SolarBridge's more recent second-generation microinverters in the past year or so.

Microinverters vs. String Inverters 

In general, installers are making a choice between microinverters and string inverters, comparing functionalities and costs. Both sides make a case for reliability: microinverters use fewer components and represent lower cost when something does fail; string inverter vendors point out microinverters have only been on the market for a few years and can't make substantial claims about reliability. IHS's Gilligan noted the sheer number of microinverter devices in the field potentially requiring repair/replacement could be daunting.

UCSD solar installation

Solar panels on a building for the San Diego Unified School District. Credit: Enphase.

SolarBridge's Lawrence argues in favor of microinverters on an operations & maintenance basis. Central inverters account for half of an operations & maintenance budget and it's the single highest failure component in a solar PV system; that's why there's been a shift from those to string inverters on commercial-scale solar. "All the reasons you'd do that, are the exact same reasons to go from string inverters to microinverters," he said. "You want as much redundancy and granularity as you can possibly get, to maximize your rooftop utilization and simplify your O&M." Factoring in replacement costs, labor savings in not having work with high-voltage DC, "for most of our customers that alone is enough to justify the additional [price] premium." With a microinverter you'll know when (and which) one panel is underperforming, and it might be tolerable to just leave it alone; on a string inverter you might not know where the problem is while you lose power over the entire string, he pointed out.

Scott Wiater, president of installer Standard Solar, acknowledges that microinverter technologies and reliability have improved over the past couple of years, but he's not convinced this is an argument in their favor vs. string inverters. "I have concerns over the long term," he said. "If you truly believe you're going to get 25 years out of a microinverter with no maintenance, that might hold true, but we haven't had that experience." In fact he advises that any residential or commercial system should plan to replace whatever inverter it uses at least once over a 20-year lifetime. 

Commercial-Scale Adoption: Yes or No?

microinverter industry playersTalking with both inverter vendors and solar installers, the choice of microinverters vs. string inverters for commercial solar settings is making some initial inroads into light commercial applications, but might not be quite ready to move up in scale at that commercial level.

"For projects under 50kW, we have found that microinverters can be positive for the project LCOE on an 'all-in' basis," explained Jeremy Jones, CTO of SoCore Energy, an early adopter of microinverters, including commercial solar projects into the hundreds of kilowatts in size. In general the technology's "high granularity of real time data is very useful in the ongoing asset management," and SoCore's projects with microinverters "have consistently outperformed our other string inverter and central inverter sites." The technology stacks up favorably to central and string inverters (especially for three-phase 208-volt systems) in terms of added costs, he said: warranty extensions, third-party monitoring, and other balance-of-systems costs. Microinverters' performance and low-cost warranties also benefit longer-term finance deals, he added.

However, above 50kW "we have had a harder time making microinverters 'pencil' on typical projects," Jones added. Until costs come down, those larger-sized projects where microinverters can make sense tend to be unique cases where there's a higher value per kilowatt-hour (higher electric rates or SREC values), or sites that can maximize kWh per kW due to high balance-of-systems costs, such as parking canopies, he explained.

SMA's Marshall is "bullish on the commercial market, that's where the volume will be" for inverters in general, but he doesn't see it as a big boon for microinverters because of what he calculates as a 25-30 cents/Watt cost delta from residential string inverters. In the residential space there are ways to knock prices down to mitigate that difference, but in the commercial space that gap is too big for the average buyer, he said. "As a mainstream option? We don't see it today." Microinverters may have a play for "some unique projects" such as campuses or municipalities spanning multiple buildings, but the big growth in commercial solar will be in large retailers, "big flat open roofs, and big flat structures like carports," he said, and there a three-phase inverter "blows the door off in terms of raw economics." 

SolarBridge's Lawrence is "seeing a lot of activity" in smaller commercial settings (100-kw or less), tallying to 15-20 percent of the company's product installations. But while the company is bidding into projects ranging up to 1-MW, it's "harder to make the case above 250-kW," he acknowledged; "those don't pencil out for us right now."

"Anything below around 1 megawatt, we are shifting from a central to more of a string inverter, but we're certainly not going to the microinverter level yet -- nor do we think we will anytime soon," said Standard Solar's Wiater. "The economics behind the projects and having it pencil out, microinverters just can't compete with string or central inverters on a larger scale." While microinverters can help on some rooftop applications where shading might be an issue (close to elevator shafts, vents, HVAC units), a more tightly-designed system with an efficient string inverter "can have a much better return for the customer," he said.

Jeff Jankiewicz, project/logistics manager at Renewable Energy Corporation in Maryland, "definitely considers" microinverters as part of a system design; "we like the performance and efficiency they provide." But for his company it's really only for residential and small commercial projects; the largest they've done is a 20-kW system out in Maryland's horse country. Any bigger than that and it's a case-by-case comparison, specifically looking at shading and energy conversion.

Microinverters and the Grid: The Solar Industry’s Next Battle

Everyone we talked with about microinverters agreed on one thing, however: there's a trend coming that will incorporate more advanced grid management capabilities, such as reactive power and low-voltage ride-throughs, to give utilities more control and the ability to reach in and curtail availability to support grid reliability. California's Rule 21 proceedings is the first such example, seeking to mandate control functions in distributed generators. Those grid-management capabilities are already coming and "very, very soon," Lawrence urged, pointing to new requirements being codified in Australia and the U.S. probably following within a year or so.

SMA Solar Technology [S92.DE] is becoming very vocal about this topic. Its microinverter architecture incorporates a multigate feature with wired Ethernet that allows for a single point of interface into the array, which he emphasized is important for modern grid codes and providing grid management services, Marshall emphasized. Power-One's [PWER] Yee, ReneSola's [SOL] Armentrout, and SolarBridge's Lawrence echoed the concern over regulations and requirements coming down the road that will necessitate microinverters becoming more grid-friendly. They also questioned whether all microinverter architectures are suited for such site-level controls -- specifically market-leading Enphase, which they said is limited in its architecture and topology.

Enphase's Belur responds strongly to this debate. "We 100 percent support the need for advanced grid functions, and we are absolutely capable of providing those," he replied, calling those criticisms an "oversimplification of the problem." Enphase, he said, is "the most proactive company" pushing for those grid-management requirements — but is seeking to do it judiciously through standards bodies and with proper certification and testing bodies, "and you cannot ignore the policy on top of that," he said. "It needs to be done; let's do it properly," he said.

Integration of energy storage, which also recently got a California state mandate, is another looming question as it relates to inverters. Standard Solar's Wiater thinks that's a bigger challenge for inverter functionality than grid-friendly controls, to more directly address the issue of buffering solar energy's intermittency. Some inverters are being designed to interact with energy storage, he noted, but he questions how that would work for a microinverter because it "defeats the purpose" to switch from DC to AC on a roof, then convert back to DC again. Power-One's Yee, meanwhile, sees more distributed solar combined with battery storage as a tipping point in favor of multi-port string inverters being a more cost-effective approach.

Wiater agrees that grid management features are coming, and that the bigger inverter technologies have been out in front of some of these requirements, e.g. to curtail output. On the installer side, SoCore's Jones isn't seeing customers or utilities push strongly for such capabilities yet, but "spec'ing these features in now will allow us to future proof our designs and open up possible future revenue streams."

This issue might have bigger ramifications than just competitiveness between inverter suppliers. Once distributed solar generation gets enough penetration into the grid, utilities will say they can't support it without stronger control capabilities, Lawrence warned. That's likely going to be hashed out as a negotiation between the solar industry and utilities and implemented via codes and standards applicable to everyone, and the industry needs to get out in front of that resolution, he pointed out. "The solar industry is going to have to participate, or utilities will have a good case why they can limit the penetration of solar PV," he said. He cited discussions with a large U.S. solar developer who listed these smart-grid control capabilities as one of their top-four priorities for the coming year: "They believe it's coming," he confirmed. Getting the solar industry working together to help these speed these capabilities along "will help head off utility objections to more and more solar."

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

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

August 23, 2013

Microinverters Make a Move on Multi-MW Solar Power Installations

Tildy Bayar

EnPhase Microinverter
A microinverter from iEnergy
Photovoltaic (PV) microinverters, traditionally used in smaller rooftop solar installations, are being used in a 2.3-MW commercial rooftop installation in Ontario, Canada, supplier Enphase Energy (ENPH) has announced. The installation is the largest commercial rooftop project under the province’s feed-in tariff (FiT).

Analysis firm IHS Research has called the announcement a milestone in the microinverter segment’s progress towards establishing itself outside its biggest market, the U.S., and outside the residential solar segment. 

According to IHS’s analysis, PV microinverter shipments are forecast to exceed 2 GW in 2017 — and penetration into larger installations, along with success in new markets, will be the key driver for this growth. IHS inverter analyst Cormac Gilligan cautioned that if microinverters are unable to move into new markets and lower their dependence on the residential sector, their success will be tested.

The U.S. accounted for nearly 75 percent of the shipments IHS recorded prior to 2013, but in many states the residential market for microinverters is approaching saturation. It will be increasingly important, said Gilligan, that microinverters are used by the third-party/solar lease companies which are very active in the country. While solar lease companies such as Vivint Solar and Sunrun have used microinverters in limited numbers, other large companies like SolarCity (SCTY) have preferred to stick with string inverters as the more proven technology, he said. IHS does forecast that microinverters will be used in greater numbers by solar lease suppliers in the coming years as the technology improves and new models are released.

Microinverter use in commercial installations will grow by more than 20 times 2012’s amount to over 700 MW in 2017, said IHS, with revenues of more than US$200 million and commercial installations accounting for over one third of total inverter shipments in that year.

In 2012 the world’s second-largest microinverter market was France, largely due to market leader Enphase’s penetration, said Gilligan. In addition to the U.S. and France, the company currently focuses on Canada, Italy and the UK. In future, IHS projects Australia, Japan and the UK as very attractive markets for microinverters, as all have large residential markets and smaller commercial ones.   

Although microinverters are currently more expensive than traditional string inverters, IHS forecasts that prices will decrease by 10 percent per year, on average, which will contribute to increased commercial adoption.

What’s Driving Microinverters’ Success?

Features such as embedded module-level monitoring, increased energy yield and improved safety have enabled microinverters to successfully penetrate the MW-scale installation space in 2013, said IHS, and these factors are expected to drive the projected growth in commercial uptake. All are currently important considerations when choosing an inverter for a solar project, Gilligan said, but they will also grow in importance.

For example, he explained, safety features are particularly important on a rooftop commercial solar installation in case of fire, so that fire personnel are protected. Indeed, safety was a key concern mentioned by the owners of the Ontario MW-scale system.

On larger projects, costs such as installation and servicing can add up. With microinverters’ module-level monitoring an installer or electrician can quickly discover which module is underperforming and replace it, saving on labour costs. And, Gilligan pointed out, in commercial locations such as cities and car parks it’s likely that there will be shading from buildings or trees, in which case the microinverter for each module can carry out its own diagnostic, optimising energy harvesting and helping to pay for the extra investment.  

Gilligan said microinverters will be used less in larger (2 MW and above) installations because for these projects it may not be economical, as installing a microinverter for each module may become challenging or time-consuming. “There’s no particular limit,” he said, “but I’d say up to around 250 kW is where microinverters become attractive. Thereafter, for 101 KW — medium-sized commercial installations — and above, there would have to be unique circumstances or customer demand.”

In the case of very large PV projects, he said, the customer or installer usually needs to be familiar with microinverter technology and have used it in the past — for example, in the U.S. and Canada where customers are already knowledgable and comfortable with it.

Key Players

Enphase, which has dominated the market to date, holds a 15 percent share of the total U.S. inverter market, and the company has grown that share year-on-year over the past few years, said Gilligan. Other key microinverter suppliers are Enecsys, SolarBridge and two traditional inverter suppliers, SMA (S92.DE) and Power-One (PWER), who have now entered the microinverter space. These larger companies are likely to have the bankability and resources to promote and offer a microinverter solution, said Gilligan, with the U.S. currently their biggest target market.

The traditional string inverter suppliers, he continued, don’t seem to be running scared just yet — although they have realised that it is important to offer a microinverter solution as part of their portfolio. “So if they have a particular customer or installer or integrator who’s comfortable using microinverters, they will offer one to them,” he said. “But equally, if they have an electrician or installer who’s very comfortable with the string solution, they’ll offer that. Different customers have different requirements and if there’s a unique situation — for example, a lot of shading, or angled roofs, or space issues where a larger inverter is impractical — it makes sense to use microinverters.”

Tildy Bayar is Associate Editor of Renewable Energy World magazine.
This article was first published on RenewableEnergyWorld.com, and is reprinted with permission.

August 06, 2013

Three Overpriced Alternative Energy Stocks & Two Bargains

By Harris Roen

Knowing when to get in and out of a stock is critical to being a successful investor. This is especially true in the volatile alternative energy sector. The Roen Financial Report calculates a fair value range for each of the +/-250 alternative energy stocks that it tracks, so that investors can better understand a stocks relative value. Comparing the current stock price to the fair value range helps determine whether a stock is considered overvalued, undervalued, or at fair value.

Which stocks are good prospects for the future, and where should investors proceed with caution? This article looks at three stocks that the Roen Financial Report considers overvalued, and two ranked as undervalued.

Overvalued Alternative Energy Stocks

ABB (Ltd) (ABB)

ABB Valuation chart

ABB is a large Swiss-based company in the business of automating power, which makes it a key player in development of the smart grid. Though its stock has gained 20% since July 2010, there have been wide price fluctuations between then and now. For example, after July 2011 (when the ABB was considered above fair value to overvalued for four months), the stock dropped 39% over the next 3 months. Conversely, when ABB reached undervalued levels in both the second half of 2011, and thru spring of 2012, investors would have done well to buy it when it was trading in the $16 – $17/share range. Since the beginning of 2013 the stock has jumped back into the overvalued range, so holders of the stock may want to reconsider their position.

Tetra Tech, Inc. (TTEK)

TTEK Valuation

Tetra Tech has gained over 20% since July 2010, but as with ABB, has not had straight-line increases. This environmental services company has solid sales and profitable earnings, but has been considered overvalued since the beginning of 2013. Its price has oscillated down ever since. Because its earnings per share (EPS) dropped in the most recent quarter, it remains at the top of its fair price range. I would still be cautious with this stock until it drops into the $15-$17 price level.

Google, Inc. (GOOG)

GOOG Valuation chart

Many do not consider Google an alternative energy company, and surely, it is not at the core of Google’s business. Having said that, Google understands that its whole company is based on the use of electricity, and as a result, Google has taken a proactive approach to integrating clean energy in its electric consumption portfolio (for example, Google’s wind investments are up to $1 billion).

There is no doubt that Google’s stock price chart has been impressive. Despite continued stock price increases, as recently as a year ago we calculated that Google was still trading at reasonable value levels. Since then, however, Google has been inching toward the top of its fair value range. I would not be surprised if the stock price gives back some of its gains over medium term.

Undervalued Alternative Energy Stocks

IXYS Corp (IXYS)

IXYS Valuation Chart

IXYS is a Silicon Valley-based company that manufactures products that efficiently convert power into useable electricity. Its stock was considered overvalued until recently, but due to shifts in EPS estimates, EPS averages, price earnings (PE) averages and PE ranges, its fair value assignment improved. This put IXYS at the bottom of its fair value channel, which prompted us to add IXYS as a Paradigm Portfolio stock. We think it is likely that its price will appreciate from here.

Power One Inc (PWER)

PWR Valuation chart

Quanta Services is a major Texas-based specialty energy contractor in the smart grid sector. It’s stock graph has saw-toothed up nicely since September 2011 on growing sales and earnings reports (as an aside, the stock has doubled in price since 2009 and is worth ten-times what it was trading at in 2002). This stock has strong price momentum, but still remains near the bottom of its fair price channel. We believe the stock price could easily move up 25% from current levels.

Summary

We believe the adoption of energy alternatives is a growing trend that is here to stay. Though the stock market rarely acts rationally over the short term, long-term investors who pick stocks wisely have a greater chance of making profits. Skill in knowing when to get in and out of a stock will greatly benefit the savvy investor.

About the author

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

Disclosure

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

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


April 26, 2013

Solar PV Inverter Market Shakeout Continues With ABB and Power-One Deal

James Montgomery

A pair of analyst reports issued last week came to roughly the same conclusion about the market for solar PV inverters: It's getting crowded and complicated, with top incumbents facing challenges in maintaining near-term growth in an increasingly fragmented market.

Those PV inverter stalwarts will need to pursue more restructuring and mergers & acquisitions to stay atop the shifting and broadening customer base, addressing everything from tough-to-crack markets (e.g. China, Japan) and embracing newer technologies such as module-level power conversion, i.e. microinverters, say IMS Research and GTM Research. This consolidation has already started to play out: SMA (S92.DE) bought Chinese inverter maker Jiangsu Zeversolar New Energy in December 2012, and earlier this month Advanced Energy (AEIS) acquired REFUsol, a German maker of three-phase string solar PV inverters.

And Wednesday there was another M&A splash in solar PV inverters: Swiss machinery component conglomerate ABB Group (ABB) is acquiring No. 2 PV inverter company Power-One (PWER) for approximately $1 billion.

The $6.35/share cash consideration — which, including Power-One's $266 million net cash, amounts to a 6.4× multiple on 2012 EBITDA and 13× on projected 2013 earnings — was a 57 percent premium to Power-One's closing on April 19 and a 50 percent premium on its 90-day average stock price. (PWER's stock already has shot up today and absorbed all of that premium.) The deal is expected to close in the second half of this year, and be accretive to earnings in the first year. Power-One will be slotted within ABB's discrete automation and motion division, alongside power control and quality, industrial motion, and electric vehicle charging and components.

The solar PV inverter market is expected to grow 10 percent annually through 2021, say the companies, citing data from the International Energy Agency (IEA). IMS Research pegs it as a $7 billion market today and exceeding $9 billion in 2016, rising 14 percent annually through 2017. Within that, the inverter segment is "the most attractive and 'intelligent' part of the PV value chain," the companies say.

Global PV Inverter Revenues

Global PV inverter revenues. (Source: IMS Research/IHS)

Here's what both sides gain from the deal:

ABB: Gains better access to the Americas region (USA, Canada, Central/South America). Power-One is active here and is targeting this as a key growth segment for 2013 at all levels, residential, commercial and utility. The company's Trio (commercial) and Ultra (utility) inverters were recently UL-certified. Adding Power-One also gives ABB inroads into residential and commercial markets in Europe and worldwide beyond its traditional utility-scale focus, points out Cormac Gilligan, a lead analyst on IMS Research's inverter team.

Jefferies analyst Scott Reynolds likens this deal to ABB's 2012 acquisition of Thomas & Betts, which expanded its portfolio into low-voltage technology but also added 6,000 distribution points and wholesales in North America. Power-One "has a significantly larger sales and distribution footprint than ABB which will enable the combined entity to accelerate growth," he writes in a research note.

Power-One: Gains access to ABB's broader worldwide footprint for manufacturing and R&D capabilities, including in-house know-how of power electronics. It also can leverage ABB's brand and background for "bankability" in securing access to finance, Gilligan says. ABB also cites its own strengths in the wind inverter sector, plus monitoring/control, infrastructure, and services.

ABB/Power-One Renewables Portfolio

As a combined entity, ABB and Power-One will still have to balance the trend of decreasing prices for PV inverters that will squeeze profits. And like everyone else they'll have to secure inroads into emerging markets (Asia, Middle East, South America). Markets in Japan, China, and India in particular will be key: working with local suppliers and meeting each country's unique requirements (e.g., JET certification in Japan) and price points.

To that end, M&A activity in the PV inverter market is likely only just getting started. ABB pursued this Power-One deal now because waiting for more clarity in market direction could very well lead to paying more, said Joe Hogan, ABB CEO, during an investor conference call. There are no midsize or large deals in ABB's short-term pipeline, he noted, and emphasized that "you won't see us ever do a solar panel deal" because "we're not a machinery company at all."

Some might question ABB's long-term appetite for solar M&A given last fall's backpedaling of investment CPV startup Greenvolts. But PV inverters are very much in the company's wheelhouse of expertise in power electronics, power management and grid interactions, Hogan reiterated. Solar PV inverters have to interface with grids in diverse regions with unique technical and regulatory requirements, and "we know how to do that. It's in our DNA," he said.

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

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

December 28, 2012

The Smart Grid in 2013: Three Green Money Managers Square Off on EnerNOC

Tom Konrad

What will the New Year hold for Clean Energy?  

For the people who manage clean energy portfolios, mutual funds, and indexes the question is more than idle curiosity.  Getting the answer right means finding the stocks which will put a shine on your solar portfolio’s returns.  Getting it wrong means the competition will blow away your wind stocks.

I asked my network of green money managers for their predictions.  This is the second in a series on their predictions and stock picks from my panel.  This first article focused on what they had to say about trends in the solar sector, this article will take a look at their predictions for the Smart Grid.

Image representing EnerNoc as depicted in Crun...

Sam Healy: Regulatory Certainty Boosts EnerNOC

Sam Healy is a portfolio manager at Lamassu Capital.   Healy’s top trend for 2013 is the maturation of the Demand Response (DR) industry, and its implications for DR leader EnerNOC (NASD:ENOC).  He says,

At this point, most of the [DR] rules and reg[ulations] are set, with the exception of the pending EPA decision regarding diesel generator use as back up power for DR which is due the 14th but may be pushed back.  Assuming this issue gets settled ENOC will finally have a clean regulatory situation, pricing as a tail wind, and visibility into a nice 2013 and 2014.  If this plays out the company could really start to generate FCF [free cash flow] and EPS [earnings per share] and I suspect the investor worries will decrease.

Healy and Lamassu Capital own shares of  EnerNOC.

 Garvin Jabusch: Increased Spending on Smart Grid 

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha PortfolioHe also authors the blog ”Green Alpha’s Next Economy.”

Healy gets some support from Jabusch, who thinks “infrastructure upgrades to accommodate a renewables-friendly distributed smart grid (especially where networks have been damaged (such as in the wake of superstorm Sandy)” will have a significant impact on clean energy stocks in 2013.   Demand response is probably the cheapest way to increase grid stability, and back-up generatiors many firms install in response to Sandy-style blackouts can also be used to provide DR, with firms like EnerNOC acting as middlemen between the owners of back-up units and the utility.

Rafael Coven: EnerNOC and Smart Meters Under Pressure

Rafael Coven is Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)
While Coven thinks the market will have a “Greater focus on generating cash flow and the ability to be profitable without… government largess,” he’s skeptical of EnerNOC’s ability to make the grade.  He expects a

Stronger entry of major utilities and industrial companies into the Demand Response/Demand Management space.  This will put increasing pressure on the likes of EnerNOC and could either severely hurt ENOC or push it to be acquired by an Electric Utility or services company.

He asks, “If a stand alone company’s product [like EnerNOC's Demand Response] is really that good, then one should ask why hasn’t one of the big boys licensed the technology or bought the company?”  He predicts

Continued aggressive acquisitions by conglomerates such as ABB Group (NYSE:ABB), Siemens (NYSE:SI), Schneider Electric (Paris:SU, OTC:SBGSF), General Electric (NYSE:GE), Eaton (NYSE:ETN), Johnson Controls (NYSE:JCI), Honeywell (NYSE:HON), and Emerson (NYSE:EMR) of energy controls, sensor, software, and services companies. … These are the companies than can really leverage the technologies and scale them into global businesses.  As such truly innovative companies in smart energy space are perfect candidates for acquisition.

Demand Response is not the only Smart Grid business Coven sees coming under pressure.  He also expects “ Increasing commoditization of smart meter business.   The buyers buy in bulk, and bid on price.  If the products aren’t truly innovative to the degree that they can charge higher prices, I suspect that pricing will get worse.”

Coven does see one bright spot: Grid security, where expects increasing spending.

Bottom Line

While Healy and Jabusch see tail winds for the smart grid and demand response industries, Coven may be right that increased revenues may not lead to greater profitability.   The last few years of booming solar installations and crashing solar stock prices should serve as an object lesson in that regard.

On the other hand, if Coven’s prediction of aggressive acquisitions by conglomerates bears fruit, EnerNOC’s shareholders may benefit if more or more of these well capitalized companies decides they want EnerNOC’s technology or customers.

Disclosure: I own ABB and JCI.  I have no positions in the other stocks mentioned.  Sam Healy owns ENOC.

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

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

November 18, 2012

Axion Power – A Battery Manufacturer Charging Forward

John Petersen

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

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

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

11.18.12 AXPW Price.png

Business History

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

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

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

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

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

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

Stock Market Dynamics

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

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

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

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

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

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

Technical Accomplishments


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

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

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

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

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

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

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

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

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

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

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

11.18.12 String Behavior.png

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

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

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

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

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

11.18.12 PbC APU.png

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

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

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

Risks and Uncertainties


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

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

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

Investment Conclusions

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

11.18.12 Gartner.png

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

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

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

September 30, 2012

Geothermal Transmission 101

Paul Schwabe

Among renewable resources, one of the most valuable attributes of geothermal electricity is the baseload characteristic of the energy resource. That is, geothermal electricity generators are able to deliver a stable level of power production over time. Yet for better or worse, this baseload characteristic—along with other notable factors such as size constraints and varying market segments—reveals that interconnecting a geothermal plant to a transmission or distribution system poses unique challenges compared to other renewable energy technologies [1].

A recent report by NREL, "Geothermal Power and Interconnection: The Economics of Getting to the Market," delves into the specialized world of geothermal transmission. Among other things, this report finds that from a transmission perspective, not all types of geothermal energy technologies are treated equally. Conventional hydrothermal technologies likely fit differently into the transmission framework than do emerging geothermal technologies such as enhanced geothermal systems (EGS), co-produced geothermal with oil and gas facilities and geopressured geothermal.

Table 1 shows three geothermal technologies and the corresponding market segment they serve. It also describes how particular attributes of each technology present challenges to connecting to the grid and how they may be considered in long term system planning.

For example, due to their large project size and their proven commercial viability, hydrothermal geothermal technologies offer a wide range of transmission options; the electricity produced by the plants can serve either local grid networks or be exported to other networks (referred to as balancing authorities, "BA," in Table 1). The report's author suggests that until they are proven, emerging technologies such as EGS are best utilized serving their home network, but if successful, electricity from these new technologies could eventually be transmitted to other networks as well. Meanwhile, co-produced and geopressured geothermal are likely restricted to distributed generation applications due to remote project locations, large electrical demand of the oil or gas facilities, and relatively small generation capacities (i.e., less than 5 MW).


Table showing the attributes, challenges and
long term system planning characteristics for conventional
hydrothermal geothermal, co-production geothermal, and
emerging technologies. Table describes each of these
categories for distributed generation, local network
generation, power sales to another balancing authority
using existing lines and power sales to another balancing
authority using new lines.

Table 1. Geothermal Generation Groupings and Transmission Requirements. Source: [1]

The author also finds that there are several emerging markets in the Western United States where there is expected to be a near-term need for new baseload generation. These markets are largely where coal plants are expected to be taken offline in the next 5-10 years.  It is estimated that there will be more than 3,000 MW of new baseload opportunities that will emerge from diminished coal usage across the Western United States [1].  While some of these resources will be replaced with other forms of fossil fuel electricity generation such as natural gas, there is likely enough of a need to also elicit interest from geothermal developers.

The report also shows what the author succinctly describes as "The Uphill Economics of New Transmission." Generally, the cost of new transmission is determined by how much electricity the new line caries. Due to economies of scale, a MW of carrying capability on a large transmission line is cheaper than a MW of carrying capability on a smaller line.  Figure 1 shows the cost of transmission per megawatt served over various transmission line sizes.


Bar chart showing the Dollar per MW capacity of
new electricity transmission. The cost per MW is shown for
both 100 mile and 600 mile lines and at different voltage
levels. The cost per MW generally decrease and the line
capacities’ increase.

Figure 1. Total Line and Substation Costs per Megawatt of Transmission Capability.  Source: [1]

Given that most U.S. geothermal plants are less than 80 megawatts in capacity, they are relatively small energy generators compared to other baseload electricity sources such as coal or natural gas power plants.  Without economies of scale, new transmission for commercially available hydrothermal geothermal is a significant challenge, and in practice, drives even proven hydrothermal geothermal development into areas with existing, but underutilized transmission in place [1].

As each of these geothermal technologies offers the benefit of a stable electricity generation profile, there is likely to be a demand for the energy they produce. However, the role geothermal energy will play in long term transmission planning remains to be seen.

Paul Schwabe is an Energy Analyst with the National Renewable Energy Laboratory’s project finance team and has significant expertise in wind and geothermal projects. He has over 10 years of experience in the energy industry, including electricity market analysis, natural gas forecasting, and financial modeling.
This article was first published on the Renewable Energy Project Finance blog.

September 24, 2012

Powering Advanced Energy

by Debra Fiakas CFA

ae_header_logo[1].gif Solar power producers have many challenges.  One is the direct current to alternating current dilemma.  Solar panels create power that flows one way in a direct current (DC).  We use electricity in our homes and businesses in alternating current (AC) that flows both directions, forward and backward.  So solar cell producers must use solar inverters that convert the electricity from the direct current in the solar panel into alternating current.

This is where Advanced Energy Industries, Inc. (AEIS:  Nasdaq) comes in. AEIS makes power inverters for the solar power industry.  The inverters transform the power in the solar arrays into a reliable electrical power.  Sales to solar distributors and engineering firms involved in building solar power plants represented 43.5% of total revenue in the first half of 2012, a significant increase from a 36.4% share in 2011 and 23% in 2010.

The rest of Advanced Energy’s sales are to the semiconductor industry.  The AEIC power conversion products can be used in a thin-film deposition fabricator to control the raw electrical power that comes in from a utility. Put simply, the power flow can be customized and made more predictable for the highly sensitive deposition process.

Sales to the chip makers slipped in 2011 and again in the first half of 2012.  Fortunately, there appears to be momentum in the solar power industry that has power producers knocking on Advanced Energy’s door.  Analysts following Advanced Energy have projected 15% annual growth in sales and earnings over the next five years.

If those analysts are right in their collective wisdom, investors could be justified in paying as much as 15 times earnings for AEIS  -  Price Earnings to Growth Rate is 1.00.  Giving the professionals a full vote of confidence, we can use their average projected earnings estimate for fiscal year 2013  -  $1.12 per share.  That yields a target price of $16.80 per share and implies a current value of $14.60.  That is not much higher than the current share price of $13.78 (9-18-12).    Surprisingly, the mean target price among that group of analysts is a bit lower at $13.70.

After all this math, it is hard to get enthusiastic about Advanced Energy from a valuation standpoint.  The stock chart is even more dissuasive.  AEIS is trading very near its 52-week high.  The 50-day average price is dropping day by day and appears poised to fall below the average price over 200 days.  It seems prudent to wait for better days to take a long position in AEIS.  

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

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

September 21, 2012

SMA Solar's Transformerless Inverter Provides Power During Outages

Ed Gunther [Orlando, Florida USA]

From Solar Light Flashes: SPI12 Edition

Sunny Boy TL-US Inverter

SMA Solar Technology AG (ETR:S92) will begin limited shipments of the transformerless Sunny Boy 3000/4000/5000TL-US-22 inverter series for 3 to 5 kiloWatt rated AC power PV systems in 4Q12. The TL-US series has added a unique Emergency Power Supply feature providing daytime power to a dedicated power socket in the event of a grid power outage. The power socket is isolated from the grid during the outage and supplies up to 12 Amps so long as the PV system is generating. Grid tied inverters without battery storage support are supposed to shutdown during grid power outages to prevent islanding. SMA developed the feature in accordance with solar inverter specifications required to enter the Japanese market after the Fukushima Daiichi nuclear disaster.

From Solar Light Flashes: SPI12 Edition

The TL-US series integrate DC AFCI (Arc-Fault Circuit Interrupter) protection meeting the requirements of National Electrical Code – NEC 2011 690.11. I was told the TL-US has a revised CEC efficiency of 97% since the preliminary product datasheet was released.

Well, multiple sources have confirmed the SunPower Corporation (NASDAQ:SPWR) Oasis 1.5 MW AC Stations I saw at the 250 MW California Valley Solar Ranch (CVSR) project were sourced from SMA America and manufactured at the Denver manufacturing facility much like those for another vertically integrated utility-scale PV power solutions provider.

From SunPower’s California Valley Solar Ranch (CVSR)

DISCLOSURE: No position in any of the stocks mentioned.

Edgar Gunther is a photovoltaic enthusiast who researches and pens the GUNTHER Portfolio under the Photovoltaic Blogger moniker. The GUNTHER Portfolio is an eclectic collection of niche Blog posts about solar photovoltaic technologies, companies, industry developments, and occasional energy politics sprinkled with insight, analysis, and irreverent commentary.

June 20, 2012

Solar Inverter Shakeout: 3 Survivors, 2 Buyers, a Loser and a Wildcard

Tom Konrad CFA

The inverter for the solar array...
Inverter for a solar array. (Photo credit: Wikipedia)
Solar inverter stocks are looking cheap, but until the weaker players are forced out, they are likely to get cheaper.

The major publicly traded solar inverter companies are Power-One (NASD:PWER), Satcon (NASD:SATC), SMA Solar (OTC:SMTGF), Siemens (NYSE:SI), Advanced Energy Industries (NASD:AEIS), Schneider Electric (OTC:SBGSF) and upstart Enphase Energy (NASD:ENPH).  Over the  last year the industry has faced eroding margins and an increasingly competitive environment.  This parallels the problems of solar manufacturers: the industry has too much capacity for a market that is not growing as fast as many expected.

Power-One and SMA currently look quite cheap in terms of Price to Earnings ratios (5.9 and 4.9, respectively), so I asked my panel of green money managers for their thoughts on the industry.  Is the industry near bottom?

I received responses from Rafael Coven, Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD), and from Garvin Jabush, the Cofounder and CIO of Green Alpha Advisors and manager of the Sierra Club Green Alpha Portfolio.   Here are their thoughts:

Coven on the Competitive Landscape

Solar Inverter industry economics have deteriorated with the decline in overall solar market and diminishing  government budgets for solar incentives.   Given the difficult demand picture and insufficient product differentiation the market is becoming commoditized and increasingly price-driven.

Jabusch on How it Will Be Resolved

[T]he problem, as with panels and wafers, is narrowing margins.  The solution, as with panels and wafers, will be to make up for that with increasing scale….  [We] believe the scale of renewables will continue to expand, although timing their turnaround is proving challenging.

Which Companies Will Survive

Both agree that diversification and a strong balance sheet will be key to company survival.

Coven:

Just as in Solar PV, the shakeout will weed out the weaker (undercapitalized) players (thankfully there  are far fewer players than in solar PV).   There are better emerging inverter technologies, but I’m don’t know their time to commercial launch, nor how good the product pipelines of the current solar inverter players are vis-à-vis coming entrants.   I doubt that the undercapitalized inverter players will have the resources either survive new low-cost entrants from Asia nor be able to buy or license some of the better emerging technologies.  Companies such as Siemens or Schneider can afford to buy whatever looks like the winning technology.   In this business, having diversification is critical.

Jabush:

[T]he respective sector leaders with the strongest financial and market positions will weather the downturn the best, and we feel like Power-One is one of these.

Two Buyers and Three Probable Survivors

As Coven says, Siemens and Schneider are diversified giants, and so will not feel pressure as much as more focused industry players. Power-One and SMA are also well capitalized with negligible debt and current profits.  Power-One is more diversified than SMA, with a large electronics business selling power supply products to computer and storage industries.  I expect all four will survive the shake-out.  Solar is only a sideline for Advanced Energy Industries, so it, too should be able to weather the decreasing margins in the industry.

Probable Loser

Satcon looks unlikely to survive the shake-out.  The company is losing money, has shrinking sales, and a horrible operating margin of -46%.  Even rapid growth would not help the company’s economics, unless it were accompanied by increased pricing, which seems unlikely.  I expect Satcon to declare bankruptcy, with its rivals buying any valuable pieces from Satcon’s creditors after.

Wildcard

Like Satcon, Enphase has a weak balance sheet and is losing money rapidly.  Unlike Satcon, Enphase has one of the “emerging technologies” Coven spoke about, selling microinverters which are integrated with the individual panels.  Microinverters have the advantage that they simplify installation by removing the need to work with direct current, and they are also better at optimizing system output.  Because of this, Enphase is growing rapidly, while Satcon is shrinking.

Given Enphase’s weak balance sheet, the stock is likely to continue to decline despite the strong revenue growth.  Either Enphase will be acquired by a stronger player, or existing shareholders will suffer significant dilution as the company is forced to return to the markets for additional operating capital.

China Takeover

An acquirer might not just be one of the stronger industry players Coven pointed to.  Jabusch speculates that one of the stronger diversified Chinese solar companies might look to acquire a newly cheap power conversion player.  He thinks it “makes sense for a larger solar firm to want to add power control devices such as inverters, storage and distribution to their verticals,” while emphasizing that this is only speculation.  ”But,” he says, “ the pieces fit, so it can’t be ruled out.”

Conclusion

Given the consensus that the shake-out is far from over, it is too early to buy into the solar inverter industry.  Even likely industry survivors will continue to see deteriorating margins until the weaker players exit.  Possible buy-out targets may receive a price bump on buy-out news, but any acquirer (even one from China) will probably wait for weakening industry economics to allow them to pick up their target our of bankruptcy, or at least a better price than is available today.

Disclosure: No positions.

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

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

May 16, 2012

Strong Grid Stocks Getting Stronger

Will 2012 Finally be the Year of the Strong Grid?

Tom Konrad CFA

Utility infrastructure companies are seeing the beginnings of the long-anticipated infrastructure boom, and have the rising revenues and backlog to prove it.

Investing in electric utility infrastructure has long been one of my favored ways to invest in the growing renewable energy sector without having to take a bet on unproven technology.  The North American grid is in badly in need of an upgrade, and increasing penetration of variable and distributed resources such as solar and wind will require further upgrades in order to link these resources to the grid and distribute the effects of these resources variability over a wider area.  Smart grid projects also allow the grid to better cope with solar and wind variability, and tap the energy efficiency potential at customer sites.

Further, the natural gas boom has led to a gas pipeline building boom, which also helps the bottom line of many of these companies.

Over the last couple years since I asked if 2010 might be the “Year of the Strong Grid” this building boom has been delayed, as many companies delay capital projects amid economic uncertainty.  Now, it appears that these projects cannot be delayed much longer, and most companies in the sector are showing strong earnings growth and stronger backlogs.

Earnings Surprises

On May 8, Pike Electric (NYSE:PIKE) missed earnings expectations by 2 cents, due to low storm repair revenue. Core revenue was up, and management increased their revenue guidance for the rest of 2012.

On May 3rd, MasTec, Inc. (NYSE:MTZ) reported first quarter earnings, beating analyst expectations by a cent on revenues up 26% over Q1 2011.  More importantly, MasTec increased revenue guidance for the full year to $3.35 billion, compared to current analyst estimates of 3.27 billion.  They also increased earnings guidance for the second quarter to $0.35 per share, compared to analyst expectations of $0.32 per share.  MasTec anticipates strong growth from both wind and solar work this year.   MasTec was up 4% at 11 AM.

Also on May 3rd, Quanta Services (NYSE:PWR) reported first quarter profits of 22 cents vs. expectations of 16 cents, and reversed a first quarter loss of 8 cents in 2011, and also projected a improved results in 2012, providing guidance of $1.00 to $1.20 earnings per share, and revenues of $5.4 to $5.7 billion, compared to average analyst estimates of $5.29 billion. The stock rose 4%.

On May 1, General Cable (NYSE:BGC) beat revenue estimates by $1.65 billion compared to $1.60 billion, and earnings by 49 cents a share compared to expectations of 33 cents a share.  The stock jumped 11%.

On April 20, Wesco International (NYSE:WCC) beat analyst expectations for both revenue ($1.61 billion to $1.58 billion) and earnings ($1.03 to $0.96), and increased revenue projections.

On March 8, MYR Group (NASD:MYRG) beat Q4 2011 earnings expectations by 2 cents and revenues by $32 million (16%).

Canada’s CVTech Group (TSX: CVT) had a disappointing Q4 2012, but has announced strong contract awards since then, and so also seems likely to report a strong first quarter. Other companies likely to benefit from this trend are large cap companies like Honeywell International (NYSE:HON), ABB Group (NYSE:ABB), and Siemens (NYSE:SI).

2012 looks like it’s finally shaping up to be the Year of the Strong Grid.

Disclosure: Long ABB, CVT, MTZ.

An earlier version of this article first appeared on the author's Forbes.com Green Stocks blog.

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

April 04, 2012

Grid-scale Energy Storage: Lux Predicts $113.5 Billion in Global Demand by 2017

John Petersen

Last month Lux Research released a bottom-up evaluation of the cost effectiveness of eight energy storage technologies in six grid-scale applications throughout 44 countries, including all 50 U.S. states. Their report titled "Grid Storage under the Microscope: Using Local Knowledge to Forecast Global Demand" predicts that annual global demand for grid-scale energy storage will reach an astounding 185.4 gigawatt-hours (GWh) by 2017 and represent a $113.5 billion incremental revenue opportunity for an industry that currently generates sales of $50 to $60 billion a year.

In the grid-scale sector alone, Lux predicts an average year-on-year demand growth of 231% from 2012 through 2015 when the growth rate moderates to 43% per year for 2016 and 2017. The forecast is tempered, however, by a cautionary note that demand of that magnitude can't be satisfied because "Believe it or not, the grid storage market will be supply-constrained in 2017."

Technologies and players

The eight energy storage technologies Lux evaluated for their new report are summarized in the following table, along with the price and performance metrics highlighted in beige. Comparable price and performance metrics from a recent SAND2011-2730 Sandia National Laboratories "Energy Storage Systems Cost Update" are also presented and highlighted in green. While there's room to quibble over the details and users of Lux's Smart Grid Storage Tracker and Demand Forecaster can fine tune the price and performance variables to suit their analytical needs, the parallels between the two sets of system cost estimates are close enough to lend substantial credence to Lux's basic assumptions.

4.4.12 Price-Performance.png

Based on a comprehensive evaluation of various local factors including "utility market structure, generation technology compositions, peak power demand, demand growth rate, infrastructure growth rate, penetration and growth rate of intermittent renewable energy sources, grid reliability, [time of use] electricity rates, commercial demand charges, and outage costs," Lux concluded that Japan, China, the United Kingdom, Germany, and the State of Arizona will be the top five regions for grid storage and collectively account for about 58% of global demand in 2017. Japan and China will each account for about 18%; United Kingdom and Germany, will each account for about 9%; and the US will account for about 23%, with Arizona alone accounting for 4% of global demand.

Some of the more surprising conclusions in the Lux report related to the relative importance of the various grid-scale applications by 2017. For me the biggest surprise was the conclusion that the current killer apps, ancillary services and renewable energy integration, will only account for 1.4% of global demand in 2017 while renewable energy time shifting will account for an impressive 54% of demand, or $61 billion in annual revenue potential. I was also surprised by the conclusion that high spreads between peak and off-peak electricity prices would create a major market opportunity in the residential and commercial sectors, which account for 28% and 17%, respectively, of the 2017 demand forecast.

Based on their in depth evaluation of application requirements and the price and performance of the eight energy storage technologies they evaluated, Lux reported that:

Li-ion takes the early lead, but fades to cheaper alternatives. Li-ion batteries for [power] applications capture nearly 80% of the market in 2012, but quickly fade as cheaper molten-salt and flow batteries become available in the ensuing years. By 2017, Li-ion batteries capture only 13% of the market, yielding 33% to vanadium redox batteries and a nearly even split of the rest of the market between sodium sulfur, sodium nickel chloride, and zinc bromine flow batteries at 19%, 15%, and 19%, respectively. This indicates the short timeframe Li-ion battery developers have to reduce their costs. In the long run, systems with discharge durations between two hours and four hours are the “sweet spot” size for most grid applications. Currently, Li-ion batteries are sought-after due to their availability and proven performance. Flow batteries and molten salt batteries, both of which perform well for longer discharge applications, have shown comparable performance to Li-ion batteries at a fraction of the cost and are currently limited by their availability and proven reliability. Flywheels retain 2% of the market in 2017 and find their niche in relatively small frequency regulation market and other niche applications that require rapid discharge capabilities, short durations, and an extremely long cycle life.

Many participants in the lithium-ion battery sector are developing and demonstrating grid-scale energy storage products. To date, the highest profile player has been A123 Systems (AONE), which has shipped over 90 MW of storage systems for ancillary services and renewables integration. While Johnson Controls (JCI) has been quiet about its plans to package and sell lithium-ion batteries for stationary applications, I have to believe the global footprint and sterling reputation of its building efficiency unit will make it a formidable competitor in the commercial markets.

Sodium Nickel Chloride, or Zebra, batteries have been a relatively low profile chemistry for years. They were originally developed by Daimler for use in electric vehicles but failed to gain much traction in that market despite a decade of solid performance in a 3,000 vehicle fleet that's logged over 150 million kilometers. In 2009 General Electric (GE) announced plans to build a NaNiCl factory in New York. In 2010, Italy's Fiamm bought a controlling interest in Swizerland's MES-DEA, the sole European manufacturer of NaNiCl batteries, and is now doing business as FZ Sonick. Both firms are rapidly ramping their marketing efforts on grid-scale systems.

The largest manufacturer of sodium sulfur batteries is Japan's NGK Insulators (NGKIF.PK), which was the global leader in grid-scale storage for the over a decade with an installed base of over 300 MW. NGK had a spotless safety record until late last year when they suspended NaS battery sales and asked customers to refrain from using installed systems pending completion of an investigation into the cause of a battery fire in Japan. Last year, NGK accounted for roughly 54% of the grid-scale energy storage market. While NGK's market share will fall as other technologies gain traction in the grid-scale markets, its revenues should continue to ramp because of rapid overall growth rates in the sector.

There have been no publicly held companies in the vanadium redox battery space since China's Prudent Energy bought VRB Power Systems in January 2009. At present, ZBB Energy (ZBB) is the only publicly held company that's active in the zinc bromine battery space. ZBB is actively exploring markets for a both zinc bromine flow battery that was originally developed by Johnson Controls and novel technology agnostic control systems that can integrate and manage a variety of conventional and renewable power sources and energy storage technologies.

I was a bit surprised that lead-carbon wasn't included in Lux's list of 2017 market leaders. When I asked the analyst why, he explained that the two leading developers of lead-carbon batteries, Axion Power International (AXPW.OB) and East Penn Manufacturing, were currently launching new products and conducting demonstrations, but didn't yet have enough price and performance history to warrant inclusion at anything beyond placeholder values. He also agreed that if Sandia's price and performance estimates prove accurate, lead-carbon could be a formidable competitor and garner a substantial market share.

Supply constraints

While Lux's bottom-up demand analysis contemplates an enormous ramp in new demand over the next five years, they acknowledged that the global battery industry can't satisfy that demand with existing and planned infrastructure. They didn't drill down into the details for the current report, but I think it's critical for investors to understand the magnitude of likely shortages and the market dynamics that are likely to flow from crushing supply constraints.

In its new report Lux predicted that lithium-ion batteries could account for up to 13% of $113.5 in demand by 2017, or roughly 20 GWh of batteries. To put that number in perspective, last year Lux reported that total global manufacturing capacity for large lithium-ion batteries would grow to about 30 GWh by 2017, which means demand from stationary applications alone could absorb almost two-thirds of global manufacturing capacity. This is good news for lithium-ion battery manufacturers in the short-term because it will help absorb an expected glut of manufacturing capacity. Over the long-term Lux believes lithium-ion batteries are not economically sustainable for grid-scale applications because:

"Li-ion batteries developed for transportation applications are energy dense storage devices. Stationary storage projects rarely value this metric, resulting in wasted value for grid-tied Li-ion battery systems. Rapidly evolving technologies with equivalent or superior performance metrics and substantially lower costs and higher resource availability will take over the majority of the grid storage market in the coming years."

For decades the battery industry has striven to standardize battery chemistries, formats and manufacturing methods. As a result, batteries are usually viewed as fungible commodities with little product differentiation or brand loyalty. In the final analysis, purchase decisions for grid-scale storage systems will be driven by the customer's specific power and energy needs and the ability of a particular battery chemistry to serve those needs at the lowest total cost of ownership. Absent a clearly demonstrable performance advantage, comparable products within a technology class will invariably be forced to compete on the basis of price, which will ultimately compress margins.

Any time there are several competing uses for a supply constrained commodity, the buyer that's willing to pay the highest price will get the first call on available production. If electric vehicle manufacturers are willing to pay up and outbid grid-scale storage users, they'll undoubtedly get enough batteries to satisfy their needs. If automakers are not willing to pay a higher price, battery manufacturers will undoubtedly serve their own economic interests first. On balance, I believe rapid growth in grid-scale energy storage will create substantial secondary problems for electric vehicle manufacturers who are already grappling with fundamentally uneconomic products.

As former director of Axion Power International, I'm intimately familiar with the work that's being done in the field of lead-carbon battery technology. Based on everything I know, I believe that Sandia's cost estimates are reasonable and that lead-carbon batteries will be a good choice for a large number of grid-scale storage applications that don't require extreme performance. It doesn't take much market share in a $113.5 billion niche to make for a very successful company.

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

January 23, 2012

Understanding Manufacturing Economics for Grid-Scale Energy Storage

John Petersen

I have a new favorite word — AGGREGATION!

At the risk of sounding like a reporter, I’m going to summarize a pre-holiday news story you might have missed but need to know about.

In late November the PJM Interconnect, the largest of nine regional grid system operators in the US, announced that it had begun buying frequency regulation services from small-scale, behind the meter, demand response assets in Pennsylvania.

The first resources brought on-line by PJM were variable speed pumps at a water treatment plant and a 500 kW industrial battery array at a factory. Each of these resources has been configured to respond to PJM’s signals within four seconds and provide 100 kW of frequency regulation capacity.

In the water treatment plant, the operator will change pump speeds as necessary while keeping average throughput at 80% of nameplate capacity. For the industrial battery array, the operator will shift loads to the battery when the grid needs power and charge the battery when the grid has excess power.

The contract operators for both installations envision portfolios of flexible industrial loads that can be aggregated and operated as a distributed virtual utility that responds instantaneously to supply and demand conditions on the grid side of the meter. They’re literally turning grid loads into grid assets.

How cool is that?

I learned about the development because my old team at Axion Power International (AXPW.OB) built the battery array and is using its New Castle plant in Pennsylvania as the test-facility. But this was more than just an Axion event because it opens a world of opportunity for all manufacturers of industrial power quality and reliability systems.

Traditionally, the battery industry’s pitch on industrial energy storage systems focused on ensuring the highest possible level of power quality and reliability for industrial customers. More recently manufacturers have refined their pitch to include other behind the meter benefits like time of use and demand charge management.

This latest twist creates a whole new set of opportunities to reduce the net cost of a customer’s power quality assets by aggregating incremental revenue from grid-side ancillary services. The battery industry is at a tipping point because energy prices have finally reached a level where waste isn’t always cheaper than storage.

It’s still a tough cost-benefit equation because customers hate anything that eats into margins, but as energy storage system (ESS) developers find new ways to aggregate benefits and use their facilities more efficiently, the potential market grows exponentially.

Now it’s time to shuck the reporter’s fedora and give my horns a little room to breathe. Let’s drill deeper into the inherently confusing metrics ESS developers use to describe grid-scale storage systems.

In a recent report on grid-scale ESS costs, the DOE’s Sandia National Laboratories took a bifurcated approach to pricing that separated the costs of the power control subsystem from the costs of the energy storage subsystem. Their summary table of generic ESS costs using the principal battery chemistries breaks down like this.

1.23.12 Sandia.png

The problem arises when battery manufacturers focus on a power metric in their public statements, instead of an energy metric, and fail to give readers any clues about who contributes what share of system value.

To highlight the problem I’ll use Sandia’s numbers to estimate the prices of Axion’s PowerCube and A123 Systems’ (AONE) Laurel Mountain wind farm project.

1.23.12 Projects.png

ESS buyers aren’t stupid. They won’t let battery manufacturers earn the same margin on the power control subsystem that they earn on the energy storage subsystem.

That leads to the inescapable conclusion that a $2 million ESS sale that’s 70% power control systems and 30% batteries is not the same as a $2 million battery sale. At some point the failure to clearly distinguish between purchased components and proprietary components will give rise to stakeholder confusion that could have been avoided. If market participants can’t find a way to effectively communicate the difference between power control subsystem sales and energy storage subsystem sales, they run an enormous risk that investors, analysts, bankers and other stakeholders will over-estimate the relative impact of ESS sales on the bottom line and then be disappointed when their inflated expectations aren’t met. Losing credibility with stakeholders is a luxury that no company can afford.

Life was simpler when UPS systems integrators built their products and bought batteries as necessary components. It gets far more difficult when battery manufacturers sell ESS products where the bulk of the added value comes from upstream component suppliers.

While my cup usually overflows with sage advice for anybody who’ll listen, I don’t see any easy answers to this conundrum. I suppose the industry could take the easy way out and claim that the batteries just keep the turbines turning when the wind dies down, but that’s really not an acceptable answer either.

1.23.12 Toon.png

NOTE: This article was first published in the Winter 2012 issue of Batteries International Magazine and I want to thank editor Michael Halls and cartoonist Jan Darasz for their contributions.

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

December 08, 2011

Hype Busters From Lux Research Explain Grid Based Energy Storage

John Petersen

In 1883 Thomas Edison said, "The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers than that very selfsame thing. ... Just as soon as a man gets working on the secondary battery it brings out his latent capacity for lying."

The problem isn't so much the batteries, which haven't improved all that much over the last century. Instead, the problem lies in the fertile imaginations of scientists, engineers, politicians, ideologues, analysts and investors who focus on new energy storage applications, overestimate the potential, underestimate the challenges and make a quantum leap from the reasonable to the absurd. There is no issue in the energy storage sector that's more wildly over-estimated than the short- to medium-term potential for using manufactured energy storage devices in the electric grid.

This week, the Smart Grid Intelligence Team at Lux Research, aka the hype busters, presented a 46 minute webinar on the current state of the grid-based energy storage market and its likely development over the next few years. After listening to the live webinar I asked Lux if they're be willing to share their work with my readers and they graciously agreed. Readers who want to listen to the entire webinar can do so by clicking on this link to "Grid Storage: Connecting dots in a fragmented market." For readers who don't have the time for the webinar, I'll try to summarize some of the highlights.

While respected institutions like Sandia National Laboratories have estimated that grid based energy storage represents a $200 billion opportunity, the global installed base of manufactured energy storage devices cost about $1.1 billion, roughly half of that capacity was built in 2011, and a similar amount of new capacity will be added next year. The following table offers a more granular analysis that allocates the installed base and planned additions, expressed in millions of dollars, among the five storage technologies Lux evaluated.

12.8.11 Storage Base.png

By 2015, Lux forecasts an annual market for grid-based storage in the $1.5 billion range. Other firms like Pike research expect faster growth rates. While the prospect of rapid and sustained growth is enough to awaken the animal spirits in all of us, Lux took pains to emphasize several key points:
  • There is no silver bullet solution for the grid and several technology classes will be important;
  • There is no unified mass market for grid-based energy storage technologies;
  • The market for grid-based energy storage is highly fragmented and extremely price sensitive;
  • The two largest market segments for grid-based storage are behind the meter installations for commercial and industrial facilities and in front of the meter facilities for renewable power generators;
  • Most buyers of grid-based energy storage will require several years of reliability data before making a major capital commitment to any energy storage technology; and
  • End-users of energy storage systems will try to aggregate as many value streams as possible to maximize the total economic benefit of their energy storage investments.
For energy storage investors, the most important question is always "Cui Bono?," who will benefit. While there are a lot more questions than answers at this point and Lux did not focus on the principal players in the emerging grid-based storage sector during the webinar, there is a fairly short list of public companies that are actively involved in developing large scale energy storage systems for the grid connected market including:
  • Japan's NGK Insulators (NGKIF.PK), which has built and installed the overwhelming bulk of the high-temperature sodium-sulfur battery systems in the world and is currently trading at about 40% discount from recent highs because it has suspended battery sales pending investigation of a recent fire.
  • General Electric (GE), which has built a new manufacturing facility for a high-temperature molten salt device known as the Zebra battery and is preparing to launch a series of products for large commercial and industrial users.
  • A123 Systems (AONE), which has a strong working relationship with AES Corporation (AES) and is making rapid progress in the renewable power generation market with its high-power lithium-ion battery systems that are used for output smoothing and renewable to grid integration.
  • Altair Nanotechnologies (ALTI), which has demonstrated a high-power lithium-ion battery system for frequency regulation and negotiated a significant sale in El Salvador that's bogged down in regulatory approval issues.
  • Enersys (ENS), which manufactures advanced lead-acid batteries for commercial and industrial power quality, load leveling and uninterruptable power supply systems.
  • Axion Power International (AXPW.OB), which has joined with Viridity Energy to demonstrate a behind the meter energy storage system for commercial and industrial facilities that integrates utility revenue and demand response savings with conventional power quality, load leveling and uninterruptable power benefits to users.
  • Active Power (ACPW), which is a world-leader in flywheel based power quality and reliability systems for data centers and other critical infrastructure facilities that require absolute reliability.
  • ZBB Energy (ZBB), which recently completed a three-year validation test of its flow-battery system in cooperation with Australia's Commonwealth Industrial and Scientific Research Organization, is awaiting UL approval for its power control systems and is rapidly expanding its sales and marketing team.
My clearest takeaway from the Lux webinar is that regulated utilities will probably be among the last to invest heavily in grid-based storage because of their risk aversion and their need to justify capital spending to regulatory agencies that are charged with protecting the ratepayers.

On the power producer's end of the grid there are significant opportunities for storage systems to smooth and stabilize power output from wind and solar while optimizing revenue streams to the owners of the facilities. At the power user's end of the grid, the most readily quantifiable values will be derived by commercial and industrial customers who can aggregate the internal benefits of power quality and reliability with external monetary benefits from demand response programs and providing ancillary services to the utility side of the meter. Over time, the most successful technologies will build a long enough track record of reliability to take a direct run at utilities and transmission system operators, but it's not reasonable to expect the utility and transmission markets to develop rapidly over the next five years.

It's far too early in the game for me to try handicapping likely winners and losers, but most of the companies in the list are currently trading at lottery-ticket prices that will not be available once their competitive positions in this rapidly expanding niche are better understood.

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

July 28, 2011

Comverge, Diverge, or Merge?

Tom Konrad CFA

Comverge (COMV) has a great residential demand response business.  The company lacks focus, but the stock has significant upside as an acquisition target.

As part of my ongoing series on energy management companies (see these articles on World Energy Solutions (XWES) and EnerNOC (ENOC)) I spoke with Comverge CEO Blake Young.

The Comverge Advantage

Comverge is the strong leader in residential demand response (DR,) one of the most cost effective grid stability solutions.  Even within demand response, residential DR is an excellent niche, because working in the market for residential DR is much more difficult than for that commercial and industrial (C&I) DR.  For instance, World Energy Solutions CEO Rich Domaleski told me that his company leverages their market based energy sourcing platform to sell the other energy services, such as efficiency and DR.  Yet World Energy has no interest in entering the residential space: their focus is on large customers where they can make a significant profit from a single transaction, and they typically only consider customers with annual energy budgets over $500,000, or more than 100 times a typical household energy budget.  DR leader EnerNOC likewise focuses on large C&I customers for similar reasons.

Yet there is strong demand for Residential DR as well.  Although it's cheaper to achieve large reductions in peak demand at large electricity customers, many utility regulators have a mandate to allow all classes of customers to participate in utility programs.  In practice, this means that many utilities will pay more per MW for residential DR than they will for C&I DR, leading to higher margins for those companies able to provide residential DR cost competitively.  According to Young, Comverge ended 2010 with 41% gross margins on their residential business (57% of sales), but only 33% gross margins on their C&I business (43% of sales.)
 
In residential DR, Comverge places a switch and transmitter/receiver on mainly air conditioners and pool pumps, gathering DR capacity a kilowatt at a time. It takes 1000 houses to get 1MW. In commercial applications, one single steel mill’s DR capacity could be 50MW, the equivalent of 50,000 houses. Residential is harder to deploy, but once deployed, it is distributed and easily cycled. Commercial is bigger, but the DR company needs to deal with professional energy managers who are liable to shop around for the best deal, compressing margins.  And just like distributed generation, distributed DR has advantages for utilities in that they can address local stresses on the grid with local demand reduction.

Comverge's expertise in Residential DR grew out of 30 years of history selling equipment to utilities used in DR programs.  They launched their program to provide Demand Response as a service in 2003, and went public in 2007.  They've been able to achieve their leadership as a residential DR provider because they have a large number of scalable residential DR contracts.

The Stock Price

Given Comverge's leadership in the highest margin DR niche, it is rather surprising that the stock has performed so horribly since Young took the reins in February last year.  When I asked him to what he attributed the fall in the stock price, he told me that Comverge has "trended virtually the same as other companies in the space."

A quick look at the graph below will show you that that is an overly charitable description of the stock's performance, at best.  The only other pure-play DR company is EnerNOC, and while the two companies followed the same trends closely from their IPOs in mid 2007, a significant gap has opened up over the last two years. 

COMV Comparison.png
Image source: Yahoo! Finance

Since February 2010, EnerNOC shareholders have lost roughly half of their money, while Comverge shareholders have lost three-quarters of their investment.  If Young believes Comverge has trended "virtually the same as other companies in the space" during his tenure, he must consider Comverge's "space" to be companies in severe financial trouble.

Fear of Dilution

Comverge is not yet in severe financial trouble, so why has Comverge fallen to the level reached only in the depths of the 2008 financial crisis?  The answer, most likely, is shareholders' fear of further dilutive offerings.  Selling new stock to raise money is not always bad, but it is a problem if shareholders think it will be invested in less profitable businesses than the current one. 

Young's apparent complacency about the stock price seems to extend to a general complacency about the use of shareholder funds. 
 
Where does the capital go?  Young gave me the example of the recent PJM (a regional electricity transmission organization in the Eastern US) auction for the 2014-15 capacity year.  Comverge bid for and won 20% more capacity in that auction than they won in the 2013-14 auction.  Meanwhile, the market is becoming more competitive, with prices in the PJM auction having fallen 20% over the previous year, meaning that Comverge's expected revenue from the PJM market will be 4% lower in the 2013-14 year than in 2012-13, while they have to acquire 20% more MW.   Growth is good, but in this market Comverge is running just to stand still.  Those contracts tie up capital in the form of collateral which will be paid in penalties if Comverge does not meet its obligation to deliver those megawatts.  What's particularly ironic about this is that PJM introduced a new mechanism in this most recent auction to allow smaller players to bid without putting up as much capital, which Comverge did not take advantage of because they consider it too complex. 

Comverge has been investing in a lot of things other than what they are best at, which is residential DR.  Young told me that the company is aggressively pursuing C&I customers (the C&I share of revenues has been growing much faster than the Residential), as well as investing heavily in their IntelliSource software platform.  They recently also moved their former CFO to a newly created position as head of international operations, where Young says they are "looking very hard" at the Middle East, Africa, China, and South America.

While any of these strategies might make sense for a profitable company expecting maturation of its core business, Comverge is not profitable, and residential DR (as well as DR in general) has plenty of room for growth according to Young himself.

Comverge's experience with small residential customers might serve to give the company an advantage when working with smaller commercial businesses, but they don't have any obvious advantage with the large C&I clients, and they are pursuing those as well.

When I asked Young what competitive advantage they have in the C&I market, he spoke of their close relationship with their customers, and IntelliSource, which incorporates large amounts of data about the electricity use and control on the system to better predict how many MW of capacity they can deliver at any time.     He also says that many utilities like to work with a single demand response provider.  IntelliSource seems like more of an advantage with smaller customers.  Large customers' power usage naturally comes in larger blocks, so such detailed data, while useful, will be less relevant than with large numbers of smaller customers.  Yet the argument that utilities like to work with a single provider is a strong one, and justifies Comverge's presence in all parts of the DR market, even if they do not have a competitive advantage in large C&I.

Yet that argument does not justify the company's expensive participation in the competitive PJM market, which does not differentiate between DR sourced from residential customers, nor does it justify a move overseas.

What I'd prefer to see is a focus on growing the core business of working with utilities that do want a significant portion of their DR megawatts to come from residential customers, in order to maintain the company's profit margins at least until Comverge achieves profitability and there is a significant recovery in the stock price, which would lower the company's cost of funds.  Moving into more and more new businesses adds to overhead and moves this date out further and further.

Shareholder Discontent

The plummeting stock price and lack of focus have drawn the attention of a group of activist shareholders called SAVE, led by Brad Tirpak, whose provocative ideas about distributed solar's effect on utilities I wrote about in February.    Comverge's 2006 S-1 registration statement states that the certificate of incorporation "provide[s] for a classified board of directors, [which] could discourage potential acquisition proposals and could delay or prevent a change of control."  SAVE first needed to remove Comverge's classified board structure in order to gain influence at Comverge.

Tirpak sponsored a proposal on Comverge's 2010 Proxy which instructed the board to repeal the classified structure of the board and "complete transition from the current staggered system to 100% annual election of each director in one election cycle unless this is absolutely impossible," and also requested "that this transition is made solely through direct action of our board if feasible."  The proposal passed with 72% of the vote

In response, the board placed an amendment to Comverge's articles of incorporation on Comverge's 2011 Proxy Statement, which was designed to "implement over a period of three years the stockholder proposal to declassify the Board," and recommended that shareholders vote for the change.

SAVE saw this proposal as "a thinly veiled attempt to entrench Alec G. Dreyer as the Chairman of the Board for a further three years," because the board did not declassify through direct action (which would have been immediate) and implemented the proposal over three years, rather than immediately. 

The 2010 proposal was clear that legal constraints were the only valid reason not to declassify the board immediately and completely, so I asked frequent AltEnergyStocks contributor and IPO attorney John Petersen and Charles Knight, an attorney with Venture Law Advisors in Denver for their opinions.  Both told me that the board would not be able to declassify by direct action and a second vote would be required if the staggered system arose from the firm's certificate of incorporation, which Comverge's S-1 confirms is the case.  Knight also told me that companies often declassify "over time as the prior directors were elected for longer terms and are generally entitled to serve out their remaining terms if elected prior to declassification under a company’s bylaws." 

In other words, declassification over a period of three years, although slow, was declassification "in the most expeditious manner possible, in compliance with applicable law, to adopt annual election of each director."  Possibly the board could have called a special election of shareholders to declassify the board in 2010, shortly after the shareholder proposal passed, but that possibility was ruled out by the text of the 2010 proxy, which stated that the proposal would run on the 2011 ballot.

SAVE was successful in defeating the 2011 proposal to declassify the board over three years, urging the board to declassify immediately and "explore all strategic alternatives" (i.e. put the company up for sale.)  But this was a Pyrrhic victory, as the board cannot legally declassify immediately. 

By lobbying against the implementation of its own proposal, SAVE has damaged their own credibility, which makes management less likely to listen to them regarding potential mergers with other companies which might lower Comverge's cost of funds and produce an immediate return for Comverge's shareholders.  In our interview, Young was quite dismissive of SAVE and Tirpak, whom he seems to regard as minor annoyances. 

Value

Although I understand management's dismissal of Tirpak's efforts, I also agree that there would be significant benefit to shareholders in the company pursuing all strategic options.

Despite the lack of focus, Comverge has significant value, and at current prices would make an attractive takeover target for other companies in the space.  There is a clear appetite from large players for companies in the Energy Management space.  For instance, Johnson Controls (JCI) recently purchased the formerly OTC-listed EnergyConnect.  These companies have a lower cost of capital, and so can more easily afford the capital needed to participate in the DR space for large customers.

On measures of cash and current assets, Comverge appears well-capitalized, but much of this money is tied up as collateral.   The most recent quarterly report states that Comverge committed $17.9M in advance of the 2014-15 auction, funded from cash on hand and a revolver loan.  Young told me that they got "some" of this back after the auction, so call it $15M.  But Comverge's most recent balance sheet shows less than $27M in cash and $24M debt.  Was that a good use of so much of the company's liquidity?

Yet the company does have a strong backlog, including $532 million worth of future revenues through 2024 under existing long term contracts, and a contractual backlog for the coming year of $128 million as of the end of Q1.  At 35-40% gross margins, that's about $50M per year before overhead costs, but at $3.30 a share, Comverge's market cap is only $82 million.  Comverge would be worth a lot more to an acquiring company like Johnson Controls, or Siemens (SI), or ABB, Ltd. (ABB) that have strong balance sheets and have shown appetites for acquisitions in the smart grid space.  EnerNOC, which is profitable, could also see instant gains by eliminating much redundant overhead and gaining valuable expertise in the residential market.

Comverge Should Merge

At the current price of $3.22, Comverge is an attractive acquisition target, and would probably have $6-$8 worth of value to a better capitalized acquirer.  But investors who buy now are taking a real risk.  Although Young told me that he intends to break even in 2012, such predictions have an unfortunate habit of slipping, and have slipped at Comverge in the past.  The company seems to be aggressively investing in less profitable businesses that diverge from its main business and are not justified given Comverge's current high cost of funds resulting from the lack of profitability and the low share price.

Perhaps Comverge will achieve break-even in 2012 and profitability in 2013, as Young expects.  But I don't see how that will happen without either further diluting existing shareholders, or merging with a larger company that has a lower cost of capital.  Since Young and many of the board members are significant shareholders, I hope they see that it's too their own benefit to take the latter course.

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

July 09, 2011

The Sector Information Technology Forgot

Tom Konrad CFA

Information technology has mostly passed the energy sector by... but for how long?

Information Technology revolutionized the way we buy things (Amazon, eBay), how we get information (Google, Wikipedia, the decline of newspapers), and how we interact with out peers (Facebook, Twitter, LinkedIn.)  Yet so far, it has had little, if any transformative impact on energy.  Tim Healy, CEO of EnerNOC (ENOC), the world's largest  third party provider of Demand Response to utilities and grid operators, thinks that's about to change.

Demand Response (DR) began decades ago with Interruptible loads and Interruptible rates, driven by simple economics.  It 's much cheaper to pay users to temporarily curtail usage during peak periods than is is to build new capacity.  Under Interruptible loads and rate, utilities give large customers favorable electricity prices in return for an agreement that the utility can turn off certain parts of their equipment (interruptible loads) or their entire power supply (interruptible rates) for a few hours per year in the event there is not enough spare generation capacity to meet demand.  My first encounter with DR came as far back as the late 1980's, when I was an undergraduate at Harvey Mudd College in Southern California.  At the time, the college was on an interruptible rate plan.  I don't recall any power outages because of the interruptible rate, most likely because I was not on campus at the time.  For an institution where most students and faculty are away during the hottest months of the year when Southern California energy demand peaks, an interruptible rate must have made a lot of financial sense.

But interruptible rates are limited in their application.  Most businesses and institutions are less able to compromise on power reliability.  That's where Information Technology (IT) comes in.  By selectively controlling machinery, lighting, and HVAC equipment, modern DR providers such as EnerNOC can wring better coordinated and targeted power reductions from facilities without disrupting mission-critical operations. 

Because types of energy use are so varied across institutional, commercial, industrial, and government sectors, there are few cross-cutting DR measures that apply everywhere.  Instead, EnerNOC works with each facility or business owner individually to identify the energy services they can do without for short periods of time, and connects those devices to monitor/controllers that feed into a central Network Operations Center (the NOC in EnerNOC) where aggregate load can be controlled as easily as any power plant.  One way to look at DR is as a virtual power plant, that can substitute for new supply-side resources such as gas turbines.  Such virtual power plants can not only shave peak loads, but improve grid stability in other ways as well.

Despite DR's long history, energy consulting firm KEMA estimated in 2007 that only 21% economic DR market was then operational, with the market potential growing along with overall load growth.  Different definitions of market sizing lead to different market penetrations, but all put market penetration at well below half.  The low market penetration arises from the idiosyncratic nature of different industries.  Demand Response at a supermarket chain looks a lot different from DR of agricultural irrigation.  EnerNOC recently purchased M2M Communications specifically because M2M's technology allowed EnerNOC into a novel and mostly un-penetrated market: agricultural irrigation operations. 

Data Driven Energy Efficiency

Although EnerNOC sees DR as their core product; DR also forms a strong platform to sell other energy services to clients.  Using IT to crunch the same data that are necessary for automated Demand Response can help pinpoint opportunities for cost-effective energy efficiency improvements.  That data can also be used to understand normal energy usage and negotiate the most favorable deal with energy providers, or help evaluate a company's carbon footprint.  These data-driven efficiency services help broaden margins, since they do not require that EnerNOC share the revenue they get from utilities with the facility owners.  According to Healy, pure play DR providers usually have gross margins in the mid 20s, while EnerNOC's are in the mid-40's. 

The World Scene

In sharp contrast to the vast majority of clean energy technologies, the United States has by far the most developed DR market, and EnerNOC is the leading player in that market.  While both Europe and Japan have been aggressive in promoting solar and wind power, they have much less demand response capacity, and now they are waking up to its advantages.  My colleague John Petersen recently returned from the Grid-Scale Energy Storage Conference in Brussels, and told me by email that the utility representatives "made it clear that the only economic grid storage in their view [is] pumped hydro" and that they spoke "casually as you please about 'load shedding' as a solution for variability." 

"Load-shedding" is utility-speak for temporarily cutting off power to certain lines.  If they are seriously considering load shedding just to cope with variability, they will want to sign up as many customers as possible for interruptible rates.  From there, it is only a small step to pursue full scale Demand Response, and since European utilities have little experience with this, it makes sense to call in a third party vendor such as EnerNOC.  Indeed, EnerNOC is beginning to expand internationally already.  In the first quarter of 2011, international revenues were 15% of total revenues, compared to less than 1% the previous year.  The majority of these revenues came from Canada, but other revenue outside North America grew from only $13K in Q1 2010 to almost $5M in Q1 2011.

To cope with the loss of power from nuclear generators shut down after the Japanese earthquake and tsunami, Japanese citizens have shown remarkable willingness to do without some electric services for the greater good.  While TEPCO has managed to bring more new supply online than initially anticipated, that still leaves the anticipated summer shortfall at between 3 and 4.3 GW.  Most of this will be met by conservation from Japanese residential and commercial users, and I expect the experience of manually turning down power consumption for the greater good will help prime the technophilic Japanese for more automated ways to control energy use, such as DR and other Smart Grid technologies.

Leading Vendor

Although many utilities pursue their own DR programs, those that choose (or are asked by regulators) to consider third party solutions seem likely to prefer a one-stop shop from a well established vendor to a collection of specific solutions from smaller vendors.  EnerNOC's current leading position and strategy of acquiring new technologies by acquisition as they become available seem likely to continue to be a source of strength going forward.  Their strong balance sheet with no net debt and positive cash flow and earnings not only give them the resources to continue to acquire new technologies to supplement their existing capabilities, but also give utilities confidence that they will be able to fulfill their obligations as a DR vendor.

Conclusion

As Germany and Japan come to grips with the reality of trying to quickly phase out nuclear power and replace it with variable resources such as wind and solar, they will also have a rapidly growing need for dispatchable resources to manage the variability of the new resources.  The application of IT to energy allows Demand Response and other IT-enabled Smart Grid technologies to deploy more quickly and cheaply than even natural gas turbines.  I expect EnerNOC to be among the leaders in this last wave of the IT revolution.

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

July 07, 2011

Inexpensive Grid Stability Solutions

Tom Konrad, CFA

With all the discussion of grid based energy storage for renewable energy integration, the two cheapest and most mature solutions are overlooked.  They are also the solutions most often overlooked by investors captivated by the story of clean technology.

A few years ago, I put together some graphs to show this as dramatically as possible.  I surveyed the available data on energy storage and other grid integration technologies for the costs of existing installations, and calculated average cost per installed kW (power), per installed kWh (energy) and round trip efficiency (the percent of energy lost through round-trip charging and discharging.)

The results are shown in the graph below.  Keep in mind that the data is a few years old at this point, and all numbers are approximate, since they are culled from a variety of different sources.  The graph shown is on a log-log scale, so a technology at the top of the graph is 10 times cheaper when it comes to delivering power to the grid than a technology on the horizontal line, and a technology at the far right is 100 times cheaper for storing energy than a technology on the vertical line.


The most cost-effective technologies are closer to the upper right hand corner of the graph, and have relatively large bubbles (high round trip efficiency.) 

Large Scale Energy Storage Technologies

The most talked-about energy storage technologies, Pumped Hydropower [PHES], Compressed Air Energy Storage [CAES], and molten salt thermal storage in conjunction with Concentrating Solar Power [CSP-Tower] can clearly be seen to outperform both batteries and flow batteries for energy storage applications.  Note that the numbers are approximate.  PHES is shown on my graph as slightly less viable than CAES, but the balance of opinion favors the economics of PHES.  The CAES bubble may overstate the viability of that technology: there are only two operational CAES plants, which leads to considerable uncertainly in the construction costs for future plants.  Similarly, the Economics of PHES may be understated.  Each Pumped Hydro site is unique and has its own economics, and the best sites are likely to be considerably better than shown.  Such sites will have existing reservoirs that can be raised and lowered at will to reflect current electricity supply imbalances.  I discuss PHES in more detail here.

Hydrogen [H2], flow batteries, and conventional batteries are simply to expensive to be viable as an energy storage medium except in situations such as remote power, where transmission, demand response, and PHES or thermal storage are impractical.  While the economics of large scale energy storage for Hydrogen compare well with those of molten salt thermal storage, the high cost of fuel cells makes hydrogen storage nearly useless as a power resource, and the low round trip efficiency means that much energy is lost transforming electricity back and forth in to hydrogen.  Large hydrogen tanks are relatively inexpensive to build, but filling and emptying those tanks is too slow a process to be practical as a grid based storage solution.

Yet all these solutions pale in comparison to the virtual energy storage provided by high voltage transmission.  When a region has excess electricity, it usually makes much more sense to sell it to a neighboring region that can use it than try to store the electricity locally.  Hours or months later, the same transmission line can be used to re-import the power when relative prices in the two regions reverse, making a transmission line to a neighboring region act as if it were a connection to a battery with infinite capacity.

Grid Stability (Power) Technologies

While the energy storage technologies on the right side of the graph are good for smoothing out long term imbalances between electricity supply and demand, short-term variations in supply and demand are best addressed by the cheap power resources towards the top of the graph.  The quicker the fluctuations that need to be smoothed, the more important it is that the technology be able to absorb or deliver power quickly, and the less important it is that a large amount of energy be stored for extended periods of time. 

Three highly effective technologies for producing quick bursts of high power but without much energy storage capacity are flywheels (currently in their earliest stages of deployment by Beacon Power (BCON)), Superconducting Magnetic Energy Storage [SMES] a technology provided by American Superconductor (AMSC) that has been shown to be able to maintain grid stability when events such as lightning strikes would otherwise overload the grid with large, sharp jolts of power, and ultra-capacitors such as those provided by Maxwell Technologies (MXWL) which are generally too expensive for grid based applications, but are beginning to find a niche in vehicles.  These technologies are not shown on the graph because I would need to expand the vertical axis multiple orders of magnitude upwards.

Among established technologies, Lithium-Ion [Li-ion], Nickel-Metal Hydride [NiMH] and Lead-Acid [PbA] batteries perform acceptably in remote grid stability applications where few other options exist, but all are eclipsed by the low cost and effectiveness of Demand Response. Demand Response is a suite of technologies which allow the utility to ask energy users to reduce their energy usage when the utility's generation capacity has trouble meeting current demand.  Like transmission, but unlike batteries, flow batteries, thermal storage, PHES, or CAES, the electricity storage provided by demand response technologies is virtual: when a customer temporarily turns up the thermostat in response to a signal from the utility, the use of energy to cool the building is delayed until after the event when the customer drops the thermostat back to its usual setting.  This avoids the cost of physical electricity storage, and makes Demand Response the most economical way to meet short-term spikes in energy demand (such as on hot summer days when air conditioning demand is high) and short term supply shortfalls, such as when power plants fail to come online at the scheduled time, or when power output suddenly drops.

The Bonneville Power Association's Hydropower Surplus

 Recently, a heavy snow pack and a quick melt have caused the Bonneville Power Association (BPA) to shut down wind power generation for several hours each night in the Colombia Gorge.  This has wind farm owners (who stand to lose Federal tax credits for energy production) heading to court.  BPA claims shutting wind farms is necessary, but wind farm owners claim that two inexpensive solutions exist to deal with the excess power: Unused transmission capacity to Canada and Southern California, and the possibility of paying customers to shift their energy consumption from daytime to nighttime hours.  Both these solutions would cost BPA money, while their current approach of refusing to accept wind power at night is free.  This is why BPA chose not to honor its contracts with wind farms. While this makes economic sense for BPA, it sets a bad precedent because it was poor planning on BPA's part to sign such contracts in the first place.  Should wind farm owners have to bear the financial consequences of BPA's bad planning?  If they had known that BPA would not honor those contracts, they might have spent their capital in other regions of the country where the most productive season for wind does not correspond with the most productive season for hydropower.

In my opinion, this ruckus is more about industry players jockeying for position, than about wind being too unstable for the grid or incompatible with salmon.  Both Demand-Response and Transmission are existing, cheap ways to deal with the potential power surplus, and no matter what the courts rule, Demand Response and High Voltage Transmission are both key in allowing wind to achieve its full economic and development potential.  In fact,  Tim Healy, CEO of Demand-Response firm EnerNOC in a recent interview, said his firm has been helping BPA shed some excess power duing nighttime hours by turning some of their customers equipment on when it might otherwise be off.

Investments

I've written extensively about transmission stocks in my "Strong Grid" series.  I included the two exchange-traded Demand Response companies, EnerNOC (ENOC), and Comverge (COMV) in my recent list of Ten Clean Energy Stocks I'd Buy Now, because their prices are looking very attractive.  I've already written about World Energy Solutions (XWES), and I spoke with EnerNOC CEO Tim Healy about his company last week in preparation for a this article.  I plan to follow that with articles about Comverge, and EnergyConnect (ECNG.OB), an OTC-traded demand-response provider.

DISCLOSURE: Long COMV, ENOC, BCON.

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

May 20, 2011

A Profitable Smart Grid Penny Stock Aims for a NASDAQ Listing

Tom Konrad CFA

A NASDAQ listing could bring a quick profit to investors who buy now, but beware the business risk.

Ambient Corp. (ABTG.OB) offers an Internet Protocol (IP) smart grid communications platform to electric utilities.  So far, they have exactly one customer: Duke Energy (DUK).  Duke selected Ambient's X-series communication node solution, which flexibly gathers data from multiple smart meters and relays it to the utility.  For instance, in some cases Duke is using Ambient's nodes to gather data from both Echelon Corporation's (ELON) smart meters using data over powerline technology, and Badger Meter's (BMI) smart gas meters which use a wireless mesh to deliver data.

Based solely on its deal with Duke, Ambient became profitable in the last quarter of 2010, and gained more ground in Q1 2011.  Yet as readers following the American Superconductor (AMSC)/Sinovel (601558.SS) saga know, over-reliance on a single customer can be very dangerous.  You can't get much more reliant on a single customer than Ambient is on Duke.

That said, Duke Energy is not a hyper-competitive Chinese wind company with investments in any of the company's competitors.  They are a regulated utility, and, as such, their moves are more transparent and conservative rather than the enigmatic and abrupt.  Major changes in Duke's strategy come out of the regulatory process, and are part of the public record.  Regulators also tend to prefer a go-slow approach, which means client acquisition for companies like Ambient is slow and painful, but also that their clients are less prone to fund competitors and start refusing deliveries with little warning.

There are advantages to having Duke as a customer as well.  Duke has been a leader in smart grid deployment, and given the conservative nature of utilities, if a smart grid solution is seen to work well for Duke, other utilities will be more likely to adopt it than to opt for a technology that has not yet been widely deployed.  One potential market expansion may come from Duke's merger with the smaller Progress Energy.  But there is also the risk that Duke might switch to the technology from Progress energy's own smart grid project.  Overall, though, I think the merger will be good for Ambient, since their interoperability makes them a natural choice for a merging company trying to consolidate two systems.

Hoped-for NASDAQ listing

The single customer is the main reason to be wary of Ambient stock.  The reasons to be optimistic include the company's current profitability, strong balance sheet, and plans to aim for a NASDAQ listing.  The company's major shareholder, Vicis Capital, has given Ambient's board permission to conduct a reverse stock split to boost the company's current $0.08-$0.09 share price over the $4 threshold needed for a listing. 

The company is also working to raise their profile by retaining a PR firm, Elevate Communications of Boston.  I'm not sure when the firm was retained, but I received my first press release from them when Ambient released their 2010 results in February.  They contacted me again last week, although they did not respond when I requested an interview with the CEO in preparation for this article. [Update: I was contacted by Elevate in response to this article. They very much wanted to brief me on the company, but had not seen my email.] I mainly wanted to ask him about their prospects for finding other customers, and why nothing has come of the R&D effort with ConEd in 2007.  Assessing why past potential deals did not materialize might give some insight into Ambient's future prospects.

That said, the fact that Ambient only has one customer is old news. 

What's new news is that the one customer has become lucrative enough to push Ambient into profitability.  I'm not sure how much of the current profitability is due to stimulus-related smart grid spending by Duke, but I trust that it will likely continue for a few more quarters, if only because Ambient does not seem to be in a hurry to complete their reverse split and get listed.  So I'm betting that there will be at least a few more good quarters to get investors excited and give a quick return to those who get in now.

Other investors seem to think so, too.  The stock price found a bottom around $0.075 and started moving upwards since the positive Q1 earnings and revenue numbers.

ABTG chart

Conclusion

I think Ambient is worth speculating on at the current $0.09 stock price.  If they manage to find another big customer soon, I'd consider them a good long term buy, but as it is I'm more comfortable holding for less than a year to take advantage of the currently growing profitability and potential listing.

DISCLOSURE: Long ABTG.OB.

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

April 08, 2011

ABB Group – A Cleantech Company?

Tom Konrad CFA

Power and automation giant ABB, Ltd. (NYSE:ABB) was named Cleantech Corporation of the Year at the Cleantech Forum in San Francisco. The company has been focused on acquiring start ups in the cleantech space for the last couple of years, with two significant ones in 2010: Ventyx, a provider of IT systems to utilities, and Baldor Electric, the premier supplier of high-efficiency motors in the US.

I very much like ABB's approach to cleantech. I'd even written about Baldor as a good way to invest in energy efficiency earlier in 2010 just a couple months before the buyout announcement.

While ABB is touting its eco-sheik acquisitions in smart grid (Ventryx, Trilliant) and Electric vehicle charginA Diamond in the Roughg (Ecototality), they seldom mention one of the best reasons for a clean energy investor to be interested in the company: ABB has long been a leading supplier of electric transformers (this one was outside my former house in Denver), substations, and high-voltage DC transmission.

Despite all the talk of grid-based energy storage, the least expensive solution to the variability of wind and solar power is geographic dispersion, according to Leo Casey, Chief Technology Officer of Boston-based inverter company Satcon Technology (NASD:SATC.)

Any investor familiar with the concept of diversification will agree. The farther you travel, the more the weather changes. So the output of dispersed solar and wind plants are less and less correlated the farther you spread them. By connecting them with a robust grid, you've built a diversified electricity generation portfolio, which will be much less volatile than an undiversified portfolio of local wind or solar generation.

So congratulations, ABB. You deserve the recognition... both for the shiny new acquisitions, and for the less pretty, but absolutely necessary power businesses you've always been known for.

This article was first published on Tom Konrad's Green Stocks blog.

DISCLOSURE: Long SATC

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

March 24, 2011

Clean Energy Stocks to Fill the Nuclear Gap

Tom Konrad, CFA

If the Japanese use less nuclear power, what will take its place?

I'm astounded by the resilience and discipline of the Japanese people in response to the three-pronged earthquake, tsunami, and nuclear disaster, perhaps in large part by my cultural roots in the egocentric United States, where we seem to have forgotten the virtue of self-sacrifice for the greater good. 

Yet while Japanese society has shown itself to be particularly resilient, the Japanese electric grid is much less resilient.  According to International Energy Agency statistics, Japan produced 258 TWh of electricity from nuclear in 2008, or 24% of total production. 

The situation seems to be mostly stabilized at the Fukushima Daiichi reactor complex, but according to the March 23rd update on the reactor status at Fukushima from the Japan Atomic Industrial Forum, Reactors 1, 2, 3, and 4 have all suffered damage, had their fuel rods exposed for some period, and/or had seawater pumped in for cooling.  It seems unlikely that any of these reactors, with a 2.8GW total generation capacity will ever be returned to service.  Assuming that these reactors normally operate at a 90% capacity factor, these four reactors would have accounted for an annual electricity production of approximately 22 TWh, or 2.5% of total production. 

At the very least, these 22 annual TWh will need to be replaced with other sources or by improved energy efficiency, and the disaster will likely shift Japan (and much of the rest of the world) slowly away from nuclear power, with fewer new plants built, and fewer old ones being granted extensions in their permits to operate.

Outside Japan, regulators are likely to require additional safeguards on new nuclear generators, as well as be more strict when considering the extension of operating permits for existing older plants.  This will increase the already high cost of nuclear power, and further slow the construction of new plants. 

Energy efficiency, conservation, and other forms of energy generation will have to fill the gap.  Which will benefit most?

The Conversation So Far

Over the last few weeks, I have read innumerable prognostications about how Japan and the rest of the world will fill the energy gap.  I asked several clean energy money managers for their top post-Fukushima stock picks, which are published on my Green Stocks blog at Forbes.  I also posted a quick poll to see what sectors readers thought would benefit (see chart.)Poll results

Opinion is strongly divided, especially among my poll respondents, perhaps in part because I allowed respondents to vote for as many as three sectors, since I'm fairly confident that more than one sector will benefit.

Perhaps the most vocal contingent is the group that is arguing that solar will benefit.  Two of the green money managers I asked for stock picks chose solar stocks (MEMC Electronic  Materials [WFR] and LDK Solar [LDK].)  Among the pundits, AltEnergyStocks' solar expert Joe McCabe was quick to see benefit for solar.

Yet even our own bloggers can't agree.  A few days after McCabe's post, our battery expert John Peterson wrote,

The nuclear reactors that have recently gone off-line in Japan and Germany accounted for roughly 125 TWh of electricity production last year. In comparison, global electricity production from wind and solar power in 2009 was 269 TWh and 21 TWh, respectively. In other words, we just lost base-load power that represents 43% of the world’s renewable electricity output. The gap cannot possibly be filled by new wind and solar power facilities.

John thinks oil, natural gas, and coal are the only energy technologies able to take up the slack. 

John Segrich, manager of the Gabelli SRI Green Growth Fund (SRIGX) also told me "The big beneficiary in the aftermath of the Japan nuclear crisis will be natural gas related companies."  (His stock pick is Capstone Turbine (CPST), because the company's microturbines can provide immediate, clean, and efficient distributed generation.

Market Reaction

The market seems to think solar, natural gas, and wind will all benefit.   While the natural gas exchange traded notes (ETNs) are based on baskets of commodity futures, while the solar and wind exchange traded funds (ETFs) are baskets of stocks, the gains in all three over the 10 days following the crisis are surprisingly similar (see chart.)
ETF returns 3/10 thru 3/21

Can the solar bulls and the natural gas bulls both be right?  Yes.  As John Petersen pointed out, the amount of nuclear power going offline is large compared to the current installations of renewable energy.  Hence, if renewable energy were to fill only part of this gap, it would still amount to significant industry growth, while leaving a lot of room for growth in fossil fuels.

Linear vs. Geometric Growth

However, I fell John is far too dismissive of the growth potential of renewable energy, while he completely neglects the potential of energy efficiency to fill part of the gap. 

First, he compares the nuclear generating capacity going off-line to current installations of renewable energy, noting that it is half of current installed capacity.  If renewable energy were on a linear growth curve, such a comparison would be valid.  However, renewable energy installation has often grown exponentially in the past, and can still do so.  While it takes ten years or more to permit and build a nuclear reactor, utility scale wind and solar farms are typically built in three to 18 months. 

Between 2004 and 2009, grid connected PV capacity increased at an average annual rate of 60%.  Over the same period, wind installations grew at the relatively leisurely but still impressive compound annual rate of 26% (see chart.)
World wind installed capacity

If we assume that combined wind and solar capacity continue to grow at a (slower) annual 25% rate, then replacing 43% of the world's current renewable output will take all of 19 months.  Replacing that capacity with nuclear or coal would take much longer, because nuclear and coal plants take so long to construct.

Variability

While Petersen's critique of renewable energy installation rates are not supported by the facts, his later points regarding wind and solar variability are salient.  He points out that energy storage is currently well suited to smoothing minute-to-minute variation, an important function because it greatly reduced the strain on the rest of the electric grid.  He is also correct that batteries cannot cost-effectively provide the tens of hours of storage that a wind or solar facility would need to mimic a baseload or dispatchable resource.

Geographic Dispersion

Perhaps because Petersen is a battery expert, he missed non-storage solutions to the variable output from wind and solar farms.  The most important of these is geographic dispersion.  Geographic dispersion in solar and wind is akin to diversification in a financial portfolio, but much more effective because of much lower correlation in electricity generation, and because correlation falls with distance.

First, wind and solar power tend to be negatively correlated simply because, in most locations, wind tends to be strongest when the sun is weak (early morning, late evening, during storms, and at night.)   In finance, there are very few negatively correlated asset classes, and those assets that are negatively correlated with the market tend to produce minuscule or negative returns, which would be the equivalent of an electrical load in the grid analogy.

Hence, there are great benefits in diversification, and long distance transmission is the key to supplying these benefits.  This idea is backed up by numerous studies demonstrating the benefits of geographic diversification, and also widely acknowledged by experts in the field, as I discussed in a recent article on ABB Ltd. (ABB).

While geographic dispersion cannot produce baseload power, baseload power was always an artificial construct in the first place.  An ideal power source would produce power that corresponds to demand: Electricity production would fall at night and peak on hot sunny afternoons (as it does from geographically dispersed solar arrays), not stay at a constant rate.

The Japanese Grid

For such a small country, the Japanese grid is not well interconnected.  The Northeast and West of the country operate at different frequencies, and are connected only by two relatively low capacity frequency converter facilities.  This is a large part of the reason that Tokyo (in the Northeast, as are Sendai and Fukushima) is suffered rolling blackouts after the quake: the relatively unaffected West was unable to supply the Northeast with significant electricity through these two weak links.

In order to benefit from the geographic dispersion which makes high wind and solar penetrations practical, Japan will need a more robust electric grid.  It would be an incredibly daunting task to build significant new transmission in densely populated Japan, if it were not for a state of the art technology ideally suited to both transmitting large amounts of electricity over long distances with low line losses, and for running those links underwater.  This technology is High Voltage DC (HVDC) transmission.

Japan currently has two underwater DC links, and the two frequency conversion stations using similar technology.  These facilities were built in the late 1900s, with technology provided by Japanese companies such as Mitsubishi.  The leading providers of modern HVDC are ABB Ltd. (ABB) and Siemens (SI), two companies that might stand to benefit if the Japanese decide to learn the lessons of the Sendai/Fukushima tragedy and build a more resilient grid based on strong links and safe, diversified electricity generation.

The First Fuel

Wind, solar, natural gas, and new grid links will take at least a year or three to replace the lost generation at Fukushima, and in the meantime, there is only one energy resource that can take up the slack.  That is energy efficiency and conservation, often called the first fuel because it is the least expensive resource available. 

Japan is already a leader in energy efficiency, but the discipline with which they are handling the disaster convinces me that they are ready to "renew their commitment to energy efficiency," as Nobel Prize winning economist Joesph Stiglitz said in a March 19th interview with Barrons.  Deployment and grid stability of energy efficiency and conservation can be enhanced with the use of smart grid technology.  Smart grid technology (such as demand response) can also aid in the integration of variable resources such as wind.

Filling the Gap

Much depends on how Japan decides to rebuild, but whatever they do their priorities will probably be:
  1. Quick to deploy
  2. Low cost
  3. Improve grid safety and stability
  4. Not greatly increase reliance on foreign imports
Energy Efficiency meets all four goals.  Many energy efficiency stocks are local operations, but suppliers of highly energy efficient components, such as Power Integrations (POWI) should be well placed to benefit.  Investors' focus should be on companies with industry-leading technology that the Japanese will not be able to source locally.

Wind is quick to deploy and inexpensive when compared to natural gas generation based on expensive liquified natural gas (LNG), but there will be a limited number of sites available in densely populated Japan.  Most likely, we will see an acceleration of Japanese plans for offshore wind power.  This should help wind companies with offshore turbines, and possibly integrate nicely with a build-out of a Japanese underwater HVDC grid, similar to the proposed Atlantic Wind Connection for the US.

An underwater HVDC grid makes sense, and if Japan sees this sense, ABB and Siemens are the most logical beneficiaries.

Solar power is not cheap, although it is much less expensive and faster to deploy than new nuclear power, and the high prices of imported LNG should not make it cost prohibitive as a solution.  Global suppliers of PV should all benefit, as the increase in demand allows them to charge somewhat higher margins than they would otherwise.

Grid Based Energy Storage will need to increase along with wind and solar to help accommodate local fluctuations in power output, but it is easy to overestimate the market for this.  It's typically not low cost, but grid based storage (at least when it takes the form of batteries) is quick to deploy, improves grid safety and stability, and does not greatly increase the reliance on foreign imports. Petersen just published a good overview of grid based storage applications here, including the US-listed stocks he thinks are well positioned for this opportunity.  One Japanese company he does not mention is NGK Insulators Ltd. (NGKIF.PK), a vendor of the Sodium sulfur batteries, the technology which currently has the greatest installed capacity for battery-based grid storage.  This was my top pick for a stock to benefit from the rebuilding of the Japanese grid.

It might make sense to build some grid based storage at the sites of existing Japanese nuclear reactors.  When the grid and back-up generation gave out at Fukushima, the battery backup kept the plants safe for 8 hours.  Grid based storage systems cycle their state of charge over time, so if a future disaster knocked out both grid power and backup generators at a nuclear plant co-located with grid based battery storage, most of the time the grid based storage would be able to supply some extra power to the nuclear plant, and keep the cooling systems operating longer than it could with dedicated battery backup alone.

Natural gas will also see a boost, especially in the short term, now that Japan must run existing gas fired generation harder to make up for the loss of the nuclear plants.  In the longer term, suppliers of gas turbines will probably see some increase in demand.  Given the high price of LNG, there will be an emphasis on particularly efficient means of converting natural gas into electricity.  Segrich's Capstone Turbine (CPST) is one, especially when used in combined heat and power operations.  For even more efficient conversion of natural gas to electricity, the Japanese may turn to solid-oxide fuel cells, such as those sold by FuelCell Energy (FCEL). Both these companies' products can be used in natural gas powered buses, and so may benefit if bus buyers shift away from diesel in favor of natural gas.

Geothermal Power has, as usual, received some lip service as a possible beneficiary.  Japan is on the ring of fire, with good geothermal potential.  The country already had 547MW of installed geothermal generation in 2000.  Geothermal also has the advantage of being baseload, often operating with capacity factors of 95%, even higher than nuclear.

However, geothermal plants take four to six years to construct, which means that new geothermal (unless it involved installing upgraded turbines or bottoming cycles at existing plants) will only make a small contribution to fill the gap left by lost nuclear generation in the near term.  Companies that might possibly benefit in the short term are vendors of binary cycle turbines (i.e. Ormat (ORA) and United Technologies (UTX)) to be used as bottoming cycles at existing plants.

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.


March 22, 2011

Grid-based Energy Storage: Widely Misunderstood Challenges and Opportunities

John Petersen

The most widely misunderstood subject in the field of energy storage is the potential for grid-based applications. They fire the imagination because the grid is so pervasive and the need is so great. They also present immense challenges to storage technology developers because the fundamental economic value per unit of grid-based energy storage is very low. While the subject of grid-based storage provides rich fodder for media reports and political posturing, the reality bears little relation to the perception. On March 9th, Lux Research published a sorely needed reality check in a new report titled "Grid Storage – Islands of Opportunity in a Sea of Failure," which concluded that "Amongst the sea of possible scenarios, there are few combinations that offer an acceptable payback, while endless potential pitfalls exist."

Lux analyzed the business scenario for 14 emerging energy storage technologies across 23 applications to identify the best investments for utilities, transmission operators, independent power producers and building operators in California, Germany, and China. The report was based in large part on data from a December 2010 study published by the Electric Power Research Institute, "Electricity Energy Storage Technology Options – A White Paper Primer on Applications, Costs and Benefits." While the Lux report and the EPRI study both offer detailed insight for institutional investors that are contemplating investments in energy storage, they're too detailed for individual investors who are mainly concerned with managing their personal portfolios.

The first thing individual investors need to understand is that while global electric power generating capacity is roughly 4,000 GW, total installed energy storage capacity is less than 128 GW, or 3.2% of generating capacity. The second thing they need to understand is that substantially all of the existing storage facilities are pumped hydro. The following graph from the EPRI report provides additional color on how much installed capacity really exists for the exciting new energy storage technologies the press is gushing over.

3.22.11 Global Storage.png

While EPRI's installed capacity graph should be enough to make cautious investors pause to check their assumptions, another graph from the EPRI report is far more useful. It shows the estimated size of the potential market for 15 key energy storage applications on the horizontal axis and then shows the maximum price per kWh of storage capacity an end-user would be willing to pay on the vertical axis. The red annotations are mine.

3.22.11 Grid Markets.png

Wholesale frequency regulation, the application that's getting the bulk of the media attention, is shown on the left-hand side of the graph. It's the primary target for cool storage technologies like flywheel-based systems from Beacon Power (BCOND) and lithium-ion battery based systems from Altair Nanotechnologies (ALTI), A123 Systems (AONE), Ener1 (HEV) and others. Despite the media's excitement, the reality is wholesale frequency regulation represents less than 1% of potential demand for grid-based storage. The other 99% can only be served by cheap energy storage technologies. Less than a half of the potential market will ever be addressable by manufactured energy storage devices. The rest will remain out of reach without widespread deployment of pumped hydro, compressed air and other large-scale electro-mechanical systems.

There's little question that the potential markets for manufactured energy storage devices in grid-based applications are big enough to support several successful companies. They're just not as easy as the media reports would have us believe. Wholesale frequency regulation in the US is probably limited to something on the order of 400 MW, which works out to about $1.6 billion in domestic revenue potential. The bigger prize is the $16 billion of potential demand for manufactured systems that can be installed at a price point of $500 to $1,700 per kWh. Globally, those target markets are closer to $5 billion and $50 billion, respectively.

Of the electro-chemical energy storage technologies discussed in the EPRI report, conventional and advanced lead-acid batteries and flow batteries usually offered the best cost profiles for the work of transmission and distribution upgrade deferral in both fixed and transportable formats. The economics remain challenging when you include the costs of containerization, interconnect equipment and control electronics, but they are within the realm of reason. Once you get beyond short-duration frequency regulation, however, cool technologies don't stand a chance of being competitive.

The universe of publicly traded US companies that can respond to the need for cheap grid-based energy storage is small. It includes Enersys (ENS), Exide Technologies (XIDE), and C&D Technologies (CHHPD.PK)  in the established manufacturer ranks with Axion Power International (AXPW.OB) and ZBB Energy (ZBB) in the emerging company ranks. Cool technologies will probably continue to claim the lion's share of the headlines, but cheap technologies will almost certainly claim the lion's share of the revenues and profits. From an investor's perspective, those are the only metrics that really matter.

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

March 08, 2011

Two Stocks For Grid Storage - ZBB Energy and Axion Power

John Petersen

On March 4, 2011 the Pacific Northwest National Laboratory published a comprehensive review of "Electrochemical Energy Storage Technologies for Green Grid" that is a must-read for serious investors who want to understand the technical and economic intricacies of the energy storage sector. It explains why storage is a key enabling technology for wind and solar power, the smart grid, efficient transportation and a legion of high-technology manufacturing and service enterprises that can't survive without reliable power. It also explains why energy storage is an investment mega-trend that will endure for decades. While I normally try to provide links to materials that are available for free, this particular review is only available from the American Chemical Society website and their charge for non-members is $35. If you own stock in a battery company or are thinking about investing in one, it's the best $35 you'll ever spend.

Conceptually, a battery is nothing more than a bottle that stores electricity. The term "energy" describes the total amount of electricity you can put into the bottle. The term "power" describes how quickly you can empty or fill the bottle. The basic problem with energy storage is that batteries are thousands of times more expensive than the electricity they store. You may be able to buy a kilowatt-hour (kWh) of electricity for a dime, but a battery to store that much electricity will set you back $150 to $1,000. Once you include battery depreciation in the equation, the cost of electricity from a battery is always higher than the cost of electricity from a wall-socket. If you only need to store a few watt-hours of energy for a cell phone or laptop computer, convenience will usually outweigh battery cost. If you need five, ten or twenty thousand watt-hours of battery capacity so that you can use electricity from solar panels at night or drive a plug-in vehicle 40 to 80 miles, battery cost quickly becomes a major issue, if not an insurmountable obstacle.

In its report, the PNNL explains that capital cost and life-cycle cost are the most important and fundamental issues in the energy storage sector. Capital costs are usually expressed in terms of dollars per kilowatt ($/kW) for power applications and dollars per kilowatt-hour ($/kWh) for energy applications. Cycle-life cost is calculated by dividing the sum of the capital cost and expected maintenance costs by the number of cycles a battery can deliver over its useful life. In general, the authors of the PNNL report believe the following attributes are essential for grid storage applications:
  • Capital cost of $250 per kWh or less;
  • Long calendar life (e.g. > 15 years);
  • Long cycle-life (e.g. > 4,000 deep cycles);
  • High safety standards; and
  • Low maintenance costs.
It's a tall order and most energy storage technologies fall short of the mark. The following graph from the PNNL report shows the estimated capital cost per cycle of various storage technologies before project financing costs, operation and maintenance costs, and replacement costs.

3.8.11 Storage Costs.jpg

After studying the PNNL report in detail, I believe flow battery and lead-carbon battery technologies have the best shot at meeting these high standards in the short term. Others will no doubt disagree. The only way for a serious investor to make an informed decision is to download the report, study the PNNL observations and draw his own conclusions.

There is one publicly-held pure-play energy storage company in the flow battery space. ZBB Energy (ZBB) is the owner of a zinc-bromine technology that was invented by Exxon, developed by Johnson Controls and ultimately sold to ZBB. Over the last few years, ZBB has developed a modular system architecture for its technology and successfully completed a three-year validation test by Australia's Commonwealth Scientific and Industrial Research Organisation (CSIRO). ZBB has also devoted considerable resources to an open-platform power management system that facilitates the integration of diverse power sources and diverse energy storage device types to meet the needs of a particular customer. ZBB has been a poor market performer since its IPO in 2007 and currently trades at one-fifth of the IPO price. Its market capitalization of $33 million is the lowest of the 18 pure-play energy storage companies I follow. ZBB hasn't had a particularly strong balance sheet for several years and it will need to raise additional capital. Given the proven status of its technology and its low market capitalization, I believe ZBB has limited downside risk and attractive upside potential.

The section of the PNNL report that I found most illuminating was their discussion of lead-acid batteries in general and lead-carbon batteries in particular. While I've been writing about lead-carbon battery technologies for a couple of years, the PNNL review is the first major report from a national laboratory that does not require A to B to C analysis to integrate information from several sources. The following schematic from Furukawa Battery shows the three primary lead-acid battery electrode configurations that are presently being developed.

3.8.11 LAB Configurations.jpg

In its discussion of conventional lead-acid batteries the PNNL report noted that lead-acid has historically suffered from limited cycle life (e.g. 1,000 cycles), limited depth of discharge (e.g. less than 30%), low round-trip energy efficiency (e.g. 50% to 75%) and low charge acceptance capacity (e.g. 7% of the one hour discharge rate). In combination, these technical factors have made large-scale applications problematic from an economic perspective.

The first innovation PNNL discussed in the field of advanced lead-acid batteries involves the use of carbon additives to improve cyclability while inhibiting the formation of hard lead sulfate crystals on the negative electrodes. In the graphic, a carbon additive design will replicate the conventional lead-acid battery configuration shown on the upper left. Johnson Controls (JCI) and Exide Technologies (XIDE) are both actively developing carbon enhanced lead-acid batteries in both flooded and absorbed glass mat, or AGM, form factors. Both companies claim performance improvements of 100% or more, which can reduce the capital cost per cycle by 50% or more.

The second innovation PNNL discussed is an asymmetric lead-carbon capacitor that uses a carbon electrode assembly to replace conventional lead-based negative electrodes. In the graphic, an asymmetric lead-carbon capacitor is shown on the upper right. The key advantages noted by PNNL include a higher operating voltage for the cell as a whole, greater utilization of negative electrode capacitance, the elimination of negative electrode sulfation and reduced swings in acid concentration. The asymmetric lead-carbon capacitor was patented in 2001 and is owned by Axion Power International (AXPW.OB) which has trademarked the name PbC® and filed a suite of protective patents around the core technology. In exhaustive performance tests over the last three years, Axion has demonstated that the PbC battery:
  • Offers a depth of discharge of up to 70%, as compared to 30% for conventional lead-acid;
  • Offers stable round-trip energy efficiency of 85%, as compared to 50% to 75% for conventional lead-acid;
  • Offers cycle life improvements of 400% or more;  and
  • Offers dynamic charge acceptance rates that are a 10x improvement over conventional lead-acid.
In combination, these unique features of the PbC battery can reduce capital cost per cycle by an order of magnitude and make the PbC the most cost-effective electrochemical storage system in the industry. Axion's PbC battery is almost ready for commercial roll-out. The company has taken delivery of its second generation electrode fabrication line and expects to commission the line by the end of this month. Once the line is commissioned, potential customers who have been testing first generation products for over a year will need to conduct extensive process and equipment validation evaluations before placing orders. Barring unforeseen difficulties, that process should be completed this year. Axion has enough capital to finance its activities over the next year, but will need additional capital to build new electrode production capacity if demand for its product develops. Given the unique attributes of the PbC technology and Axion's relatively low market capitalization of $70 million, I believe Axion has limited downside risk and attractive upside potential.

The last innovation PNNL discussed in the field of advanced lead-acid batteries was the Ultrabattery, a half-measure developed by CSIRO that represents an improvement over conventional lead-acid batteries but does not offer all the performance advantages of the PbC. In the graphic, Ultrabattery is shown on the bottom. The PNNL report was the first detailed discussion I've seen of the Ultrabattery technology and it highlights a couple of issues that strike me as potentially problematic. During a discharge cycle the Ultrabattery does not begin to access the capacitance of its carbon electrode until the lead electrode has been depleted. Likewise during a charge cycle, the carbon electrode charges first which results in significant hydrogen production at the lead electrode.

Several lithium ion battery companies including A123 Systems (AONE), Ener1 (HEV) and Altair Nanotechnologies (ALTI) have sold high profile demonstrations of their technologies in grid- connected applications. After reading the PNNL report I'm more convinced than ever that these demonstrations will not turn into sustainable businesses until those manufacturers are able to overcome a variety of hurdles relating to system cost, safety, durability and cycle life. They may be successful, but when I compare their market capitalizations with the market capitalizations of ZBB and Axion, I have to believe that the greater upside potential lies in the companies with the lower current market capitalizations.

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

January 27, 2011

General Electric: Seeking to Define the Smart Grid

By Harris Roen

General Electric (GE) is a standout company that supplies products and services in the alternative energy and environmental fields. GE also has a robust stake in smart grid technology; its energy division alone has products that include power delivery, smart metering, charging systems, and power sensing. According to Cleantech, GE is a player in 5 of the 6 critical business areas affecting smart grid development.
 
As part of their commitment to shape the future of the smart grid, GE committed $200 million for entrepreneurs, students and other innovators as a “call to action” for ideas on smart grid, renewable energy and efficiency. 19 GE also has a fantastic Web site that worth visiting, that allows viewers to visualize and understand what a smart grid can do, at http://ge.ecomagination.com/smartgrid/#/landing_page.

It must be understood that General Electric is one of the largest companies in the world—period. It is in the top 15 of publicly traded companies in measures like sales, gross income, market capitalization and shares outstanding. GE has 23 major business groups ranging from energy to health care to entertainment to finance. GE employs over 300,000 people in over 100 countries worldwide, and netted over $9.8 billion in the past 12 months.

GE can fix your neighbor’s dishwasher or build a nuclear power plant in Asia. Accordingly when looking at GE as in investment, the overall company must be considered, not just areas of interest to the Paradigm Portfolio. Here the news is good—second quarter 2010 earnings were up a whopping 15% from the previous quarter!

GE

The chart on the above shows that GE is still attractively priced compared to historic norms. The 4 columns in the chart show ratios of the current price per share of the stock compared to 4 different measures: sales per share, book value per share, earnings per share and free cash flow per share (FCFPS).

The top of the bars show the highest annual average since 2003 (note that Price/FCFPS exceeds the height of the chart). The bottom of the bar shows the lowest annual average, and cross bar shows current levels.
 
GE has a price/earnings ratio around 17. While this is higher than the 9 to 10 p/e range when GE was recommended for inclusion in the Paradigm Portfolio in May 2009, it is still within historic norms. Other measures on the chart are well below historic norms.

This means that even if sales, earnings and cash flow remain the same for this company, the stock price has a good chance of appreciating. For all these reasons I am still optimistic about GE, which looks like a reasonably priced company in the $13/share to $17/share range.

DISCLOSURE: None.

This is the third part of a three-part series drawn from “Smart Grid Investment Opportunities: Understanding the Smart Grid Investment Landscape”, a special supplement to the “ROEN FINANCIAL REPORT” ISSN 1947-8364 (print) ISSN 1947-8372 (online), published monthly for $69 per year print or $59 per year e-mail by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

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

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

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

January 23, 2011

MasTec (MTZ): Connectivity to the Smart Grid

By Harris Roen

An important part of the smart grid will be devices that connect the user to the grid, or “reading points”. These reading points go way beyond the current meter reading system that just monitor the amount of energy used. The long held belief that meter reading was the only way to monitor household and business’s consumption is quickly being replaced with alternate ideas.
 
MasTec (MTZ) is a contracting firm with $2.1 billion in annual sales focused on utility and communications infrastructure. It specializes in communications, high-speed Internet and electric distribution, as well as water, sewer and natural gas. This communications and electric specialization makes MasTec a key company in smart grid deployment.

MasTec Sales and Earnings

MasTec is a well-run company with excellent financials. As seen in the graph above, sales have grown continually since 2003 in an almost straight-line fashion. It is particularly impressive that MasTec has maintained increasing sales during the recent recession.
 
The graph also shows that earnings per share from normal business, which excludes events such as acquisitions, refinancing, asset sales and the like (EPS from continuing operations). This has been positive since 2005. In other words, the company has been consistent in building shareholder value. Estimated future earrings have consistently been revised upwards for MasTec, another positive sign for the company’s long-term share price.

I believe MasTec is still undervalued. My analysis of a fair price per share for MasTec, based on both historic and future predicted earnings, is roughly 9.9 on the low end and 23.3 on the high end. The share price has been heading up the past few months, in the 14 to 15 range, which I think is approaching fair value. I see Mastec as a good trade in the 12 to 13 price range.

DISCLOSURE: At the time of publication, individuals involved with the Roen Financial Report or Swiftwood Press, LLC owned or controlled shares of MasTec.

This is the second part of a three-part series drawn from “Smart Grid Investment Opportunities: Understanding the Smart Grid Investment Landscape”, a special supplement to the “ROEN FINANCIAL REPORT” ISSN 1947-8364 (print) ISSN 1947-8372 (online), published monthly for $69 per year print or $59 per year e-mail by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

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

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

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

Related Article: Ten Clean Energy Stocks for 2010

January 20, 2011

Understanding the Smart Grid

By Harris Roen

The modernization of the electric grid is an exciting investment opportunity that promises to be one of the biggest energy investment stories of the early 21st century. Smart Grid systems will provide large growth opportunities for many companies around the globe. This is being accomplished through a combination of updating existing technologies along with the creation of new systems aimed at improving the quality of the electric grid.

By understanding how the dream of a smart grid will become a reality, an informed investor will be in a very good position to capitalize on this trend. Accordingly, this report outlines what the smart grid is, what it can do, and most importantly, which companies are most likely to profit from smart grid business.

WHAT IS THE SMART GRID?

According to the U.S. Department of Energy, creating a smart grid is a “colossal task” that will take years or even decades to complete. Because this undertaking is so enormous, and because we are only in the early stages of smart grid implementation, the term “smart grid” defines more of a goal than a specific design or outcome.

Smart Grid technology is defined as having the following characteristics:
  • Enables active participation by consumers in demand response
  • Self-heals from power disturbance events
  • Operates resiliently against physical and cyber attack
  • Provides power quality for 21st century needs
  • Accommodates all generation and storage options
  • Enables new products, services, and markets
  • Optimizes assets and operates efficiently

The smart grid, therefore, pertains to any part of the electric infrastructure, from the power plant to transmission lines to the end user, which can make the system work more efficiently through improved communication and integration.
smart grid information flow
The chart above is a simplified diagram showing how energy and information moves through the smart grid. Energy and information are represented by blue arrows that can move in two different directions.

WHAT CAN A SMART GRID DO?

Currently the grid is all about providing enough electricity during peak usage times so the system will not fail. That means that there is plenty of excess capacity during non-peak periods.

One example of how a smart grid could improve this reality is in conjunction with electric vehicles. Vehicle battery systems could be set to charge at night, when peak demand is low and there is plenty of capacity. Cars that are parked during the day could then feed power back into the grid when electricity demand is higher.

This is but one of the many ways that a smart grid could act synergistically in reducing energy use and promote alternative fuel sources. Some other promises of a fully functioning smart grid include:

A city of buildings that will make slight adjustments to heating or air conditioning when peak demands become critical.

A dishwasher that will know to turn itself on when power demand is at its least.

A utility that will know in real time how to most efficiently use their substations to save on distribution costs and loads.

All this and much more are benefits that a smart grid can bring to the nations power system. When these types of energy savings are combined with maximizing the particular generating characteristics of alternative energy producers such as wind and solar, there is a synergistic benefit of reducing carbon emissions and other pollutants.

INGREDIENTS THAT FORM THE SMART GRID

Some smart grid technologies are already in use, or are close on the horizon. Many of the ingredients or components that will create the smart grid, however, are farther away as smart grid vendors compete through a myriad of implementation standards and strategies.

To get a handle on what a smart grid means for different industries, it is useful to break down the components of smart grid technologies.

Advanced metering

A typical electric meter merely records the amount of electricity being used. Advanced metering can send information in more than one direction, which will create a mountain of data that will be useful to both electric providers and end users. Businesses in this area are meter manufacturers, communications companies, and data management systems.

Demand Response

Demand response has the goal of identifying peak electric usage times, and finding ways to curtail that use. This has already been going on for decades; utilities may simply get on the phone with major energy users to work on peak time reduction strategies through price incentives or other measures. Also, utilities have implemented outreach programs to home owners and other users. If demand response was updated and automated, it could drastically change the electric grid landscape.

This could well be the most important energy and cost saving component of the smart grid, resulting in a 20% reduction of peak energy use in less than 10 years. Demand response efforts will start with large industrial and commercial users in the short term, and will eventually reach into individual households via smart appliances.

Distribution Grid Management

This effort is focused on improving the inelegance of the electric grid: sub-stations and electric lines. According to Cleantech “Smart meters and home energy management systems may be easier to grasp and may appear more tangible than distribution system concepts such as Volt/VAR control and feeder automation, but improvements in core distribution technology can have tremendous impacts on efficiency.”

Electric companies could see a quick payoff by installing routers, switches, data recorders and that like on thousands of sub-stations, which could have an immediate impact on millions of miles of electric wire, creating substantial business for vendors in this area. Integrating these complex, multi-platform systems will also be a substantial continuing business for service providers.

Home energy management

Systems that integrate a home’s energy usage into a so called “smart home”. This could include a myriad of sensors and communications systems between appliances, outlets, thermostats, consumer devices, security systems and the like. Though initial costs are high, if done in aggregate across millions of homes the energy savings could be substantial.

Building energy management

Deploying smart systems to office buildings, factories, apartments and the like can have a much more immediate impact than home energy management. Most of the savings will come with more intelligent lighting and HVAC (Heating, Ventilating, and Air Conditioning).

These systems will also employ the need for sensors and communication equipment, net-worked together in a centralized monitoring and control apparatus.

Interconnection of the Grid

Defines how different power sources, e.g. wind turbines, solar arrays, conventional power plants, will connect to the electric grid. Solar is particularly different in that it produces power in Direct Current (DC), as opposed to the more common Alternating Current (AC).

The issues of grid interconnection are laid out in detail in the United Nations report Multi Dimensional Issues in International Electric Power Grid Interconnections. The benefits of improved grid interactions range from preventing blackouts to better interfacing with electric vehicles. And the potential cost savings could go into the billions of dollars.

This is the first part of a three-part series drawn from “Smart Grid Investment Opportunities: Understanding the Smart Grid Investment Landscape” is a special supplement to the “ROEN FINANCIAL REPORT” ISSN 1947-8364 (print) ISSN 1947-8372 (online), published monthly for $69 per year print or $59 per year e-mail by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

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

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

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

June 22, 2010

The Best Peak Oil Investments Meet the Smart Grid: Telvent GIT SA (TLVT)

Tom Konrad CFA

I'm bullish on Smart Transportation, which is my term for applying information technology to make our transportation system more efficient.  The majority of my list of Smart Transportation Stocks focus on GPS navigation.  I've been a fan of GPS navigation ever since 2001, when I first experienced the relief using one while driving in an unfamiliar city.  But I'm much less enthusiastic about GPS Navigation stocks: I feel the industry is too competitive, which is great for the consumer, but not so great for the shareholder. 

Hence, I'm drawn to the three Smart Transportation stocks that apply IT to transportation infrastructure, enabling congestion-based tolling and the better timing of traffic lights.  The three stocks I've found are AECOM Technology Corporation (ACM), Cubic Corporation (CUB), and Telvent Git S.A. (TLVT).  AECOM provides technical and management services to governments, some of which is on Smart Transportation projects.  Cubic develops and installs transportation fare collection systems and defense electronics, while Telvent provides IT services to a broad range of transportation and energy infrastructure markets.

Each of these companies gets less than a third of their revenues from Smart Transportation.  But in the case of Telvent, the other two-thirds is also interesting: applying IT to electric and natural gas infrastructure.  In other words, the Smart Grid, and smarter pipelines.  The company also has smaller segments applying information technology to agricultural supply chains and environmental services.

Energy

Telvent's Energy segment accounted for 33.5% of revenues in Q1 2010, mostly in North America (this segment is headquartered in Houston), but also from the EU and Latin America.  They provide enterprise-level information management and automation control to companies with large pipeline networks.  They also provide the information management services electric utilities need to manage and use the information flowing from Smart Grid projects.

The value of applying information technology to energy systems lies in the reduction of waste: better information and controls can let a company move more gas through the same pipeline network, and also detect leaks more quickly.  The Smart Grid is about creating a two-way flow of information on top of the electric grid; Telvent's role is to help utilities take this information and use it to better match energy production and load, and also detect system instability sooner, reducing wear on utility assets and potentially preventing blackouts.

Transportation

Telvent's global Transportation segment accounted for 24.8% of revenues in Q1 2010.  This segment struggled in 2009 but is beginning to show signs of recovery.  SmartMobility™ platform is a collection of information services from automated enforcement such as the traffic signals that take pictures of cars running red lights to traffic signal optimization and toll and fare collection.  These are offered a la carte, or as an integrated solution, and help municipalities and other regions manage their road, rail, and maritime transportation systems more effectively.  In short, they help governments make most of the Smart Transportation improvements I mentioned in my recent article.

Agriculture

Telvent's agriculture business is the result of a recent acquisition, and operates solely in North America, and accounted for 12.0% of revenues in Q1 2010.  The segment helps participants in all parts of the grain and livestock complex with weather information, an agricultural products trading platform and real-time pricing information.  Although I'm not bullish about the earnings prospects of biofuels businesses, I think the growing size of the biofuels industry will put increasing strains on other agricultural businesses, and both will require more and more up-to-date pricing and supply chain information.  If I'm right, this trend will be a boon for Telvent's agriculture business.  Tevent is also realizing some synergies from the acquisition my incorporating the real time weather data from the agricultural segment into their SmartMobility™ transportation offering.

Environment

The Environment segment focuses on water system management, monitoring of weather and air quality, and hazardous material containment.  It accounts for 8.6% of revenues and is growing quickly.

Global Efficiency

At 21.1% of revenue, the Global Efficiency segment is a cross-disciplinary IT consultancy offering to help clients use resources more effectively.  Key markets include insurance, health care, finance, government services, and telecommunications.  This segment is struggling against increased competition in Spain, but sees strong potential growth in Brazil.

Valuation

At a recent price of $18, Telvent has a trailing P/E of a little over 13, and pays no dividend.  Although it trades at only 65% over book value, operating cash flow ($33M) is low compared to net debt ($471M) and it has a low current ratio of around 1.  The company recently refinanced its debt, increasing the maturity and stretching out the payment schedule, which means that debt is not an immediate problem, and if the company can achieve decent growth over the next few years, they should be able to handle it easily.  

Although I could not be much more enthusiastic about the business, the high debt to cash flow means that I'll be watching and waiting for much cheaper valuations before I'm ready to buy TLVT stock.

DISCLOSURE: No position.

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.

May 16, 2010

The Best Peak Oil Investments Meet the Strong Grid: CVTech Group

Tom Konrad CFA

CVTech Group (CVT.TO, CVTPF.PK) operates in two of my favorite clean energy sectors: electricity transmission and distribution and efficient vehicles.  Here is a look at the company's fundamentals.

CVTech logoIn "The Strongest Strong Grid Stocks" of my 2010: The Year of the Strong Grid? series, I took a quick look at CVTech Group's financial ratios, and decided not to look deeper because they had considerably more debt in comparison to income than the other electricity transmission ("strong grid") stocks I covered in that article.  I came across CVTech again while looking at companies involved in vehicle efficiency for my Peak Oil Investments series.  CVTech came up as a vehicle efficiency stock because it has a division that designs, engineers, and manufactures Continuously Variable Transmissions (CVT).  CVT has the potential to increase vehicle efficiency by 6%, according to independent consultancy Robert Baird & Co, so I decided CVTech deserved a second look. 

Energy Division

CVTech's Energy division accounts for about 88% of revenues, or 84% of the company's EBITDA.  The vast majority of this division is focused on construction and maintenance of electrical utility transmission and distribution (T&D) in Quebec and the Northeastern United States.  According to Judy Chang of the Brattle Group, speaking at the Yale Climate and Energy Institute's Annual Conference in April, the Northeast states will need to invest $10 billion in electricity transmission by 2020 in order to meet their existing renewable energy mandates.  According to a CVTech investor presentation [pdf], Quebec will need to invest more than C$14 billion to upgrade power transmission between 2009 and 2018.  With 2009 Energy division revenues at $140 million, the division could grow rapidly even if it only captures a small fraction of regional T&D spending.

A typical large transmission construction and service contract for the Energy division is a $40M regional "construction, maintenance, of an overhead distribution network" for Hydro-Quebec, with two 1-year renewal options.  A less typical project that caught my eye was installing pole-attached solar panels for PSE&G in New Jersey.  I've been following this project since it was announced because I think it makes a lot more sense for the electric grid to have a large number of small, distributed solar panels than large solar installations.  Distributed solar panels are not subject to large, quick fluctuations in output from cloud transients, yet the mass production and installation of the individual panels for a single owner should allow PSE&G to capture some of the economies of scale that is usually associated with large solar farms.  Because of these advantages, I expect to see more, similar projects in the future, and CVTech's prior experience may give the company an advantage in bidding for them.

Vehicle Division

The vehicle division specializes in the design and manufacture of CVT systems for small vehicles such as snowmobiles, ATVs and Golf Carts.  Because CVTech's CVTs use belts, they do not work well for high-torque applications such as trucks.  They have about 10% of the worldwide market for CVTs in vehicles that use them, but the trend to smaller cars may work to their advantage.  In January, they were selected to supply the automatic transmission option for the Tata Nano, giving them excellent growth prospects.

Valuation

At a $24 trailing P/E ratio and a 1.7% dividend yield, CVTech does not seem like a good value proposition.  However, earnings were depressed by the economic climate in 2009: the P/E ratio would have been below 8 if 2008 earnings were used instead of 2009.   Spending on T&D in the Northeastern US and Quebec needs to not only rebound but grow to keep up with unmet needs, and CVTech should be in a good position to capture some of that growth.  The company also has good potential for a boost from the Vehicle division.  I think the company is well valued at C$1.20, but I plan to delay my own buying because I expect a general market decline has the potential to bring it to a much better valuation sometime this year.

Late Note (5/14/10): CVTech reported first quarter 2010 earnings after this article was written but before publication.  Income was up $0.02 a share, bringing 12 month trailing EPS to $0.07, making the company look slightly more attractive than discussed above.  Top line revenue increased greatly because of a recent acquisition and the severe storms in the Northeast US in Q1 2010. 

Selected data Date
Value
Stock Price
5/5/2010
C$1.20
Shares Outstanding
12/31/2009
65,288,310
Market Capitalization
5/5/2010
C$78M
Annual Revenues
2009
C$160M
Earnings per Share
2009
C$0.05
Earnings per Share
2008
C$0.17
P/E (trailing 12 month)
5/5/2010 price, 2009 earnings
24.0
Cash per share
12/31/09
C$0.08
Book Value per Share
12/31/09
C$2.24
Net Debt per Share
12/31/09
C$1.19
Current Ratio
12/31/09
1.36
Dividend yield
5/5/2010
1.67%
% Revenues from Electricity(Vehicle) division
2009
88% (12%)
EBITDA from Electricity(Vehicle) division
2009
84% (16%)


DISCLOSURE: No position.

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.

May 08, 2010

2010: The Year of the Strong Grid?: Index

Tom Konrad CFA

A somewhat delayed index to my Year of the Strong Grid series, looking into electricty transmission and distribution (T&D) or "Strong Grid" companies.

Part
Subject / Description
Stocks mentioned
I
Introduction: Why Electricity Transmission and Distribution is a good investment.
None
II
Comparing the financial strength of eletricty T&D companies
ABB AMSC CPTC.OB CVT.TO BGC JST MTZ MYRG PIKE PWR RSSYF.PK SI VMI WCC
III
EMCORE Group (EME) and AZZ Incorporated (AZZ)
BGC JST MTZ VMI WCC EME AZZ
IV
General Cable Group (BGC)
BGC
V
Hubbell, Inc. (HUB-A, HUB-B)
HUB-B HUB-A
VI
CVTech Group (CVT.TO, CVTPF.PK)
CVT.TO

I'm pubishing the index now (even though I wrote the series a couple months ago) because I'm about to write a crossover article with my Best Peak Oil Investments series on CVTech Group, a company that belongs in both series.  And I may return to this series again.

DISCLOSURE: Long PWR.

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.

March 06, 2010

Will Surging Smart Grid Investments Result in Surging Electric Prices?

John Petersen

The electric power system in the U.S. is dirty, antiquated, stupid, unstable, and a security nightmare. After years of discussion and debate, consensus now holds that the generation, transmission and distribution infrastructure will need hundreds of billions in new investment to reduce emissions, improve reliability, minimize waste and inefficiency, improve security, and facilitate the integration of wind, solar and other emerging alternative energy technologies. Commonly cited capital spending estimates range from $200 billion globally by 2015 to $2 trillion overall. In his November 2008 report, "The Sixth Industrial Revolution: The Coming of Cleantech," Merrill Lynch strategist Steven Millunovich observed that cleantech markets will dwarf IT to the tune of two orders of magnitude. While there's plenty of room to debate how the future will unfold, there's little question that we're watching the emergence of an investment mega-trend that will endure for decades.

The elephant in the living room is that while some smart grid spending will be recovered through increased efficiency, consumers will ultimately pay for any excess costs in the form of higher electric bills.

In the early release overview for its 2010 Annual Energy Outlook, the Energy Information Administration forecast that over the next 25 years, the constant dollar costs price per million BTUs of energy would change as follows:


2009
2035
Price
Percent

Price
Price
Change
Change
Crude Oil
$10.24
$23.04
$12.80
125.0%
Natural Gas
$3.24
$7.84
$4.60
142.0%
Coal
$1.56
$1.44
-$0.12
-7.7%
Electricity
$28.07
$29.87
$1.80
6.4%

To put these seemingly benign price forecasts into historical context, I prepared the following graph to show what happened to constant dollar energy costs over the last 17 years expressed as a percentage of their April 1993 values.

Energy Cost History.png

When I look at the historical trend-lines and factor in what I know about the energy industry and global economics, my sense is that:
  • The estimate for crude oil prices is too low given likely economic development in Asia and elsewhere;
  • The estimate for natural gas prices is too high given the recent emergence of shale gas as a resource; and
  • The estimates for coal and electricity prices must assume continuation of the status quo into the indefinite future.
When I consider the costs of alternative energy from wind and solar, the storage required to make these inherently variable alternative resources stable, the carbon mitigation requirements that will almost certainly be imposed on the coal mining and electric power industries, initiatives to move transportation from fossil fuels to electricity, and the huge amounts of capital spending required for the transition to a smart grid, the only conclusion I can reach is that electricity prices will have to climb and the increase is likely to be dramatic, particularly in the early years of a smart-grid build out. I don't have the skills required to forecast the probable magnitude of the coming price escalations, but I don't believe for a second that a flat line on the price graph is either a possible long-term outcome or a rational expectation. In short, there is no free lunch.

Every industrial revolution in history has been driven by new technologies that proved their ability to do more beneficial work with fewer economic inputs. The fundamental dynamic will be no different in cleantech, however the need will be even more pressing as global demand for energy, along with water, food and every commodity you can imagine, continues to skyrocket. My friend and colleague Jack Lifton is fond of reminding readers that the "Green Road to a sustainable energy future begins in the black earth." We truly can't have a secure energy future without a security in raw materials supplies, which is why I'm an unrelenting critic of ideologically appealing but resource foolish notions like plug-in vehicles that promise to do less beneficial work while requiring far greater economic inputs. It's all about getting the energy we need at the lowest possible price. But discussing energy options without carefully considering the natural resource constraints for proposed solutions is a non-starter.

Many of the adjustments we'll be forced to make in coming decades will be quite painful, but the world has already moved on while we were paying attention to other things. I'm a firm believer that energy storage is a critical enabling technology for our energy future, but unless and until storage is cheaper than waste, the potential benefits of storage will remain unrealized. This truly is a sector where price is the only thing that matters and the technology that does the required work for the cheapest price will win the lion's share of the potential market.

Disclosure: No companies mentioned.

March 04, 2010

2010: The Year of the Strong Grid? Part VI: Will the Real Strong Grid Companies Please Stand Up?

Tom Konrad, CFA

For clean electricity to flourish, the electric grid needs not only to be smarter, but more robust.  This is where my strong grid stocks come in.  But stringing wires for power is a lot like stringing wires for telecommunications as well a large number of other businesses which do not have much to do with the energy trends I hope will boost the long term prospect of these companies.  Knowing how much these companies earn from grid infrastructure helps predict how much they will benefit from the trend.

Unlike many of the financial statistics I've been looking at in this series, companies have a great deal of leeway in defining their operating segments.  Not a single company I looked at has a electric grid infrastructure segment, let alone a "strong grid" segment.  Hence the numbers presented in the following table are subjective, based on my judgment as to what constitutes grid or clean energy related activity. 

The information on which I've based these judgment calls often comes from investor presentations, many of which tend to include a slide on business segments.  When I was unable to find a suitable investor presentation, I looked at a company's most recent annual report, where segment data is often included in the notes to the financial statements.

In terms of what constitutes grid infrastructure, I attempted to exclude any non-electrical wiring, as well as any electrical work inside buildings.  I made other judgement calls along the way, especially when I had to determine how much of a specific segment to attribute to grid infrastructure.  I made a note "unhelpful segmant data" when I felt my guesses were particularly questionable.

That said, here are my guesstimates:

Company
% Grid Infrastructure
Notes
ABB, Ltd (ABB)
30-60%
Unhelpful segment data
American Superconductor (AMSC)
10-20%
Mostly a wind company (for now)
AZZ Incorporated (AZZ)
50-60%
Strong Grid Part III AZZ & EME
General Cable (BGC)
55-65%
Strong Grid Part IV: BGC
Hubbell, Inc (HUB-B)
20-30%
Strong Grid Part V: HUB-A & HUB-B
Jinpan International (JST)
40-70%
Unhelpful segment data
MasTec (MTZ)
20-30%
Plans to grow grid segment
MYR Group (MTRG)
65-75%

Pike Electric (PIKE)
90-100%
The closest to a "Pure Play"
Quanta Services (PWR)
50-60%

Siemens (SI)
10-20%
Unhelpful segment data
Valmont Industries (VMT)
20-30%

WESCO International (WCC)
10-20%


DISCLOSURE: Long BGC.

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.

February 28, 2010

2010: The Year of the Strong Grid? Part V: Hubbell Inc.

Tom Konrad, CFA

Hubbell Inc. (HUB-B) is a strong grid stock that also has strong financials, signaled by a recent dividend increase.

I came across Hubbell Inc. (HUB-B) when researching General Cable (BGC) for my recent article on the company.  Just one more example of when you start researching a sector, (in this case electrical transmission and distribution, or "strong grid") you never know what new companies you may find.

Hubbell is a diversified electrical supplier, serving electric utility, residential, commercial, and industrial markets worldwide.  About a quarter (26%) of its revenue comes from the "Power Systems" segment, which is roughly what I am focusing on in this series on the "Strong Grid."  I previously rejected EMCORE Group (EME) because it only has about 20% of its revenues from the strong grid, so the reader might reasonably ask, "What's so much better about Hubbell?"

The main advantage is that Hubbell's other divisions have exposure to the Smart Grid, and Energy Efficient lighting, which means that my best guess of the company's overall exposure to my favorite clean energy sectors is somewhere around 50%.  Emcore also had some exposure to these sectors (it is a diversified mechanical and electrical construction group), but probably not so much.

The Dividend Increase

And then there's the dividend increase.  As a value-oriented investor, I love dividends.  I'm especially fond of companies that keep increasing their dividends.  Dividends signal that management is confident about the solidity of their revenues going forward, and they are also a valuable source of return in the low-growth (or even no-growth) environment I'm expecting to prevail in coming years.  The new quarterly dividend payment of $0.36 per share (vs. $0.35 previously) equates to a 3% dividend yield at $48 per share.  Three percent is not much by historical standards, but it's pretty good in current markets.

The company's growth strategy is also one of acquisitions.  With companies still finding it difficult to raise funds, companies like Hubbell that can fund acquisitions directly from their balance sheet are in a good position to scoop up bargains, and the company's long experience with such acquisitions gives us some assurance that they will be able to integrate the acquired companies successfully. 

Share Structure
Both Hubbell class A (HUB-A) and class B (HUB-B) shares are traded on the NYSE, with B shares having much higher volume, and class A shares trading at a slight discount to B shares.  Class A shares have 20 times the voting rights of class B shares, but only have about 1/100 of the trading volume.  A long term, small investor would probably be better off holding A shares to take advantage of the discount (and the voting rights) but larger investors and traders will gravitate towards the B shares.

Valuation
On the other hand, despite the solid balance sheet and cash flow, the company is trading at too high a Price/Earnings ratio (15) for me to consider buying in what I expect to be a down market in 2010.  But if the market decline I expect materializes, that high-ish P/E will give Hubbell some room to fall.  If a market decline brings Hubbell into the mid-to-low 30's, I'll have my finger on the "buy" button.

Selected data as of 2-21-2010:
Stock Price (HUB-B/HUB-A)
$47.48/$46.67
P/E (trailing 12 month, HUB-B/HUB-A)
15.17/14.91
Cash per share
$4.41
Months to pay off net debt from cash flow
7 months
Current Ratio
2.2
Dividend yield (HUB-B/HUB-A)
3.03%/3.08%
Revenues from "Strong Grid"
26%
Revenues from Clean Energy and supporting sectors
roughly 50%
3 month average volume (HUB-B/HUB-A)
214,000 / 2,100

DISCLOSURE: Long BGC.

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.

February 21, 2010

2010: The Year of the Strong Grid? Part IV: General Cable

Tom Konrad, CFA

General Cable (BGC) is a strong grid stock that's suddenly looking a lot cheaper.  Time to buy?

General Cable is not only one of my Ten Clean Energy Stocks for 2010, it was also holding it's own in my list of "strong grid" (that is, electricity transmission) stocks that have strong financials.  About 59% of the company's revenues come from what I would consider "strong grid" markets: their "electrical utility" and "electrical transmission" segments.  I published the most recent version of that list on February 11.  In both these articles I cautioned that I did not think it was yet time to start buying the companies I covered.  Rather, these were companies to buy after a price fall.

The same day I published my recent strong grid list, General Cable reported a net loss of $0.17 for the last quarter of 2009, and lowered guidance for Q1 2010.  Adjusted earnings were in line with what analysts were expecting, but the lowered guidance spooked shareholders.  The stock got whacked.  So is it time to buy?

BGC Chart 2-20-2010

I'm personally not all that concerned by a couple of quarters of lousy growth, but I want to know about anything that might hamper the company's long term viability, so I decided to dig a little deeper by reading the Q4 2009 earnings call transcript. Here are my take-aways:
  •  The company has been focusing on reducing operating costs this year, and has strongly improved cash flow from operations over previous years (a large part of the reason it's on my lists).
  • The US utility market was unexpectedly week in Q4 09 (this may have been due to the fact that many stimulus programs ended up delaying spending in the targeted areas).
  • The company is expanding internationally and using its greater financial strength to out-compete or buy up smaller competitors in a difficult economy.  They expect 2010 to be a "bottoming" year in terms of demand for their products.
  • The company does not expect to see any strength in North American utility markets for at least two quarters.
  • While the US has not yet begun to act to build needed electricity infrastructure, Europe (also currently weak) is well into the planning stage, and is likely to be a strong market over the next five years.
  • Rising commodity prices have hurt reported earnings because of their last-in-first-out (LIFO) accounting.  This means that BGC's earnings will appear relatively low when commodity prices are rising, and relatively high when commodity prices are falling in relationship to non-LIFO competitors.  The implication is that a good time to buy the stock would be near a commodity price peak.
  • The company has a strong presence in developing markets, where it continues to pursue growth opportunities.  However, they intentionally have very little of their business in China.
Most of General Cables markets lag the economic cycle.  Since we're only seeing glimmerings of an upturn, it will be a while before BGC's revenue an pricing power recover.  Furthermore, capacity utilization in the cable market is very low world-wide: even with an upturn in volumes, cable pricing is likely to remain very competitive for quite some time.  In the long term, this is good for General Cable, because it will squeeze weaker competitors out of the market, but in the short term, I would not be surprised to see some more disappointing quarters. 

I don't see any systematic problems to worry me.  While I believe that commodities are in a long-term uptrend, which will hurt reported profits because of LIFO, but it should have no net effect on real earnings.  The industry continue to shake out until the surviving players can pass on cost increases to customers.  General Cable is likely to be one of the survivors.

At $23.85, I think the stock has not yet hit its low for the year.  The valuation looks good, but there will probably be more earnings deterioration next quarter. The 1Q 2009 earnings were $1, and the company is providing guidance that they will only be $0.05 in 1Q 2010.  That will lower the "E" and raise the P/E ratio, which probably allow for a bit more downside movement in the stock price (P).

I currently guess that the best time to buy will be a month or two after the Q1 2010 conference call, possibly in June, but I will re-evaluate that guess after the next earnings call.  I still hold a small long position in the stock which is partially hedged with a covered call.   The call will expire this month, and I'm not planning to write another.  I could be wrong about where the stock bottoms.

Selected data as of 2-20-2010:
Stock Price
$23.85
P/E (trailing 12 month)
9.66
Cash per share
$8.70
Months to pay off net debt from cash flow
20 months
Current Ratio
2.06
Dividend yield
none
Revenues from "Strong Grid"
59%

DISCLOSURE: Long BGC.

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.

February 11, 2010

2010: The Year of the Strong Grid? Part III

Two Strong Grid Stocks in Hiding

Tom Konrad, CFA

A look at two transmission (or "Strong Grid") stocks I missed previously: EMCORE Group and AZZ Incorporated.

In part I of this series, I made the case that 2010 might be the year that transmission stocks caught investors' attention, as smart grid stocks did in 2009.  In part II, I looked at the transmission stocks in our Electric Grid stock list, and compared their financial strength. 

My initial screen, based on Current ratio, Cash on Hand, Debt, Cash from Operations, P/E ratio, and dividend yeild allowed me to narrow the list down to Valmont Industries (VMI), Jinpan International (JST), General Cable (BGC), MasTec (MTZ), and Wesco International (WCC) as stocks worth further research.  I'm not buying any of these now, because I believe the market as a whole nosedive at any time.  It could also keep trending up for a while, but, on the whole, the possible upside gains do not seem sufficient compensation for the downside risks.

EMCORE Group

I particularly liked Valmont, because it has a high current ratio, no significant debt, and pays a small dividend.  A reader suggested that if I liked Valmont, I'd like EMCORE Group (EME) even better.  So how does it compare?  Valmont has a 2.6x current ratio, can pay off its debt instantly with cash, has 12.2 trailing P/E ratio (Q4 09), and pays a 0.8% dividend.  Emcore's current ratio is 1.45x, which is on the low (i.e. poor) end for the stocks in the group, could instantly pay off its debt, has an 11.7 trailing P/E (Q4 09), and does not pay a dividend.   (Note that I used Q3 09 numbers in Part II; these were what was available at the time of writing.)

EMCORE's weaker current ratio and lack of a dividend don't make it more attractive than Valmont.  A little more digging also turned up another problem with EMCORE: electric transmission seems to be only a small fraction of their overall business.  This general mechanical and electicial construction group seems to get less than 20% of its revenues from transmission, quite possibly much less.  Further, as a construction firm, the best of the five companies above to compare it to would be MazTec, which is also a contractor, as opposed to an industry supplier like Valmont.  MasTec also is not a pure play, and probably only gets about 1/3 of its revenue from electrcical transmission work, but MazTec sees transmission as key to the company's future growth.  If it weren't for the lack of transmission focus, EMCORE would compare favorably to MasTec, which has an only slightly higher current ratio (1.6x), would need a couple of years to pay off its debt using internally generated cash, has a slightly higher trailing P/E (13.3), and also does not pay a dividend.

In short, EMCORE Group probably is not a very good way to invest in the Strong Grid.

AZZ Incorporated

I'd run across AZZ Incorporated (AZZ) before, but had neglected to add it to the Electric Grid stock list, and didn't think of it when I was compiling the "Strongest Strong Grid Stocks."  This time, I came across it on StockGumShoe, where Travis Johnson investigates the paid stock newsletter teases.  If that sounds familiar, it's because we republished an article of his here in January.  Motley Fool's Hidden Gems has apparently been teasing a stock which will save us from the implosion of the electric grid, and Travis makes a good case that it's AZZ

One othe the things I like about Travis's work is that he also goes into a good deal of depth looking into the same sorts of indicators I find interesting about companies after he ferrets them out.  He has this to say about AZZ:

This one actually looks pretty appealing to me, as long as you’re not too impatient — they’ve got a price/sales ratio of under 1, but still manage to run a double digit profit margin, which is fairly unusual (though that margin might shrink), and they do appear to have a pretty strong national business with their large number of manufacturing and galvanizing plants, so they’re not completely stuck riding the regional trends if one of their areas sinks further into this recession.

The forward estimates by analysts are for very strong growth in the next several years, which gives them a price/earnings/growth (PEG) ratio of .59, which usually indicates a screaming value — but I’d be cautious about those future growth estimates.  [There's much more here.]

I find it appealing too, especially after reading what he has to say about the balance sheet and insider trades.  It still seems to have room to fall, though, but this one definitely deserves to be added to the other five "Strongest Strong Grid Stocks" listed in part two.  These are the ones  I'll be looking to add to my protfolio (assuming they're still strong) when the current euphoria turns into fear again.

Here they are (using Q4 09 data.  Price data as of 2/10/10.)  Note that most of the P/E's have dropped partly due to higher earnings in Q4 09 than Q4 08, and partly due to price declines in the last month.

Company Current Ratio T (see part II)
P/E (trailing) Yield
AZZ Incorporated (AZZ) 4.06x
instantly
9.35
3.4%
General Cable (BGC) 2.1x instantly 11.34
0
Jinpan International (JST) 2.3x instantly
12.77 0.6%
MasTec (MTZ) 1.7x 2 years 13.35 0
Valmont Industries (VMI) 2.6x instantly 12.2 0.8%

DISCLOSURE: Long BGC.

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.

February 08, 2010

Smart Grid’s Expected 250% 5-Yr Growth Rate is Great News for Cisco, IBM, Accenture, EnerNOC

Bill Paul

Lux Research forecast last week that the global smart grid market will grow some 250% over the next five years, reaching nearly $16 billion by 2015 compared with today’s $4.5 billion. Interestingly, Lux further forecast that only a few select firms will take full advantage of this looming largesse.

It’s understandable why the payoff won’t be widely shared. As regulated entities (on the transmission and distribution side), electric utilities have an obligation (specifically, the time-honored “obligation to serve”) that effectively requires that they be conservative when partnering with IT firms that can provide the money-saving, blackout-avoiding technologies which are at the heart of the smart grid. In other words, big is better.

This is why most of the more than $11 billion of new smart-grid-related revenue that Lux expects to be generated over the next five years will be pocketed by the IT beasts that already are pocketing the yeoman’s share of the $4.5 billion currently being spent.

For at least one firm – demand response leader EnerNOC (ENOC) — the potential payoff is life-changing, and only further adds to my purely personal suspicion that EnerNOC is going to be acquired at some point by a much larger firm.

Two logical buyers of EnerNOC would be Accenture (ACN) and IBM (IBM). The two are jockeying for leadership in the rapidly-developing smart-grid analysis and services market, which Lux Research believes is “poised for explosive growth” led by demand response applications.

Still another IT behemoth in line to gobble up billions of new smart-grid revenue is Cisco Systems (CSCO). Think of Cisco as the smart grid’s Mr. Goodwrench. Whether it’s routers, switches or other equipment, Cisco’s goal is to provide the IT components that utilities (with the help of consultants led by Accenture and IBM) will fashion into a system that automates the power industry from end to end – from generation to transmission to distribution to consumption.

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

February 02, 2010

2010: The Year of the Strong Grid? Part II

The Strongest Strong Grid Stocks

Tom Konrad, CFA

A comparison of the financial strength of transmission (or "Strong Grid") companies.

In Part I of this article I made the case that transmission stocks, or "Strong Grid" might be a clean energy sector that takes off in 2010, as Smart Grid stocks and Battery stocks did in 2009.  If the sector does take off, the rising tide will probably float all boats, but if it doesn't, it will probably be better to be in the strongest such companies, because, as in 2009, the harsh financial climate will probably mean that the strongest companies do best.

Metrics

For a first look at financial strength, I like to look at the following metrics as a first screen:

  • Current Ratio: the ratio of current assets to current liabilities - the higher the better
  • If Cash Flow from Operations (CFO) is positive, then T = (Total Liabilities (L) - Cash)/ CFO - the time it will take to pay off debt using internal cash flows and cash on hand.   I consider anything less than a few years good.
  • Price/Earnings ratio.  In a mature industry such as transmission suppliers, I like to see positive earnings and a P/E ratio below the average for the market, but not so low that it indicates trouble elsewhere. 
  • The dividend yield (Y) - I like companies that pay a dividend, since I believe it shows management's confidence in the company's long term profitability.  

Most of these numbers can be calculated directly from the company's "Key Statistics" page on Yahoo! Finance, although I had to calculate them myself using the most recent financial statements for the over the counter and foreign listed companies.  Most statistics are from Q3 2009 financial statements.

Transmission Builders and Suppliers

Company Current Ratio T P/E (trailing) Yield
ABB Group (ABB) 1.7 instantly 16.7 2.3%
American Superconductor (AMSC) 2.8 instantly N/A 0
Composite Technology Corp (CPTC.OB)  0.6 N/A N/A 0
CVTech Group (CVT.TO) 1.5x 7 years 24 0
General Cable (BGC) 2.1x instantly 12.3 0
Jinpan International (JST) 2.3x 6 months 10.6 0.6%
MasTec (MTZ) 1.7x 2 years 13.9 0
MYR Group (MYRG) 1.6x instantly 16.7 0
Pike Electric (PIKE) 2.3x 1 year 27 0
Quanta Services (PWR) 3.6x instantly 19 0
Resin Systems (RSSYF.PK)

I could not find current financial statements.

Siemens (SI) 1.2x 13 years 10 2.6%
Valmont Industries (VMI) 2.6x instantly 12.8 0.8%
Wesco International (WCC) 2.2x 2 years 9.2 0

In general, the companies in this industry show a good deal of financial strength.  The only ones in my list that I would eliminate from consideration on these measures are:

  • Composite Technology and Siemens, because of relatively weak current ratios. I also recently wrote about some other worries I have about Composite.
  • CVTech and Siemens because too much debt will constrain their flexibility.
  • ABB, MYR, Pike, and Quanta because they are too expensive from the standpoint of price to earnings.  

The other financial strength measures are more important for negative earnings companies such as American Superconductor and Composite Technology.  Since AMSC appears strong, other valuation measures should be considered to determine if it's overpriced before making a decision to purchase.

I won't eliminate a stock from consideration because of a lack of dividend, but I think Valmont and Jinpan are worth another look because they do pay dividends, and their financial statements are both quite strong by my favorite measures.  General Cable, MasTec, and Wesco also look solid and seem reasonably priced.  These are the five I'd be buying currently, if I were not waiting for a general market decline before buying anything.

Stocks in My Top Ten List

The P/E ratio is why MasTec was included in my Ten Clean Energy Stocks for 2010: I wanted a domestic electric transmission contractor, but did not like the price of most of the others. I included General Cable as an equipment supplier with an attractive valuation and rock- solid financials.  If I were to pick a new supplier today, it would probably be Valmont rather than General Cable, but that is only because Valmont has fallen 12% compared to a 2% fall for General Cable in the month since I created the list, making Valmont relatively more attractive.

DISCLOSURE: Long BGC, PWR, WCC.

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.

January 31, 2010

2010: The Year of the Strong Grid?

Part I: With Smart Grid Brains and Transmission Brawn...

Tom Konrad, CFA

A robust national grid will be essential to achieving high penetration for renewable electricity at reasonable cost, and the companies that can help build it are an essential part of a clean energy portfolio.  

Many renewable energy advocates, especially those enchanted by the gigantic potential for solar, think that we can get by with local renewable energy.  While it's a pretty vision, the timing of wind and solar (the only forms of renewable energy that have the potential to produce 100% of our electricity) mean that this could only be achieved with prohibitively costly investment in grid tied energy storage.  It makes much more sense to invest in a smarter and more robust grid before making large investments in energy storage.

Diversification of Electricity

There are two aspects of this: managing our energy usage better, which is the province of the smart grid, and interconnecting it better, allowing us to take advantage of the natural variations between both supply and demand in different locations with long distance transmission.  In much the same way combining two imperfectly correlated stocks in a portfolio reduces overall risk, connecting two regions with high voltage transmission reduces the overall imbalances between variable supply and variable demand that need to be met with dispatchable generation.  

It's much easier to balance supply and demand over a large area than it is over a small area.  On the smallest scale, this is the reason that almost all net zero electricity homes are grid-tied.  Although such a home has the capacity to produce all the electricity it needs on an annual basis, the cost of the batteries needed to store the extra electricity produced during sunny summer months for use on long, dark winter nights would be prohibitive.  Instead, home owners use the wires connecting them to the local grid as extremely inexpensive virtual storage.  Long distance transmission can serve the same function on a much larger scale at a cost of only a fraction of the comparable real storage.

Time and Space

Transmission shifts electric supply in space, while storage shifts electric supply in time, and smart grid technologies shift electric demand in time.  Both Smart Grid and Transmission can therefore provide virtual storage, and both do it at a low cost compared to real electricity storage.  

Last year saw investors finally take notice of Smart Grid stocks, but transmission has yet to capture their attention (perhaps because many renewable energy aficionados still cling to the dream that we can transition to clean energy sources using just the smart grid and storage.)  While such a transition would be physically possible, it would make no more economic sense than putting solar panels on your roof and racks of batteries in your basement in order to cut your connection to your electric utility.

If 2009 was the year investors woke up to the potential of the Smart Grid, 2010 may be the year they begin to see the strong grid.

Part II of this article will look at which Strong Grid stocks are the strongest financially.

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.

January 27, 2010

Playing the 'Global Grid Game' - Japan's NGK, GE Majority-Owned Indo Tech Look Strong

Maintaining and expanding the world's electric power grids in order to avoid stupendous blackouts, add gigawatts of green power, and bring electricity to a billion additional people, will cost hundreds of billions of dollars over the next 10 years.

Retrofitting just the U.S. power grid will cost $130 billion, estimates the Electric Power Research Institute (EPRI). China has earmarked $135 billion to upgrade and expand its high-voltage grid. India will need to spend billions if it has any hope of reaching its goal of increasing electrical generation capacity to 200 GW by 2012 from roughly 150 GW currently. Among the many planned projects that will cost billions are the super grids that will connect North Sea offshore wind farms to northern Europe and North African desert solar installations to southern Europe.

Of the many players in the "global grid game," two in particular that appear to have strong long-term positions are Japan's NGK Insulators Ltd. (Symbol NGKIF.PK) and Indo Tech Transformers Ltd., an Indian company that trades in Mumbai (Symbol 532717) in which General Electric Co. (Symbol GE) recently acquired a majority stake through a joint venture with a Mexican firm.

As Jesse Berst - whose web site, SmartGridNews, should be required reading - noted last month, "When it comes to the suppliers of grid-scale storage, there's Japan's NGK and its proven product line and then there is everybody else."

Given the growing need to "store" electricity from wind, solar and other so-called intermittent power sources, grid-scale energy storage will be a $4.1 billion market by 2018 compared with just $329 million in 2008, according to Pike Research, and NGK has already "garnered several significant multiyear battery orders," according to Berst.

To be sure, shares of power-storage companies (including NGK) have been performing well for many months. But with governments around the world due to spend upwards of $200 billion in green stimulus money this year and next, NGK's upward climb would logically appear to have a ways to go.

As for Indo Tech, while it's just one of several power transformer manufacturers in India, it's the one that GE appears to be using to spearhead its growth in the fast-growing Indian power market. "As generation ramps up, I think there are going to be a lot of opportunities for growth in the transmission and distribution sector," GE Energy's man in India was recently quoted as saying.

Think of Indo Tech as a purer play that may generate bigger absolute returns than GE itself will in a global market that everyone agrees is, and will continue, growing by leaps and bounds.

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

January 26, 2010

New Transmission Technologies

Tom Konrad, CFA

Why wasn't Aluminum Conductor Composite Core (ACCC) technology mentioned in Colorado's REDI report?

In December, I gave readers a brief summary and a few investing ideas based on Colorado's Renewable Energy Development Infrastructure (REDI) report.  I've now read the entire report, much of which is focused on Colorado's needs in terms of electric infrastructure.  In addition to some useful price data for long distance transmission, there was a short section on "the potential for new transmission technologies" (page 35.)  

The new technologies mentioned were 

  1. Aluminum-conductor, steel-supported (ACSS) with ultra-high strength cores.
  2. Aluminum-conductor, composite reinforced (ACCR)
  3. Superconducting Electricity Pipelines

ACSS is produced by the private company Southwire, while ACCR was developed by 3M, and Southwire is the contract manufacturer.  Superconducting Electricity Pipelines were developed by American Superconductor (AMSC), a company we recently profiled here.  

The Dog that Didn't Bark

What surprised me was what was not in the REDI report: Composite Technology Corp's (CPTC.OB) Aluminum Conductor Composite Core (ACCC) cable. I followed CPTC in 2007 and 2008.  According to most studies I saw, ACCC cable outperforms both ACSS and ACCR on a cost-adjusted basis.  Although I included the company in my Ten Green Energy Gambles for 2009 (one of my less successful picks, the stock was flat that year), I have not been following it closely since the financial crisis began, because I did not think that the company had the financial strength to do well in the new financial climate.  

But I didn't stop following the company out of any doubts about its technology, so I was curious about the absence of ACCC cable from the REDI report.  Since I have several contacts at the Colorado Governor's Energy Office (GEO), I asked around.  Unfortunately, no one was willing to talk on, or off, the record.  

What Can We Conclude?

Since I can't share with you the substance of my conversations with my contacts at GEO, I can only speculate here what the absence from the REDI report might mean. (Note that these speculations are based on my thoughts previous to talking to my contacts at GEO, and are not based on those conversations in any way.)  Knowing that the technology wasn't mentioned, we can only guss that 

  1. The drafters of the report were not aware of ACCC's technical superiority to ACSS and ACCR, 
  2. ACCC isn't really superior to ACSS and ACCR, or
  3. It was a bureaucratic oversight.

In any case, this is not good news for CPTC.  Perhaps a lack of funding or other circumstances has meant that Composite Technology has not been able to effectively communicate the advantages of ACCC to decision makers.  If that does not sound good, it could be worse: Perhaps ACCC really does not have the benefits I thought it did.  

The best-case scenario is #3, a bureaucratic oversight, but even then, why wasn't Composite Technology there making sure such oversights didn't happen?  Superior technology is only one small part of business success.  Another is making sure that people who might make decisions about your technology are aware of it.  The REDI report is intended for legislators 

Prospective investors in Composite Technology Corp. (CPTC.OB) should probably decide for themselves how important this is before investing, and current investors might consider re-evaluating their holdings.  It's all speculation, but if you're on the fence, this might tip you one way or the other.

If readers have any additional insight or guesses, let us know in the comments.

DISCLOSURE: Long AMSC.

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.

January 09, 2010

If I Could Own Only One Alternative Energy Stock, It Would Be . . .

Bill Paul

My friend Consuelo Mack, host of "Consuelo Mack's Wealthtrack" on PBS TV, asks her guests for their "one investment pick." What's my one alternative energy stock pick?

A year ago on Consuelo's show, I recommended LED lighting developer Cree Inc. (Symbol CREE), because the LED lighting market (part of the burgeoning energy efficiency sector) is expected to hit upwards of $5 billion by 2013 v. $600 million in 2008, according to investment banking firm Merriman, Curhan, Ford, and because Cree was then an attractive takeover candidate. It still is; however, since the stock has since risen something like 300% and its price-to-earnings ratio is now north of 100, it no longer warrants being my "one" investment pick, though it's still well worth having in a broad portfolio of alternative energy stocks that I think every investor should have.

If I were inclined to pick a stock I think could duplicate Cree's performance in 2010, it would be Ocean Power Technologies Inc. (Symbol OPTT). In my mind, wave and tidal power is the most overlooked, underrated green energy sector in the world. Pike Research said last summer that by 2015 wave and tidal power could be generating 2.7 gigawatts of electricity worldwide vs. just 264 megawatts in 2009.

Ocean Power is virtually the only publicly-traded firm in this sub-sector. (Look for a number of European firms to go public over the next couple of years.) The company is on the cusp of commercial operation and has a partnership with Lockheed Martin (Symbol LMT) that would seem to guarantee deep-enough pockets to survive any growing pains. And, like Cree, I see Ocean Power as a takeover candidate.

But while Ocean Power is also well worth having in a broad-based portfolio, since it still faces possible regulatory and other issues, it's just not enough of a sure thing to be my "one" pick. The same situation is true for wind and solar stocks, though for different reasons. Wind has an enormous future and several wind firms belong in your green portfolio. But the giant turbine manufacturers and wind-farm developers are becoming commodity firms; there's no obvious top pick right now. Solar too has an enormous future, but the technology is developing too quickly for any solar firm to be a sure thing right now, not even much vaunted First Solar (Symbol FSLR), though it too belongs in your green portfolio.

For my one investment pick, I choose a company without which solar and wind's potential can't be realized. It's also a company without which the energy-saving, blackout-avoiding potential of the "smart" grid can't be realized. The same company is spearheading monumental construction projects that will bring into Europe huge amounts of solar power from North Africa and wind power from the North Sea. The same company is developing rapid recharge infrastructure for electric vehicles and is quickly becoming a leader in demand response and energy management services. This company also is a - if not the - global leader in building and rebuilding thousands of miles of electric transmission lines around the world, a business that will require annual expenditures of $33 billion by 2014 vs. $12 billion in 2008, according to NextGen Research.

In January 2010, my one alternative energy investment pick is Siemens AG (Symbol SI).

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

December 23, 2009

REDI-ing Your Portfolio for a Low-Carbon Economy

Tom Konrad, CFA

Colorado's recently released Renewable Energy Development Infrastructure (REDI) report looks at what the resource-rich state needs to do to accomplish the state goal of reducing CO2 emissions 20% from 2005 levels by 2020.  Investors who expect the developed world to attempt similar cuts in emissions should take note of the report's conclusions, and invest accordingly.

Since Colorado Governor Bill Ritter recruited my friend Morey Wolfson for the Colorado Governor's Energy Office (GEO) he's had a lot less time to socialize with the rest of us in the clean energy community, but we caught up over lunch during the International Peak Oil Conference in October where I was speaking on investing for a peak oil world, and he is on the advisory board of the sponsoring organization, ASPO-USA.

Morey told me he had spent the last few months working on a report for GEO on the improvements needed in Colorado's energy infrastructure.  Even though Colorado is in the top ten states for several renewable energy resources (Wind, Solar, and Geothermal,) it will be difficult to achieve significant emissions reductions in the fast-growing state, and I find government reports an excellent place to look for a clue to future government action.  

Anticipating government action is critical to any investor, so to the extent that government reports are likely to be used by political decision makers, they are also likely to be useful for investors as well. I've found useful nuggets in similar reports in the past, including The Arizona Renewable Enegy Assessment, and both the California Renewable Energy Transmission Initiative Phase 1A and Phase 2A.  These reports have been the source of the best unbiased assessments of the cost of clean energy I've been able to find.  I used a similar approach in developing the Model Clean Energy Portfolio included in my Green Energy Investing for Beginners series.  No portfolio should be static, however, and allocations should be adjusted to reflect changes in the investment environment and new information we glean from reports such as Colorado's recent REDI report.  The report is also the source of all the charts in this article.

REDI Recommendations

The REDI report has several recommendations to policymakers:

  1. Greatly increase investment in demand-side resources (energy efficiency, demand-side management, demand response, and conservation.)
  2. Greatly increase investment in Renewable Energy development, particularly utility-scale wind and solar generation.
  3. Accelerate the construction of high voltage electric power transmission to deliver renewable energy from Colorado's renewable resource generation areas to the state's major load centers.
  4. Strategically use natural gas-fired power generation to provide needed new power to the grid and to integrate naturally variable renewable resources.
  5. Consider decreasing the utilization factor of coal-fired generation and/or consider early retirement of the oldest and least efficient of the state's coal-fired generation stations.

What it Means for Investors

Recommendations 1 and 2 are not surprising, but they should be interesting to investors in that energy efficiency gets as much emphasis as renewable energy, even in a renewable-energy rich state such as Colorado.  On a national level, the implication is that energy efficiency should be given more emphasis than renewables if we are committed to achieving aggressive carbon reduction goals.  This conclusion is reinforced when you consider the energy productivity of demand side resources compared to supply side renewables: it takes a lot more energy to build the equipment to produce renewable energy than to install the equipment needed to save the same energy.

Recommendation 3 won't come as any great supply to long time readers; I've been advocating transmission investments practically as long as I've been writing about investing in renewable energy.  As you can see from the electricity cost chart to the right, transmission currently only accounts for 7% of our national electricity bill.  When critics decry the multi-million dollar expense of long range transmission in favor of local generation and distribution upgrades, they seldom put a cost to the upgrades they call for for the simple reason that local renewables without long range transmission will cost much more than building renewables along with transmission to support them and smooth out their natural variability.

 

Recommendation 4 should be good for natural gas producers, pipelines, and suppliers of turbines.  Given the many opportunities in clean energy, I usually don't consider investments in fossil fuels, even relatively clean ones such as natural gas, but this should be a note of caution if you're considering shorting natural gas stocks.

Recommendation number 5 is bad for coal miners.  Either reducing utilization or shutting down of coal plants means less coal being burnt, hurting demand for coal.  Investors in public utilities with a lot of coal fired generation, however, might stand to benefit.  This is because old coal plants are mostly depreciated, and investors have already received the return of their capital.  In order for investors to earn a return from regulated utility operations, they have to invest in new generation or demand side resources.  New investments in demand- and supply-side resources will be higher if old coal plants are shut down or used less, providing more new investment opportunities for utilities.

Coal miners, on the other hand, are not likely to start supplying wind when the utilities buy less coal, so stay tuned for a future installment of my Green Energy Investing for Experts series that takes a look at the downside for coal miners.

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.

December 16, 2009

EnerNOC Broadens Scope in Smart Grid Sector

Demand Responder Eyes New Growth Areas as Key Market Prices Dip 

by Joyce Pellino Crane

EnerNOC, Inc., announced its acquisition of Cogent Energy, Inc., on December 9, signaling a strategic move into the energy efficiency sector that is designed to help it capitalize on the Smart Grid’s growth potential.

But the company was launched in 2004 as one solution to the country’s burgeoning demand for energy, and has grown into a leader among a handful of competitors in the demand response market.  

Boston-based EnerNOC (Nasdaq: ENOC) helps businesses and grid operators reduce electricity consumption when demand is peaking and capacity strained. The business model is designed to prevent regional blackouts and reduce the need to build more power plants.

Expectations for growth over the next few years are mixed and dependent on whether the company can successfully penetrate the energy efficiency and other ancillary markets, say some observers.

But so far, the company derives about 96 percent of its revenues from demand response customers. A demand response company, such as EnerNOC, uses technology to cut electricity usage among commercial, industrial, and institutional customers during periods--heat waves and frigid temperatures--when energy demand surges or supply falls suddenly. It can also be useful if changing weather conditions cause supply from wind or solar to fall suddenly.  EnerNOC’s platform inserts a layer of technology between commercial businesses and grid operators to ensure that there is enough power supply for all consumers during peak demand.

The company has shown significant growth in the sector, but it’s uncertain whether EnerNOC can sustain the pattern on a long-term basis.

Ben Schuman, senior research analyst for Pacific Crest Securities in Portland, Ore., said he foresees growth decelerating in EnerNOC’s largest demand response market after 2010.

“The growth in that market after 2010 is going to decelerate mainly because the capacity prices are declining,” he said.

Capacity is an industry term that refers to the energy resources needed to meet the industry’s highest electricity demand.
 
The country's power grid is operated by seven regional transmission organizations and independent system operators. The largest market among them belongs to PJM Interconnection of Valley Forge, Penn., which sends electricity to utility companies in all or part of 13 states from Northern Illinois to the Atlantic Ocean, including Washington, D.C. PJM pays EnerNOC and other demand response providers to cut the use of electricity among an aggregated pool of customers. It also pays a monthly fee to keep demand responders like EnerNOC on standby for a cutback when peak demand requires it. The demand responders are then contractually obligated to ensure that electricity usage decreases.

EnerNOC procures capacity obligations through PJM-administered auctions that are three years in advance, giving a clear line of vision to a large portion of its future revenues.

Prices in much of the PJM market are slated to drop each year through June 2012 from the current price of $102 per megawatt day. By mid-2012, some PJM regions will see prices plunge to as low as $16.47 per megawatt day, while others with less capacity will command as much as $222.30.

But the pricing volatility could have an impact, say some industry observers.

Although EnerNOC is committed to managing 2,500 megawatts in PJM territory from 2012-13, the revenues it will derive from its largest customer are projected to be flat. In May, the company announced it had secured about $100 million in future revenues from PJM—roughly the same as reported for the third quarter of 2009, ending September 30. In contrast, noted Schuman, between 2008 and 2009, revenues from the PJM region had more than tripled.

“So what has been a growth market for them flattens out,” Schuman said. “…That isn’t to say there aren’t other markets that they can break into, but I think it will be more difficult for them to grow after 2010 than it was in the past.”

But Shawn Lockman, a senior associate at Ardour Capital Investments in New York, said the company will compensate for the price drop by building a megawatt profile over the next five years that makes up for the difference.

“As they start to advocate for megawatts nationally outside the PJM territory,” he said, “you’re going to see the impact of that price drop be more dissipated.”

Lockman is optimistic about the company’s ancillary services, including monitoring-based commissioning solutions, energy procurement, energy efficiency, and carbon management, “but demand response systems is going to be their base for the foreseeable future,” he said.

Lockman gave EnerNOC’s stock a buy rating in contrast to Schuman’s recommendation to hold.

“This company is strong and they’re well-managed and they have a lot of opportunity out there,” Lockman said. “We don’t see anything that would put a dent in that on a regulatory basis.”

In fact, a recent federal order gave demand response companies a big boost. In October, the Federal Energy Regulatory Commission finalized regulations that strengthen the operation and improve the competitiveness of organized wholesale electric markets through the use of demand response. EnerNOC has leapt ahead of its competitor, Comverge, Inc., (Nasdaq: COMV) of East Hanover, NJ, according to Lockman, in the $5.2 billion US market. The privately-held CPower, Inc., of New York, NY, another competitor in the market, announced a $10.7 million round of financing in April.

EnerNOC’s initial price offering on May 18, 2007 closed at $31.13 per share. Five months later on October 18, share prices peaked at $50.50. Since then, the price has been volatile, dipping to as low as $4.80 on November 21, 2008, and closing on Monday at $28.55.

Third quarter revenues jumped 134 percent to $103 million from $44 million. Net income rose to $26.6 million from a loss of $3 million during the third quarter of 2008. Year-end revenues are projected to be between $187-9 million, according to Tim Weller, chief financial officer. EnerNOC lost $23.5 million in 2007, and $36.6 million in 2008. But today it has about $130 million in cash and marketable securities and about $4.5 million in long-term debt. It is on track to reach $250 million in projected revenues for 2010, said Weller.

“The Wall Street expectation was around $257 million,” said Schuman. “The company has done a good job of exceeding expectations for the past year.”

But warned Schuman, “growth will slow down unless they can do a really good job of penetrating other markets or some of their other services take off.”

The recent acquisition of Cogent Energy is a step in that direction. The company’s solutions will enable EnerNOC to service smaller facilities equipped with less sophisticated control systems, according to a company announcement. The acquisition significantly increases the size of EnerNOC’s application to perform detailed analysis on a business’ energy usage. Cogent gives EnerNOC “utility relationships and a customer footprint in California, and experienced head count resources in the area of energy consulting service,” Schuman wrote in a December 10 report. Cogent is expected to deliver about $5 million in revenues in 2010, he added.

Tim Healy, EnerNOC’s chairman and CEO, is determined to change how the world interacts with energy.

“We believe we’re ahead of the pack,” he said. “We envision a world in which energy management is as integral to energy accounting as every other operation.”

Joyce Pellino Crane writes at wordtrope.com/blog. She is a Boston Globe correspondent and a business technology analyst for Trender Research. Follow her on Twitter: JoyPellinoCrane.
She can be reached at joyce pellino crane at gmail period com no spaces

DISCLOSURE: No position.
DISCLAIMER: Joyce is not a registered investment advisor. 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.

December 11, 2009

Hidden Gems? Why Green Investors Should Look at Daewoo Shipbuilding and Ener1

Part 2 of 2

Bill Paul

Neither Daewoo Shipbuilding & Marine Engineering Co. Ltd., which trades OTC under the symbol DWOTF, nor Ener1 Inc., which trades on NASDAQ under the symbol HEV, is an obvious candidate for having hidden potential.

Heck, Daewoo isn’t even a green energy stock. Or is it?

Lost in the hubbub of Copenhagen and Congress, there’s been important news about both these companies that strongly suggests – at least to me – that each has plenty of undiscovered potential that will really start paying off over the next 18 to 24 months.

South Korea’s Daewoo Shipbuilding was just awarded a contract by German utility RWE AG’s (Symbol: RWEOY) renewable energy unit for up to three vessels specially designed to install offshore wind farms. The contract reportedly could be worth upwards of half a billion dollars, depending on whether RWE picks up the option on the second and third ships. The first ship is scheduled to be completed in 2011.

A couple things: at present, offshore wind power is going gangbusters thanks to healthy project returns that one European investment bank puts at around 15%. But installing the new large wind turbines under often harsh conditions requires a special kind of vessel. Daewoo’s reportedly will be the first – quite possibly the first of many. (Simultaneously, Daewoo just said it may build a wind power equipment plant in China.)

As for Ener1, seasoned green investors may think they know everything about this lithium-ion battery manufacturer. If Pike Research is correct, the future is bright for all li-ion battery manufacturers, Pike having just forecast that the global li-ion transportation battery market will total nearly $8 billion by 2015, compared with $878 million in 2010.

But the big li-ion winners should be those companies whose batteries also meet the critical need of providing energy storage for power grids. The really big winners should be those companies whose li-ion batteries also go into cars whose manufacturers can provide the rapid recharging infrastructure that consumers have indicated they want.

Tuck this away: Ener1 is the battery supplier in the world’s first project linking grid storage, electric vehicles, rapid recharging infrastructure and solar power. Other participants in the just-announced Japanese project include Mazda Motor Corp. (Symbol MZDAY) and Kyushu Electric Power, which trades in Tokyo under the symbol 9508.

Footnote: in Part 1 of this series, we explored the undiscovered potential of PFB Corp. (Symbol PFB), Vodafone Group (Symbol VOD), and Telefonica S.A. (Symbol TEF). For more please see: http://energytechstocks.com/wp/?p=2194.

Bill Paul is Managing Editor of EnergyTechStocks.com

DISCLOSURE: None

DISCLAIMER: This is a news article. Please read terms and policy.

December 10, 2009

Feel-Good Government Grants Leading Cleantech Astray

David Gold

Grants for smart grid projects. Grants for battery manufacturing lines. Loan guarantees for renewable energy project development. Grants to private companies for energy efficiency projects. And with each it seems that the cleantech world cheers. Yet for all our desire to create sustainability in our consumption and use of energy, this model of getting us there is not only unsustainable but is of questionable value.

I want to emphasize that I am speaking about government grants to the private sector where the government is not the end customer and where the grants are for implementation of projects that businesses may (or may not) have done otherwise as opposed to grants to conduct basic R&D. Projects like smart grid implementations, battery manufacturing lines, biofuels plants or industrial energy efficiency implementations that have represented the bulk of cleantech grants to the private sector this year. Instead of focusing on cultivating businesses that can sustain themselves via customers, government handouts have focused company time and money on lobbyists and grant writers. And if you haven’t noticed, the handouts are huge, with many in the tens of millions and even hundreds of millions of dollars for a single award. Some award winners, like ECOtality, are honest enough to admit that their efforts to secure government funding directly attributed to a drop in their revenues. For every company that wins a cleantech grant, there are as many as 10 times the companies that applied and lost. All those losers spent significant time and money chasing those funds and, in the process, neglecting their real business and real customers. Lately the discussion in board rooms often has concentrated more on how to win the next government grant and which lobbyist to hire than on how to build a successful and sustainable business.

At the most basic level, the goal of current U.S. energy policy should be to speed our transition to sustainable domestic energy consumption – a transition that would occur naturally as carbon-based energy sources declined but likely too slowly to avoid the environmental, economic and national security implications. Presumably, the concept behind hundreds of billions of dollars in grants to the private sector is to enable and encourage acceleration of this change. As such, it also must presume that government employees can select winners better than the private sector, do so without political influence, and that the projects being funded are absolutely ones that would not have occurred without government funding. Finally, those same government employees; 1) must be able to select projects that will help accomplish our goal and; 2) must either be able to continue to fund those projects or have effectively analyzed that a one-time grant will be sufficient to incentivize the private sector to take over from there.

My Democratic friends may scream at me, but those are an awful lot of largely unrealistic presumptions that defy the history of government grant programs to the private sector. (Synfuels and the National Institute of Standards and Technology’s Advanced Technology Program are just two examples.) And to add insult to injury, large amounts of the recent cleantech grant money handed will help the competitiveness of foreign corporations as it was awarded to U.S. subsidiaries or joint ventures of those companies (for example, hundreds of millions in battery grants involving LG Chem, Kokam, Itochu Corporation, BASF and Saft). While the government has long had a role in advancing basic R&D, the concept that the U.S. will jump-start, let alone build, a sustainable energy economy through government handouts for implementation of manufacturing plants, production facilities or enhanced utility grids is, quite simply, ludicrous.

Government grants to the private sector are great PR and make the cleantech public feel good. But they don’t provide quick economic stimulus to the economy (see Cleantech Stimulus Not Very Stimulating) and will not provide meaningful acceleration on the path to sustainable domestic energy consumption. In the end, the only way to have sustainable change is to have a change in the fundamental economics of energy – both in the cost of non-sustainable sources and in the regulatory infrastructure through which carbon based energy companies and utilities earn money. We all saw how quickly things began to change when oil hit $100 a barrel and how quickly they reverted when prices went back down. Reform the regulatory environment so that utilities can profit from conserving energy instead of from building power plants and watch how things change.

In my home state of Colorado, wind turbine manufacturer Vestas just announced it is furloughing all 500 workers at the plant it built not long ago. Why? Vestas notes the challenge of natural gas prices being so low that wind turbines can’t compete. I guess we need to borrow more money from the Chinese and other foreign governments to further increase our grants to the wind turbine market…or, we can focus on a sustainable solution.

Nothing can provoke an economic transformation more quickly than the free market appropriately motivated by profit. That, in fact, is largely how we got to where we are today with our reliance on carbon-based energy sources. And the most sweeping and powerful thing the government can do is to influence the profit motive for the private sector by changing energy economics. But that is a topic for another blog post. (And now my Republican friends can scream).

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

December 04, 2009

Hidden Gems? Why Green Investors Should Look at PFB, Vodafone And Telefonica

Part 1 of 2

Bill Paul

Looking for alternative energy stocks with undiscovered potential?

Who isn't?

Here are three possibilities (with three more to come next week). You can decide for yourself whether they are worth further investigation.

First up: PFB Corporation, which trades on the Toronto Stock Exchange under the symbol PFB. Calgary-based PFB is an energy efficiency play. The company makes insulating building products that it sells under branded names in commercial and residential markets in North America and Japan.

The company most recently reported third quarter net income of $1.6 million or 24 cents vs. $1.1 million or 16 cents, and nine months net of $2.5 million or 38 cents compared $1.1 million or 17 cents. Earnings rose significantly despite lower sales, a reflection of the difficult economy faced by all construction-related businesses.

What would seem to make PFB a hidden gem is management's demonstrated ability to control costs (and maintain the regular 6-cent-a-share divided payout) in tough economic times. With energy efficiency - especially in buildings - increasingly being recognized as by far the most cost-effective way to start greening the economy, PFB has hidden potential that might really blossom as the overall economy improves.

Next up: Vodafone Group Plc, whose ADRs trade on NASDAQ under the symbol VOD, and Telefonica S.A., whose ADRs trade on the Big Board under the symbol TEF.

Although they're already telecom giants, what gives Vodafone and Telefonica hidden potential is the role they appear destined to play in Europe's smart grid build-out.

By 2020 the British government plans to have a smart meter in every home under a program whose cost is expected to top $11.5 billion. (The rest of Europe may not be far behind.) This will require enormous amounts of data to be wirelessly transmitted from those smart meters back to Britain's energy companies. Vodafone and Telefonica (through its O2 unit) reportedly are negotiating to be the carriers of all that data, quite possibly through a new joint-venture firm.

While the payoff for investors won't be immediate, Vodafone and Telefonica could become huge long-term beneficiaries of the smart grid, which a number of communications experts now think will become as big as or bigger than the Internet.

DISCLOSURE: None

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

November 25, 2009

Smart Grid Sector Gaining Traction from Stimulus Funds

Digi International Positioned for Growth

by Joyce Pellino Crane

Caught between a maturing sector and a nascent one, Digi International, Inc., (Nasdaq:DGII) is stirring opposition among research analysts, who view its recent acquisitions as either a brazen entry into an emerging area, or a compensatory cover for poor performance.

Over the past five years, the company has ventured into the smart grid sector through several acquisitions of wireless and cellular technology companies.

One industry observer, who did not want to be quoted, said acquisitions artificially increase revenues during a down economy.  Another, who asked not to be identified, said the Digi acquisitions were not panning out, and it was unclear whether that was due to poor decisions or the economy.

But Jay M. Meier, senior research analyst at Feltl and Company said Digi’s growth will parallel the nation’s emerging smart grid.

“Everybody’s complaining that the company didn’t grow much between 2003 and 2007,” he said. “But Obama just announced $3.4 billion in matching grants in smart grid technology. It’s a whole new industry.”

Meier argued that the company has positioned itself as a one-stop shop for all digital transmission modalities, from blue tooth to broadband, and the fruits of its labor will be harvested as stimulus funds begin infusing the economy.

Digi International, a telecommunications sector company, has been moving into the smart grid space by supplying components to manufacturers of smart grid connectivity devices and solutions. Companies that buy Digi’s products integrate them into completed solution systems, much like Dell (Nasdaq:Dell) does when it builds a laptop. In addition, Digi sells industrial automation equipment, converter interfaces for utility company networks, and legacy equipment to healthcare facilities, and retail stores.

In October smart grid companies got a major boost when the Obama Administration announced $3.4 billion in grants from the 2009 American Reinvestment and Recovery Act for smart grid technology. The government money will be matched by industry funds, for a total public-private investment worth over $8 billion, according to the DOE. An analysis by the Electric Power Research Institute estimates that the implementation of smart grid technologies could reduce electricity use by more than 4 percent by 2030, according to the DOE. That would mean a savings of $20.4 billion for businesses and consumers around the country.

Meier expects Digi to benefit from the federal funds, but because it will take a while for the Energy Department to disperse the grants, he anticipates growth to begin by the middle of 2010. His price target is $16 per share.

“I’d like people to think about this as an investment and not a trade,” he said.

Share price was $7.90 as of Monday’s (Nov. 23) close.

Net sales for the preceding 12 months were $165.9 million as of fiscal 2009, ending September 30, down more than 10 percent from the same period a year earlier. But Meier noted, the plunge occurred during the global economic meltdown, which began in September 2008 and led the country into a recession that only now seems to be ending.

“The markets were in free fall, the banks were collapsing,” Meier said. “…and the stock bounced off $6.50 like bedrock.”

In an earnings conference call on October 29, Joe Dunsmore, Digi president and chief executive officer, said the revenue target for fiscal 2010 is $178 million, and $500 million by 2013, with smart energy products comprising ten to 20 percent of sales.

In September, Clean Edge, Inc., a research and publishing firm devoted to clean tech, included Digi as one of 29 pure-play and diversified companies to comprise the Nasdaq:QGRD, an index of smart grid infrastructure companies. To quantify, a company must have a global market capitalization of at least $100 million and exceed $500,000 in daily trading volume over three months.

“…the next evolution in our electric grid,” said Ron Pernick, managing director of Clean Edge, “will include the embedding of smart meters, controls, and networks to make the grid more intelligent, and the introduction of a two-way flow of electrons and energy storage to enable better integration of renewable power and energy efficiency.”

Smart grid is a term used to describe the pending transformation of the nation’s current power grid as utility companies, homeowners and businesses invest in new gadgets, transmission lines, connectivity and wireless devices that will upgrade how electricity reaches consumers and how it is consumed. The build-out is waiting for the smart grid market to gather steam, government cash to infuse the economy, and consumers to grasp the benefits.

In July, Fortune Small Business named Digi one of America’s 100 fastest growing small public companies.

The company’s 2009 annual report government filing says it has almost $76 million in cash, and Meier notes that Digi has not carried long-term debt at least since 2001.

“We think these levels create solid bases at which we recommend buying the stock,” he said, referring to the stock’s performance even during the economic crisis.

Joyce Pellino Crane writes at wordtrope.com/blog. She is a Boston Globe correspondent and a business technology analyst for Trender Research. Follow her on Twitter: JoyPellinoCrane.
She can be reached at joyce pellino crane at gmail dot com (no spaces.)

DISCLOSURE: No position.
DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

November 23, 2009

Is the New Smart Grid ETF GRID All That Smart?

Tom Konrad, CFA

First Trust Launched a Grid Infrastructure Exchange Traded Fund (ETF) on November 17th.  Although the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (Nasdaq: GRID) is labeled a "Smart Grid" ETF to capture popular excitement around smart grid technology, it covers the whole grid infrastructure sector.  This broader focus is good for clean energy investors.

I've been an advocate of investing in electric transmission and smart gird stocks since early 2007, and for almost a year now, a regular reader has been telling me to create a transmission ETF so he can buy it.  Now I don't have to: First Trust's new GRID ETF will do quite nicely.

griD Breakdown.PNGThe ETF's holdings are not those of a smart grid index.  The top holding, accounting for nearly one eighth of GRID by value, is SMA Solar (S92.DE), a leading German solar inverter company.  While I'm more enthusiastic about inverters than any other part of the solar sector, and it also makes sense to classify them as grid technology, it's quite a stretch to call them "Smart Grid."  Three other holdings, Power-One (PWER), SatCon (SATC), and Advanced Energy Industries (AEIS) also fall into this category.

The chart to the left shows a rough classification of the 29 holdings.  Overall, I found that only 23% of ETF assets were in smart grid technologies, and 34% were in older style grid infrastructure.  Solar, Wind, Energy Efficiency, and Electricity storage accounted for 11%, 9%, 6%, and 2% respectively.  The balance (Other - 15%) was the non-grid, non-green energy related businesses of these companies.  

None of these percentages are precise... such an assessment would have required sifting through company financial statements to determine what percentage of revenues or earnings came from each business.  Instead, the breakdowns are my best guesses based on my familiarity with the companies involved, many of which have been profiled in these pages.

Not Smart, but Not A Problem

I like the GRID ETF as part of a green energy port folio, despite "Smart Grid" may be a misnomer.   In fact, I like it better than I would if the fund were solely focused on Smart Grid companies.  While I'm a fan of Smart Grid stocks, so much so that I suggested that our new writer, Joyce Crane, do a series on smart grid companies, I think smart grid is too narrow a focus for an index or ETF.  GRID's much broader focus on electric grid infrastructure should bring much steadier and surer long term returns.

For instance, just before I heard about GRID's launch, I wrote an article explaining why transmission is so essential to renewable energy, and listing eight companies readers might consider.  Those, along with two I added as an afterthought in a comment, constitute 32% of the portfolio.  

Smart Grid Stocks

For readers interested in pure smart grid investments, take a look at the specific stocks that are almost totally light green on the left.  Of these, we've published recent articles on RuggedCom (RUGGF.PK, RCM.CN): One about the RuggedCom's business and the other on its attractiveness as a stock. Digi International (DGII) is profiled hereEchelon (ELON), EnerNOC (ENOC), and Comverge (COMV) are also worth considering.

Personally, I'll most likely purchase the ETF as a whole rather than individual stocks the next time I think the market  is attractively valued.  The advantage is instant diversification, and easy access to interesting foreign-listed firms SMA Solar (S92.DE), NGK Insulators (5333.JP), and Schneider Electric (SBGSF.PK, SU.FP), which together account for 28% of the ETF.

The Fund's expense ratio is currently capped at 0.70%.

DISCLOSURE: LONG PWER, SATC, RUGGF, ELON.

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.

November 20, 2009

Bold or Bogus? Digi International’s Move toward Smart Grid Technology

Research Analyst Bucks Naysayers

By Joyce Pellino Crane
Jay M. Meier may be out on a lonely limb, but the senior research analyst at Feltl and Company is unwavering in his enthusiasm for Digi International, Inc. (Nasdaq:DGII)Digi International

Meier is recommending Digi as a buy, insisting that the company is undervalued given its potential for growth in the smart grid sector.

“The company is woefully undervalued,” he said, “and it’s probably going to start growing in the second half of 2010 as evidenced by all the smart grid technology it has...”

But other research analysts are not so sure. I spoke with two who questioned whether the company’s six acquisitions since 2005 are panning out. One said that their products are tied to corporate enterprise spending, which has plummeted in the current economy. Smart grid purchases, he noted, can be put off until the economy improves because the nation’s power grid is functioning. The other noted that Digi has a catalog of legacy networking products, with none rising to the top as a big seller. Neither analyst agreed to speak on the record. The first said he stopped analyzing the company in December because it no longer fit with his coverage universe. The second said he was not well-versed enough on the company to speak about it publicly.

Meier acknowledged that his stance has spurred opposition from some industry observers.

“I understand my position is unique,” said Meier, “but I don’t believe that the bears have thought it all the way through. The smart grid didn’t exist when Digi started buying these connectivity companies.”

Smart grid is a term used to describe the pending transformation of the nation’s current power grid as utility companies, homeowners and businesses invest in new gadgets, transmission lines, connectivity and wireless devices that will upgrade how electricity reaches consumers and how it is consumed. The build-out is waiting for the smart grid market to gather steam, government cash to infuse the economy, and consumers to grasp the benefits.

Digi International, a telecommunications sector company, has been moving into the smart grid space by supplying components to manufacturers of smart grid connectivity devices and solutions. Companies that buy Digi’s products integrate them into completed solution systems, much like Dell, Inc., (Nasdaq:DELL) does when it builds a laptop. In addition, Digi sells industrial automation equipment, converter interfaces for utility company networks, and legacy equipment to healthcare facilities, and retail stores.

Naysayers argue that Digi has grown artificially from acquisitions.

“It’s true Digi has not grown organically in a meaningful way over the last few years,” said Meier. “However, they have acquired meaningful Intellectual Property around new transmission modalities, that makes Digi uniquely situated to provide the core transmission technology for the smart grid and other asset management verticals.”

Its acquisition of MaxStream, Inc., for $16.1 million in July 2006 blazed its entry into the wireless device networking market. The wireless solutions are focused on automated utility meter reading, oil and gas monitoring, remote control monitoring of commercial heating and air conditioning systems, fleet management, industrial controls, wireless sensors, and electronic signals. These products, according to Meier, are the foundation for future growth.

Meier noted that the company has publicly announced partnerships with Elster Metering, a manufacturer of smart grid meters, Itron, Inc., (Nasdaq:ITRI) a smart meter provider to global energy and water industries, Silver Spring Networks, a hardware and software provider of smart grid solutions, and Comverge, Inc., (Nasdaq:COMV), a provider of smart grid solutions. Digi will supply them with its wireless sensors and gateway technology as components.

In 2008, Comverge announced a partnership with Digi and Texas Utilities to offer smart thermostats to 2.1 million electricity customers. The gadgets will use the Zigbee communication standard chosen by the US Department of Energy for home area networks. Digi has a family of ZigBee products, pioneered by MaxStream, including gateways for home thermostats capable of connecting with utility providers over broadband or cellular technology. The ZigBee components will collect and transmit data to the utility company.

Meier touts Digi’s versatility, noting that it can supply all of the potential transmission modalites—satellite, ZigBee, celluar, blut Tooth, broadband, 802, and Wi-Fi in pre-certified modules.

“Digi is truly the only one-stop shop on the planet,” he said.

Coming next: An overview of Digi International’s financials (link broken until publication).

Joyce Pellino Crane writes at wordtrope.com/blog. She is a Boston Globe correspondent and a business technology analyst for Trender Research. Follow her on Twitter: Wordtrope. She can be reached at joyce pellino crane at gmail dot com (no spaces).

 

Digi International Acquisitions Since 2005

This timeline is intended as a supplement to the article: Bold or Bogus? Digi International’s Move toward Smart Grid Technology.

Source: The Investor Relations Group, New York, NY


April 2005 - FS Forth-Systeme GmbH/Sistemas Embebidos S.A. (FS Forth), providers of embedded modules based on the company's processors and NET+OS software, as well as other microprocessors with supporting embedded software.

May 2005 - acquired Rabbit Semiconductor® Inc. (formerly Z-World™, Inc.). The acquisition expanded Digi's embedded portfolio to include the Rabbit line of microprocessors and microprocessor-based core modules and Z-World single-board computers (now all sold under the Rabbit brand).

July 2006 - acquired MaxStream®, Inc. (MaxStream), a wireless device networking supplier. MaxStream supplies device manufacturers and integrators with reliable wireless modules and box products that allow customers to wirelessly monitor and control electronic devices. Typical applications include automated utility meter reading, oil and gas monitoring, remote control and monitoring of commercial heating and air conditioning systems, vehicle information access for fleet management, industrial controls, wireless sensors, and electronic signals. MaxStream was also a pioneer in the field of ZigBee®/802.15.4 wireless communications. The MaxStream acquisition significantly expanded Digi's wireless offering both with embedded modules and non-embedded wireless communications adapters. The products also play a key role in Digi's Drop-in Networking initiative. Effective October 1, 2007, MaxStream merged into Digi International Inc.

April 2008 - acquired Sarian Systems, Ltd. (Sarian), a designer, developer and manufacturer of advanced wireless/cellular IP-based routing equipment for mission critical applications. Sarian has a strong customer base in ATM connectivity, retail and payment systems connectivity, remote monitoring telemetry, lottery terminal connectivity and wireless backup of wired broadband connections.

July 2008 - acquired Spectrum Design Solutions, Inc. (Spectrum), a design services organization. Spectrum’s engineers have extensive experience in wireless technologies such as GSM, CDMA, GPS, Wi-Fi and proprietary RF as well as ASIC design, FPGA integration, embedded software and complete turn-key product development which allows them to address virtually any wireless development need.

July 2009 - Digi entered the market for satellite Subscriber Communicators for the ORBCOMM network with its recent purchase of MobiApps Holdings Private Limited (MobiApps). MobiApps is a developer of M2M communications technology, focusing on ORBCOMM satellite, cellular and hybrid satellite/cellular solutions. The acquisition of MobiApps by Digi will result in Satellite Communicators that are especially suited to applications that cross country and continental boundaries, providing connectivity in very remote locations, and providing mission critical wireless backup solutions when cellular coverage is insufficient. Digi will continue to produce the MobiApps M10, M100, M200 Subscriber Communicator models, as well as the custom designed and patented mixed signal application specific integrated circuit (ASIC), that it supplies to other module manufacturers.

November 18, 2009

The Case For Transmission, and Transmission Stock List

by Tom Konrad CFA

We cannot choose between transmission and renewable distributed electricity.  Local renewable generation requires long distance transmission to even out variations of supply.  Hence, both advocates of distributed renewables and large wind and solar farms should support transmission improvements.  Here are a few stocks which should benefit from such investments.

Shortly after I launched Clean Energy Wonk, Blogger took the site down because I made the mistake of including both the words "Cheap" and "Free" in the title of an article about Energy Efficiency.  Since it can apparently take up to 2 months for a human to actually check that a blog is not spam, I moved the Clean Energy Wonk domain to Wordpress.

I've now posted an article on the new Clean Energy Wonk making the case that distributed wind and solar need transmission to export excess power when they are operating, and to supply power when the wind does not blow or the sun does not shine.  Simply arguing that a state can produce enough renewable electricity locally to supply its needs does not mean that that electricity will show up at the right time, or even the right month.  Buying storage to bridge the gap would be prohibitively expensive.  I estimate that investments in transmission would cost 1/65th as much as the investments in electricity storage that they would make unnecessary. The long version on Clean Energy Wonk is called "Heretic Battles Strawman."

Because transmission is necessary for large scale renewable development, investors in transmission companies should be able to benefit from a large scale build-out of renewable generation without having to bet on a particular solar or wind company, or even a particular technology.  Our Electric Grid stock list is full of such companies.  These are my favorites:

WIRES:

CONSTRUCTION:

GRID OPERATOR:

  • ITC Holdings (ITC) is probably the safest way to play this sector, since, as a utility gird operator, most of its assets are subject to utility regulation, and hence earn a regulated return on equity paid for by utility customers.

DISCLOSURE: Long AMSC, PWR, BGC.

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.

 

November 15, 2009

Is Ruggedcom, Inc. as Solid as its Networks?

Tom Konrad, CFA

RUGGEDCOMOur recent article on Ruggedcom's (RUGGF.PK, RMC.TO) technology for a smart grid that's also robust against a number of threats such as cyberterrorism and electromagnetic pulses prompted a long-time reader to ask if we also think it's a good investment at these prices.

Good question.  As outlined in the article, Ruggedcom, Inc. has a robust business providing ruggedized routers for mission-critical networks, including electric utilities growing smart grids.  But not every great business is also a great stock.

What Makes a Great Stock

There are several things I look for in a great stock, and a strong business is only one of them.  They are:

  1. A good business.
  2. A strong balance sheet and cash flow that can allow the company to continue executing its business model when external financing is scarce.
  3. Competent and honest management with both an understanding of the business and a record of straightforwardness with shareholders and analysts. 
  4. A good value for the money.

Balance Sheet and Cash Flow

Based on Ruggedcom's Fiscal 2010 second quarter financial statements, released Nov 4, the company had $63M in current assets (those which can be turned into cash in less than a year) and $13M in current liabilities and negligible long term liabilities on September 30, 2009.  Cash from operating activities in the six months to September 30, 2009 was $652 Thousand, down from over $6M the year before.  

The large drop in operating cash flow is explained by large increases in sales and research staff, as well as negative exchange rate effects from the appreciating Canadian dollar, while revenues continue to grow despite the markedly difficult economy in Q2 and Q3 2009 when compared to the same period of 2008.  In addition to growing revenues, the company also continued to broaden its customer base over the last year.

Management is tapping the company's internal resources in order to take advantage of expected opportunities in the Electric Power and Transportation sectors.  Despite this, operating cash flow remains positive, and the company has not needed to tap the markets for external financing since before the beginning of the financial crisis, demonstrating the ability to execute without external financing.

Overall, I consider the company's balance sheet and cash flow to be excellent.

Management

The company as too new of a publicly traded stock for me to determine if management has a habit of puffing results to shareholders.  One sign of deceptive management practices are overly complex financial reporting structures.  When I reviewed the last quarterly and annual reports, they did not seem to me to be overly complex, giving me a generally positive view of management's honesty and straightforwardness.

Valuation

The company had 12.6M fully diluted shares outstanding at the end of the quarter, 6 month earnings of $0.15 and a share price of $16.60.  This translates into a P/E ratio of 55, which is extremely high, and would require phenomenal long term growth rates to be justified.  The company has about $5 per share in annual revenues, giving it about a 3.3 price to sales ratio.  This is not particularly out of line for a growth stock, but still higher than I am comfortable with.

Conclusion

Ruggedcom has a great business, a solid balance sheet, and I have found no reason to suspect management of incompetence or deception.  However, given the current valuation, I have no interest in buying more, and continue to hold my current stake only because I am hedged against overall market moves.  If a market decline were to lead to a significant drop in the stock price (as often happens with growth companies), I will look to acquire a substantial stake at that time, assuming the company's fundamentals have not also weakened substantially.

DISCLOSURE: Long RUGGF.

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.

November 11, 2009

Tres Amigas Proposes Three-way Transmission Link

by Michael Giberson

If completed, the Tres Amigas project will encourage renewable power development and efficient power flows.  Publicly traded wind power and superconducting cable company American Superconductor Corp. (Nasdaq: AMSC) is a large minority shareholder and the planned supplier.

Tres Amigas LLC has proposed building a three-way superconducting HVDC link between the three separate power systems that span the United States and much of Canada: the Eastern Interconnection, the Western Interconnection, and the Texas (ERCOT) Interconnection.  The three systems currently are linked by a small number of separate and relatively unimportant DC interties.  The proposed three-way link would allow substantial quantities of power to be moved among the three systems.gridamigas.GIF

Public statements by Tres Amigas[pdf] and partner American Superconductor Corporation (Nasdaq:AMSC) highlight the way the project can help foster development of renewable power in the region — and it would be helpful for accommodating the large amount of wind power capacity expected to be built in the area — but as a practical matter the project should be a good deal for all kinds of power plant developers and for power consumers.  The American Superconductor news release indicates that the company acquired a minority equity interest in Tres Amigas, LLC for $1.75 million in cash and stock, and the company will hold one of four seats on the Tres Amigas board of directors.  Tres Amigas is also supported by Alt Energy, LLC, a Connecticut-based investment and advisory firm.

The project is as a very early stage, and not all financing has been secured.  In addition, numerous federal and state regulatory approvals will be required. Recent news reports indicate that Tres Amigas CEO Phil Harris has been encouraging New Mexico landowners and energy developers to be prepared to offer supporting statements to regulators when the appropriate time comes.  (Links to several other early reports are in this post from Knowledge Problem on the Tres Amigas announcement.)

Basic economics tells us increasing trade opportunities between markets of any kinds tends to increase overall economic efficiency.  In electric power systems the benefits from transmission links and increased trade can include more efficient use of generation capability, increased system stability, and the ability to economize on stand-by reserves.  More efficient use of generation results when the joined systems can reduce reliance on high cost peaking units by importing cheaper power from their neighbor instead.  The joined system will have more generators available to exert stabilizing influences in response to short term disturbances, aiding reliability.  In most conditions, each of the systems should be able to safely reduce the quantity of reserves held for reliability, too, when transmission interconnection capability is increased.

A more complete analysis would have to consider the costs of the link, the efficiency of the scheduling process, the ability to share reserves, and other costs and benefits.  The key to finding a benefit comes from at least a minimal amount of diversity among the interconnected systems.  If the systems have identical generation characteristics, costs, load profiles, and coincident peak loads, then the gains from trade will be modest.  Differences among the system open up opportunities to benefit from trade.

In a case such as the Tres Amigas proposal, estimating the size of the benefits available will require extensive modeling of the three power systems to be connected, including generation and consumer load characteristics, as well as detailed modeling of the innovative three-way superconducting HVDC link between the three systems.  

(Some additional observations with some links to economics articles are available in this Knowledge Problem post on the economics of transmission interconnection.)

Distribution of benefits from trade between power systems

Generally, increased trade between regions should tend to equalize prices across the regions, meaning that consumers in the formerly high-priced regions would see lower prices, but consumers in the formerly low-prices regions may see higher prices.  In certain conditions it is possible that efficiency gains would allow consumers in all regions to see lower prices.

The producer’s story is approximately the flip side of the consumer’s story.  As increased trade tends to equalize prices, producers in the formerly high-priced areas would see lower prices, while prices in formerly low-priced areas would see higher prices.  The typical expectation is lower prices on average.  High cost generation would become less profitable and may be driven from the market.  Lower cost generation will run more frequently, but may earn lower profits given lower average prices.

Yet, with stronger interconnections and flexible trading rules between regions, each area should be less likely to need to resort to costly emergency procedures to manage the occasional stressful situations that arise in power systems.  The costs avoided represent savings to consumers, but not necessarily profits sacrificed by generators since not every emergency is accompanied by high power prices.

Benefits for renewable energy

The portions of the three interconnections near the Tres Amigas site feature good wind and solar power resources, and Tres Amigas has been pitched as a “renewable energy hub.”  Certainly, once power is put onto the transmission system there is no distinction between renewable and fossil-fueled or other electric power.  Yet there are reasons to believe that renewable power plants will see a bit more benefit than traditional dispatchable generating resources.

Linking renewable resources together over larger areas tend to reduce the net variability in output experienced by the grid, since wind and solar conditions at different sites are not perfectly correlated.  In addition, the degree of correlation tends to fall the further the resources are from each other.  The ability to shift power from region to region will therefore tend to reduce the in-system accommodations needed to compensate for renewable power output fluctuations.  So if Tres Amigas is built, the three interconnections should be able to accommodate wind and solar power resources at lower cost, with the result that more renewable power generation is likely to be built in the area.

Recent news reports indicated the possibility of grid-connected battery storage as a component of the Tres Amigas project, which would further enhance the projects ability to promote low marginal cost generation (including nuclear, wind and solar) while also supplying low-cost short term energy balancing services (and so not requiring additional balancing services from natural gas units).  Much would depend on the battery design, and no details on the possible battery component have been reported.

Challenges the Project May Face

NIMBY: Transmission projects tend to face a number of challenges, and an innovating proposal like the Tres Amigas project may face more challenges than more traditional projects.  Transmission projects tend to offer benefits to generators at one end and consumers at the other end, but few benefits to those landowners and communities that only see the transmission lines.  While the Tres Amigas project itself will be relatively contained and will offer direct economic benefits to the community hosting the facility, the project will only be valuable to the extent it is linked to upgraded transmission lines in each of the three regions.

ERCOT is already developing upgraded transmission lines that will come near the proposed Clovis, NM, site, and the regional transmission system operator in the part of the Eastern Interconnection that would be linked to Tres Amigas is evaluating a number of plans for the area.  Plans in the Western Interconnection are not as far along in the area, but the support of the New Mexico state government for the project may be seen as an encouraging sign.  Commonly seen NIMBY-based opposition to transmission has tended to be muted in the area as transmission expansion is seen as aiding in the development of wind power projects, and such projects are seen as bringing significant local economic benefits.

TEXAS: Because Tres Amigas would result in expanded wholesale power trade between ERCOT and power systems outside of the state of Texas, some observers have suggested the proposal will run aground on federal-state jurisdictional issues.  The Texas Interconnection managed by ERCOT is wholly within Texas and predominantly under the jurisdiction of the PUC of Texas and Texas state law.  Texas policymakers have devoted significant resources to maintain the state’s authority over the system, and it is believed by many observers that Texas policymakers will veto any proposal that would undo the state’s jurisdiction over ERCOT and the Texas Interconnection.

Current links between ERCOT and out-of-Texas power systems are very small, relatively speaking, and have been allowed without significant change to state jurisdiction over the system.  The large scale of trade possible under the Tres Amigas proposal may invite FERC to reconsider the current division of jurisdictional duties.  Tres Amigas is proactively seeking an opinion from FERC stating that the project would not upset existing jurisdictional boundaries around ERCOT.

TECHNICAL: Two kinds of technical issues must be overcome before the Tres Amigas can deliver on its potential, the first involves the application of American Superconductor’s technology (profiled here) and the second involves development of the right operating practices.  American Superconductor has been built on the promise of transmission efficiencies from use of superconducting materials.  After over 20 years in business, the company turned its first profit in the last quarter of 2008.  That profit was only the result of recent acquisition of a company manufacturing parts for wind turbines.

Other issues are more a matter of business systems design.  Tres Amigas will need scheduling rules that facilitate the flow of power from where it is most available to where it is most needed.  A key problem arises in the need to simultaneously coordinate a power transaction with matching transmission capability.  Power systems are becoming increasingly efficient at coordinating the dispatch of generating resources and flows of power with the systems, but scheduled flows between systems get accommodated by ad hoc rules which are not as efficient.

In principle, a unified system dispatch would efficiently coordinate use of generation and optimize power flows, including power flows across regional borders.  However, given extensive differences in power systems and operational procedures among the three interconnections, a unified system dispatch likely would not work.  Nonetheless, some explicit coordination of trade between regions can yield substantial efficiency gains while allowing individual systems to maintain diverse operating procedures.  The current best approach along these lines is termed “market coupling,” with a tri-lateral market coupling process now in place among the power markets in the Netherlands, Belgium, and France.  (Additional discussion and links are available in this Knowledge Problem post on market design issues.)

Conclusion

TRESAMIGAS L.L.C The Tres Amigas project is innovative proposal that faces considerable barriers.  To some extent the proposal is ahead of its time, but given how long it will take for complementary transmission lines to be built in the three interconnections, it is probably necessary to launch the project “ahead of its time,” so that the necessary coordination can be done.

How far ahead of its time is it? The public remarks so far are a little light on the timing. A news release from the New Mexico State Land Office [pdf] reports that the current lease with Tres Amigas gives the company two years to evaluate the proposed site.  That news release suggests that power will be flowing “by 2014.”  Given the speed at which regulatory processes move and the speed at which transmission planning and development usually moves, five years strikes me as a very optimistic projection for Tres Amigas.  Achieving the full vision laid out in early announcements ­ 5 GW transfer capability into or out of all three interconnections ­ could easily take ten years, or more.

With innovation comes a certain amount of uncertainty.  Currently the links among the three systems are almost non-existent, so any increase is likely to offer benefits.  We will learn the size the benefits, and at what cost they can be achieved as new information emerges over time.  

Michael Giberson is an instructor and research associate at the Center for Energy Commerce at Texas Tech University's Rawls College of Business, blogs on energy economics and other topics at Knowledge Problem.

November 10, 2009

AMSC’s “Secret Sauce” Starts to Simmer

Market Heats Up for Disruption-Resistant Superconductors

By Joyce Pellino Crane

When electrical transmission cables and tree branches glisten in brilliant sunlight, drop your camera and run to the nearest hardware store for a generator.

I learned this hard lesson in December after an ice storm left downed wires, branches and debris throughout several counties northwest of Boston and across six other northeastern states, leaving one million without electricity, some for as long as two weeks. It will be a long time before I forget what it’s like to wrap holiday presents by a smoky fire with gloves on.

American Superconductor’s (AMSC: Nasdaq) wires run underground inside cable systems that are less susceptible to nature or terrorist attacks than the current technology. A high temperature superconductor has almost no resistance to the flow of electricity and is imbued with the capacity to transmit 150 times the power of copper wires. A key characteristic of AMSC’s superconductor technology is its ability to self-heal by automatically isolating dangerous power surges. The feature allows a smart grid to survive attacks and natural disasters without impacting the rest of the chain.

Today’s aged and inadequate power grid is linked by copper and aluminum wires that will burn or melt if too much power is pushed through them. In August 2003, a cascading voltage collapse plunged 50 million North Americans into darkness. Eight US states, from Michigan to Massachusetts, as well as the Canadian province of Ontario, were without power, in some cases, for four days. The blackout cost the US government as much as $10 billion. Canada suffered a net loss of 18.9 million work hours.

AMSC’s superconductor wires are composed of a crystalline compound of yttrium barium copper oxide (YBCO). The company, based in Devens, Mass., uses proprietary techniques to whip up its “secret sauce,” according to Jason Fredette, AMSC director of corporate communications. That technology is now being tested in Columbus, Ohio and Holbrook, NY, where a half-mile of superconductor cable in each location are sending electricity to households and businesses. In Holbrook, the Long Island Power Authority is feeding 574 megawatts of power to 300,000 homes with a 138,000 volt system. The Columbus pilot is bringing electricity to 8,600 residents and businesses through American Electric Power’s Bixby substation. Both programs are funded, in part, by the US Department of Energy.

“Now other electric utilities from the US and overseas are seeing that the superconductor cable system isn’t much different from the regular cable system,” Fredette said, “so that gives them the confidence to try it.”

Commercial applications of AMSC’s superconductor technology are just beginning.

AMSC and LS Cable, Ltd., a Korean manufacturer, recently agreed to co-market 10 kilometers of commercial superconductor cable in power grids over the next five years. LS will sell cable systems containing the wires to utility companies across the globe.

Last month, the Tres Amigas Project announced it will use AMSC’s superconducting technology to link the three major US power grids: the Eastern Interconnection, the Western Interconnection and the Texas Interconnection. The arrangement will give renewable energy companies the means to sell power through a superconductor pipeline for the first time. [Ed. Note: We'll have an in-depth article on Tres Amigas tomorrow.]

Superconductor electricity pipelines, according to Fredette, are underground, easy to site and access, highly efficient and controllable, offer greater security and avoid complex cost allocation issues for interstate transmission of power in contrast to competing technologies.

Over the past 52 weeks share price rose from $8.22 to $37.58 each, according to Bloomberg.

Revenues are expected to climb to about $300 million by the end of the current fiscal year on March 31, according to Fredette, as compared to $183 million in fiscal 2008. Fiscal 2009 second quarter revenues jumped to $75 million from $40 million for same period a year earlier. Wind power is the company’s other core market.

“We’re still in the midst of a very rapid growth phase,” he said, “and we see that continuing for the foreseeable future.”

Joyce Pellino Crane writes at wordtrope.com/blog. She is a Boston Globe correspondent and a business technology analyst for Trender Research. Follow her on Twitter: Wordtrope. She can be reached at joycepellinocrane-at-gmail period com>

November 05, 2009

Fending Cyber Threats with a Fortress

RuggedCom Fortifies the Smart Grid and Captures the Substation Market

By Joyce Pellino Crane

    I wonder how many utility executives lie awake at night worrying  about cyberthreats to their electricity substations.

    If you’ve ever gone a few days without electricity in your home,  you’ll quickly realize how minimal life becomes.  Working on your computer—the speedway to higher thinking and creativity— is impossible.

    Watching television, charging your cell phone, keeping food frozen, and  micro-waving popcorn, can no longer be done. Every task requires  planning and, much more physical labor—consider what it would take  to wash and dry your laundry. Without electricity, all business and  governmental systems would stop cold. Imagine a world without  money transactions. Payrolls couldn’t be met, loans would languish, and interest accruals couldn't be calculated. This is the stuff of a great  Hollywood thriller.RUGGEDCOM

     But for RuggedCom, Inc., (RUGGF: Pink) a manufacturer of  ruggedized communications equipment for utility substations,  it is a serious reality. The company’s products are designed for  the smart grid, with interconnectivity options and security features  necessary for regulatory compliance. Utility customers are able to  prevent accidental or malicious service disruptions by establishing  an electronic security perimeter with its routers and switches around  critical infrastructure.

     RuggedCom designs its routers, switches, serial servers, and  media converters to withstand extreme weather conditions such as  heat waves and the negative effects of natural phenomenon like lighting  strikes. The products are also immune to radio and electro magnetic interference.

     In March a major US utility company agreed to purchase $2 million  worth of RuggedSwitch and RuggedRouter products for about 300  substations over the next four years. The units will be used to create secure communications networks for use in substation automation  and smart grid applications, according to a company press release,  dated March 17. The document did not disclose the name or location of the utility company.

      A router is a high-speed highway for transporting packets of  information among a network of computers, and a switch acts  as a bridge between the highway segments. Similar to the Internet, the smart  grid is designed to isolate disruptions and prevent cascading events.

      So far, RuggedCom has lassoed 40 percent of the worldwide  substation market, according to Manish Grigo, research analyst at Toll Cross Securities, Inc., in Toronto, because the hardware  is outperforming that of its competitors. He recommended the  company’s stock as a buy.

      RuggedCom of Woodbridge, Ontario,  competes with Cisco Systems (CSCO: NASDAQ), Inc., of San Jose, Calif., and GarrettCom, Inc., of Freemont, Calif., among others.

      The company’s fundamentals are strong, said Grigo,  even though share price has fluctuated lately. Over the  past 52 weeks, share price soared to $26.29 from $8.87,  according to Bloomberg—an 86 percent return.

     “I would expect some lumpiness along the way,” Grigo  said. “But if someone is in it for the long-term, you definitely  will benefit from this stock.”

      Utility companies test equipment extensively before  making a purchase, he said, and typically  stagger their purchases over several years. Therefore, once a company settles on a supplier, utility officials  will likely continue to buy from it.

     “They don’t upgrade their entire network all at once," he said.  “They do it over 5 and ten year periods, so they will be customers for the long haul.”      Company officials will announce fiscal 2010 second quarter  results, ending September 30, today. (Nov. 5) At the end of its first  fiscal quarter on June 30, profits were up 26 percent from the  comparable quarter a year earlier and net income was $0.9 million,  representing the seventeenth consecutive quarter of profitability,  according to a company announcement.

      “Customers are spending millions on RuggedCom’s technology,”  Grigo said. “To me that speaks volumes about their product.”

    Joyce Pellino Crane writes at wordtrope.com/blog. She is a Boston Globe correspondent and a business technology analyst for Trender Research. Follow her on Twitter: Wordtrope.

November 04, 2009

CyberTerrorism and the Smart Grid

Is There a Crack in the (Fire)Wall?

Joyce Pellino Crane

Last December when 325,000 Massachusetts homes went dark for days on end, I finally understood the transformative powers of electricity.

For starters, my hair went limp when the blow dryer didn't turn on, my laundry piled high, my food froze in the garage, and my stove was stone cold. After five days of living like Pioneer Woman, I got tired of waiting for the utility company to restring snapped cable wires, and checked into a hotel.

The nation's electric power grid is a hodgepodge of exposed wires, transformers, switching stations, antiquated meters, and power generators. Much of it has not been updated since the 1940`s when it was built for coal-fired technology. Its vulnerability was underscored last winter when as many as one million people, living in seven northeastern states, lost power to an ice glazing under frigid temperature conditions.

A push by the Obama Administration to transform today's sagging lattice into a smart grid capable of telling consumers about their energy usage and of powering their hybrid vehicles, is giving rise to new hardware. The forthcoming smart grid will be designed for energy efficiency and real-time communications, characterized by smart meters that monitor and regulate energy consumption on the spot, substations with intelligent switches and routers, and new transmission cables with significantly greater capacity then the existing ones.

But the technologies that smarten up the grid, will also make it susceptible to viral attacks, privacy issues, and other security breaches, say some industry observers, and the cost of transforming it will far outpace the government dollars earmarked for its upgrade.

 The net cost of transforming from the current grid to a smart one is estimated to run as high as $165 billion over 20 years, or $8.3 billion per years, according to a 2004 report by the Electric Power Research Institute, an independent, non-profit research company. That makes the $11 billion allotted for development of smart grid technologies from the government's 2009 stimulus package a drop in the bucket and raises questions about the return on investment.

 But the networking effects of the power grid promises revenue growth. The same EPRI report estimated the benefit-to-cost ratio to be at least four-to-one, and listed the smart grid's attributes as: increased power flow, self healing characteristics for a quick recovery, improved power quality, reduced frequency and duration of outages, reduced power plant emissions and other environmental impacts, a safer work environment for utility employees, a better quality of life for North Americans, and increased productivity.

Several companies are manufacturing smart grid technologies that will help accomplish these characteristics. Over the next few days, I'll take a look at two (RuggedCom, T: RCM, Pink:RUGGF, and American Superconductor, NASDAQ: AMSC), and tell you how their technologies are contributing to the creation of a smart grid.

Coming tomorrow:  An interview with a Toronto-based research analyst for RuggedCom, Inc., of Concord, Ontario. (Link broken until publication.)

Joyce Pellino Crane writes at wordtrope.com/blog. She is a Boston Globe correspondent and a business technology analyst for Trender Research. Follow her on Twitter: Wordtrope.

October 15, 2009

EESAT And Energy Storage Opportunities On The Smart Grid

John Petersen

Last week I appeared as a luncheon speaker at EESAT 2009, a biennial international technical conference sponsored by the DOE, Sandia National Laboratories and the Electricity Storage Association that focuses on storage technologies for utility applications. The conference included dozens of high-level technical presentations from storage technology developers and was far and away the best-organized event I've ever attended. The only notable absence was a large contingent of buyers, which left some participants wondering whether they were preaching to the choir. Nevertheless, I was encouraged by rapid growth in the number and size of utility-scale demonstration projects and the growing body of proof that storage will be a critical enabling technology for the smart grid. I left Seattle more convinced than ever that the opportunities in grid-based energy storage are huge, but that successful investing will require study, patience, diligence and a firm grasp of economics.

The theme of my presentation was that some developers of energy storage devices are destined to follow in the footsteps of Arkwright, Fulton, Vanderbilt, Carnegie, Rockefeller, Ford, Moore, Gates, and Brin, and become the next generation of industrial legends for one simple reason: we're entering an era where 500 million people in North America and Western Europe can no longer lay claim to the lion's share of global resources because the other 6 billion inhabitants of our planet know for the first time that there's more to life than mere subsistence. While each of them may only want a small piece of the pie, the law of large numbers will give rise to explosive increases in global demand for everything and the only way to avoid armed conflict or catastrophic environmental damage is to minimize waste in all its forms, beginning with energy.

On the cautionary side I returned often to the unpleasant reality that most grid-connected storage applications won't pay under current economic conditions because the spread between the cost of storage and the value of storage remains narrow. That cost-benefit equation is changing rapidly as energy costs rise and renewables are added, but as long as waste is cheaper than storage, waste will prevail. The following graph comes from a November 2004 presentation by John Broyes of Sandia National Laboratories that provided an overview of the DOE's Energy Storage Systems Program. The chart focused on the California utility market and showed the clear inverse relationship between the installed cost of energy storage systems and total demand for those systems. It merits more than a passing glance from investors who want to know where the business is (see p. 11 of the presentation for an expanded version).

2004 Sandia.png

While the graph contains a wealth of information on the wide variety of potential uses for storage in the utility market, the most important lesson for energy storage investors is price sensitivity. When total installed costs for energy storage systems are $1,000 per kW or higher, demand for storage is almost insignificant. As installed costs fall into the $600 per kW range, the number of cost-effective utility applications soars. I've been told that an updated version of the graph is in the works and will be released shortly. You can bet that I'll be among the first to write about it.

There were several EESAT presentations that focused on important but expensive frequency regulation technologies that are priced beyond the high-range of the graph. Over the last year, demonstration systems from Beacon Power (BCON), Altair Nanotechnologies (ALTI) and A123 Systems (AONE) have shown a remarkable ability to respond to regulation signals in microseconds and provide up and down regulation at speeds that traditional systems can't even begin to match. Based on estimates from the PJM Interconnection, one of the independent system operators that manage the U.S. grid, national demand for frequency regulation installations is on the order of 6,000 MW and could be much higher if flywheel and battery systems prove capable of handling longer duration load ramping intervals. The ongoing tests are not conclusive because the new systems have not been in service long enough to establish their useful lives, but the preliminary results are promising.

There were also several EESAT presentations that dealt with more mundane energy storage applications that were priced in the mid-range of the graph. Those projects ranged from the use of flow batteries at cellular telephone installations in Africa to a recently completed 12-year demonstration where Exide Technologies (XIDE) used lead-acid batteries to effectively eliminate the need for diesel fueled backup power on a remote island where the primary power source was renewable. Yet another presentation showed how computer analysis of satellite maps was being used to identify new locations in Ireland for pumped hydro, a technology that generally falls in the low-range of the graph but is commonly believed to have limited potential because most of the desirable locations are already developed.

Overall, the most important takeaways from EESAT were that from a utility perspective:
  • Storage is the economic equivalent of a dispatchable generating asset;
  • Installed cost and reliability will be the primary drivers of decisions to implement storage solutions;
  • Maintenance and cycle life will be secondary decision drivers;
  • An optimal smart grid configuration will need storage equal to at least 5% of peak system load; and
  • As renewables become prevalent, storage will become increasingly critical to grid stability.
In Energy Storage on the Smart Grid Will Be 99.45% Cheap and 0.55% Cool, I explained that the required annual storage build in the State of California was estimated at 500 MW per year for the next decade. Of this total, 50 MW would need to be fast storage in the form of flywheels and Li-ion batteries and the 450 MW balance would be 4 to 6 hour storage in the form of pumped hydro, compressed air, flow batteries and advanced lead acid batteries. When the California numbers are scaled up to a national level, they translate to billions in new annual demand for as far as the eye can see. When you add in billions in new demand for transportation, it's clear that the sector isn't even close to ready for the near-term demands. To compound the problem, essential raw material supply chains aren't ready either.

In preparation for my EESAT presentation, I spent a good deal of time analyzing how the energy storage industry of today is different from the industry that existed a few years ago. My most important conclusion was that energy storage devices are rapidly evolving from minor components in high-value durable goods to stand-alone end user products. As a result, the cost of energy storage is rocketing from less than 5% of product cost in the case of portable electronics to more than 50% of product cost in the case of an EV like the Tesla roadster. When you get into the utility arena, the storage devices are the products and represent 100% of the product costs. Since consumers generally have higher payback expectations and shorter investment horizons than utilities, I believe consumer price sensitivity will be very high notwithstanding the current flood of optimistic stories, speeches and reports from the mainstream media, politicians and environmental activists.

While some of the stock market valuations in the energy storage sector reflect the emerging reality that energy storage is and will remain a highly price sensitive product, others do not. As a result, we have a weird market dynamic where Enersys (ENS), the world's largest manufacturer, marketer and distributor of industrial batteries, trades at a 50% discount to a newcomer like A123 Systems (AONE); and Exide Technologies (XIDE), the world's second largest manufacturer of OEM automotive batteries, trades at a 28% discount to a newcomer like Ener1 (HEV). While the valuation disparities might be justified if either of the newcomers had a technology that would displace the established leaders or significantly erode their revenues or margins, that outcome can't be expected in the foreseeable future because the newcomers are focused on far more expensive products for markets that don't even exist yet.

Over the last fifteen months I've written 92 blog entries that focus exclusively on the energy storage sector; the established and emerging energy storage technologies; and the principal competitors in the industry. My recurring simple hypothesis has been that cheap energy storage will beat cool energy storage in the market and that companies that manufacture objectively cheap products will experience far more rapid and sustained stock price growth than companies that are developing objectively expensive products. Over that time, my personal trading account that includes Active Power (ACPW), Enersys (ENS), Exide Technologies (XIDE), ZBB Energy (ZBB) and Great Western Minerals Group (GWMGF.PK) has gained over 300%. Nevertheless, I think I've finally reached a point where I've said most things that can be said. Accordingly I plan to slack off a bit and write in response to current events instead of trying to maintain a regular schedule.

Over the next decade, I believe that every energy storage company that brings a product to market will have more business than it can handle. Nevertheless, I believe that companies that have attained lofty market valuations based on ambitious plans to develop exotic products are likely to trade flat or decline in price while the companies that have less ambitious goals and less expensive products have substantial upside potential.

My favorite short-term holding is ZBB Energy (ZBB) because its ZESS 50 and ZESS 500 flow battery systems are market ready and carry an attractive mid-range price while its market capitalization of $15.3 million is but a small fraction of the peer group average. My favorite mid- to long-term holding is Axion Power International (AXPW.OB) because its first generation PbC batteries are in production and have been delivered to select end users for testing, the PbC battery promises a cheap solution for a wide variety of mundane energy storage applications and Axion's market capitalization of roughly $80 million is well below the peer group average.

The only thing that will prove me right or wrong is time.

DISCLOSURE: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its stock. He also has small long positions in Active Power (ACPW), Enersys (ENS), Exide Technologies (XIDE), ZBB Energy (ZBB) and Great Western Minerals Group (GWMGF.PK).

September 24, 2009

Climate Change & Corporate Disclosure: Should Investors Care?

Charles Morand

On Monday morning, I received an e-copy of a new research note by BofA Merrill Lynch arguing that disclosure by publicly-listed companies on the issue of climate change was becoming increasingly "important". The note claimed: "[w]e believe smart investors and companies [...] will recognize the edge they can gain by understanding low carbon trends." I couldn't agree more with that statement.

It was no coincidence that on that same day the Carbon Disclosure Project (CDP), a non-profit UK-based organization that surveys public companies each year on the state of their climate change awareness, was releasing its latest report at event organized by BofA/ML in NYC.

I am fairly familiar with the CDP, having worked on one of the reports in 2006. In a nutshell, the CDP sends companies a questionnaire covering various topics such as greenhouse gas (GHG) emissions, programs to manage the identified risks of climate change, etc. (you can view a copy of the latest questionnaire here). The responses are then aggregated and made into a publicly-available report.

The CDP purportedly sends the questionnaire on behalf of institutional investors who are asked to sign on to the initiative but have no other obligation. The CDP currently claims to represent 475 institutional investors worth a collective $55 trillion. Not bad!

Putting Your Money Where Your Signature Is?

Despite their best efforts, initiatives like the CDP or the US-based CERES are mostly inconsequential when it comes to where investment dollars ultimately flow. Investors are asked to sign on but are not required to take any further action, such as committing a percentage of assets under management to low-carbon technologies or avoiding investments in companies with poor disclosure or that deny the existence of climate change altogether.

Case in point, the latest Global Trends in Sustainable Energy Investment report found that, in 2008, worldwide investments in "sustainable energy" totaled $155 billion. That's about 0.28% of the $55 trillion in assets under management represented by CDP signatories. A mere 1% commitment annually, or $550 billion for 2008, would substantially accelerate the de-carbonization of our energy supply, probably shrinking the time lines;we're currently looking at in several industries to years rather than decades.  

And that's ok. By-and-large, investors are investors and activists are activists. In certain cases, investors can be activists, either from the left side of the political spectrum with socially-responsible funds or from the right side with products like the Congressional Effect Fund. But overall, most sensible people want investors to be investors.

That's because the function that investors serve by being investors rather than activists is a critical one in a capitalist system - they force discipline and performance on firms and their management teams. By having to compete for capital with other firms in other sectors, clean energy companies have an incentive to crank out better technologies at a lower cost, and that process will have positive implications for all of society in the long run.

The problem with the CDP is that it's really an activist organization parading as an investor group. If the Sierra Club were to go around and ask Fortune 500 companies if they wanted to be hailed as environmental leaders in a glossy new report with absolutely no strings attached, I bet you anything they would get 475 signatures in a matter of days. And so it goes for CDP signatories - institutional investors the world over get to claim that climate change keeps them up at night while not having to deploy a single dime or alter their asset allocation strategies.

Approaching Climate Change Like An Investor

Someone approaching climate change like an investor - that is, as a potential source of investment outperformance (long) or underperformance (short or avoided) - isn't likely to care for activist campaigns aimed at forcing large corporates to disclose information on the matter; in fact, they may prefer less public disclosure to more.

That is because one of the greatest asset an investor can have is an informational advantage. In the case of climate change, those of us who believe that it's real and who think they can put money to work on that basis have a pretty good idea where to look and what to look for - we don't need the SEC to mandate disclosure. Those who think it's one giant hoax couldn't care less - they don't need the SEC to get involved, either. Yet this is where such campaigns are going, according to the BofA/ML report.

I like to think of climate change as an investment theme in terms of three main areas: (1) Physical, (2) Business, and (3) Regulatory. All three areas present investment risks and opportunities.

Opportunity Risk
Physical DESCRIPTION: Companies that stand to gain  from strengthening or repairing the physical infrastructure because of an increased incidence of extreme weather events or a changing climate. Examples include electric grid service companies such as CVTech Group (CVTPF.PK), Quanta Services Inc (PWR) and MasTec Inc. (MTZ)


TIMELINE
: Medium-term   
DESCRIPTION: Companies that stand to be negatively impacted by more frequent and more powerful extreme weather events, or by a changing climate. Examples include ski resort operators, sea-side resort operators and property & casualty insurers.  




TIMELINE
: Long-term
Business DESCRIPTION: Companies that provide technologies and solutions to help reduce the carbon footprint of various industries, be it power generation, transportation or the real estate industry. Renewable energy and energy efficiency are two obvious examples.




TIMELINE
: Immediate     
DESCRIPTION: Companies that make products that increase humanity's carbon footprint and that could fall out of favor with consumers on that basis. Examples include car makers with a large strategic and product focus on SUVs and other needlessly large vehicles.




TIMELINE
: Medium-term
Regulatory DESCRIPTION: Firms that have direct positive exposure to the regulatory the responses to climate change enacted by governments. Examples include firms that operate exchanges or auction/trading platforms for carbon emission credits such as Climate Exchange PLC (CXCHY.PK)  and World Energy (XWES).


TIMELINE
: Near-term
DESCRIPTION: Companies that are in the  regulatory line of fire for carbon emissions. Coal-intensive power utilities are a good example, as are other energy-intensive industries that might have a limited ability to pass costs on to consumers because of high demand elasticity or fierce competition.



TIMELINE
: Near-term 

This categorization provides a high-level framework for thinking about what may be in store for investors as far as climate change goes. However, with the exception of Business/Opportunity and Regulatory/Opportunity, the investment case is not necessarily clear-cut and requires some thinking.

For instance, oil would seem like a perfect candidate for the Business/Risk category were it not for another major and more powerful price driver: peak oil. As for Regulatory/Risk, the European experience thus far has shown how open a cap-and-trade system is to political manipulation, and firms there have been able to withstand the regulatory shock more because of achievements on the lobbying side than on the operational side. That is why I have stressed in the past that understanding emissions trading was more about understanding the rules and the politics than about understanding the commodity.

Nevertheless, these trends are worth following for people who: 1) like investing and 2) think that climate change is not the greatest hoax ever perpetrated on the American people. For instance, CVTech Group (CVTPF.PK), a small Canadian electrical network services company, reported that in fiscal 2008 around 58% of its annual revenue increase (C$23.0 MM) was due unscheduled electricity infrastructure repairs as a result of hurricanes in Texas, Louisiana, North Carolina and South Carolina. In the annual report, management noted: "Since 2005, an increase in the occurrence of hurricanes has resulted in growing demand for our services in these states."

Conclusion

I have nothing against the concept of activist organizations going after corporations with various demands, be they influenced by left- or right-wing thinking; after all, we live in a free, open society and it's everyone's right to do so within the confines of the law.

What I don't like quite as much is hypocrisy and greenwashing. As far as I go, if an institutional investor truly believes that climate change can be a worthwhile investment theme, they should put a couple of analysts on it and figure out how to put money to work. If they don't believe that it is, then they should just go on doing what they do best: manage money.

What they shouldn't do is pretend to see an investment risk or opportunity where they really don't just to appease a handful of vocal stakeholders. Lobbying to get the SEC to force disclosure on climate change is nothing more than window dressing; investors who think this is real already know where to look and what to look for and - surprise, surprise - it's not rocket science!

DISCLOSURE: None

July 26, 2009

Clean Energy Stocks Shopping List: Smart Grid and Strong Grid

My five favorite stocks with technology to improve grid reliability.

Tom Konrad, Ph.D., CFA

Although the market has risen above where it was in early June, when I said "We're near the top," I'm still bearish.  And I'm still making lists of stocks to buy when prices seem more favorable.  Previous articles in this Clean Energy Stocks Shopping List series are listed at the end of this one.

The Strong Grid

I recently wrote about our list of Smart Grid Stocks, and at least two readers were prompted to ask why wasn't (1) Beacon Power (BCON) on the list?  "Smart grid" does not have a uniform definition; the one I use focuses on the "smart:" making a more effective grid through the better use of information and communication.  Beacon uses high speed flywheels, a form of Electricity Storage extremely well-suited to high power, low energy applications to sell frequency regulation services to the grid.  Since this improves the effectiveness of the grid, but does not do it through the use of information, I think of Beacon as a "Strong" rather "Smart" grid technology, and it's listed in our Electricity Storage and Flywheel stock lists.

Frequency regulation is usually provided by keeping a natural gas turbine running at less than full capacity, although Lithium-ion and other battery manufacturers are also trying to enter this market.  There are significant efficiency gains and carbon savings to be had by using flywheels or other electricity storage for frequency regulation, and allowing the turbine to run at an efficient constant speed.  Because flywheels are cheap on a per-kW or power basis compared to batteries (even though they are expensive on a per-kWh or Energy basis,) I think they will have an advantage over batteries for this relatively overlooked, power-intensive application.

Beacon, however, still has relatively small revenues and is burning through cash quickly, with little on hand.  They are raising money through an ongoing share purchase agreement with a fund at a 14% discount to the exchange traded share price.  This ongoing dilution should keep the company afloat, but it is unlikely to do much for the share price.

Beacon has received a DOE loan guarantee for a 20MW frequency regulation plant in New York, but are looking for creative ways to provide their equity contribution to the project.  This project creates a great upside opportunity for Beacon shareholders, since it will probably bring the company to profitability if completed, but the ongoing search for funds to pull it off may also create excellent buying opportunities along the way.

In addition to being a wind turbine designer and parts supplier, (2) American Superconductor Corporation (AMSC) is another company I'd call "Strong Grid."  In addition to the eponymous high temperature superconducting cables, which both can carry 10 times more power than conventional cables and simultaneously suppress fault currents that can result in serious outages, and a China-focused wind turbine business, the company makes products which regulate power from wind farms, grid-scale surge protectors, and voltage stabilization systems.  It's these later products focused on grid stability that interest me much more than the superconducting cables, which I expect will only be cost effective in dense urban areas.

Although the company is not profitable yet, they have $2.50 cash per share in the bank, which is enough to fund their operating cash outflow for years to come.  With a Beta of over 2, the company's stock price is highly sensitive to market moves, so a market downturn should provide an excellent buying opportunity in a company that Smart Grid expert Jesse Berst thinks is 'Poised for Super Results."

The Smart Grid

I previously stated I like all smart grid stocks because I see so much potential for the sector, and I have a hard time picking winners.  But when I have to choose, in a competitive market with many new entrants, I tend to favor established companies that already have established business lines and experience working with customers in the space.  (3) Echelon Corporation (ELON) fits this bill.  The company's LonWorks building automation products are well established in the market; the move into smart grid is more the expansion of existing business lines than creating a new business.  Over the last few years, I've lost count of the number of cities which have signed up to use the company's technology to save electricity by dimming street lights.  This sort of thing is not nearly as sexy as home automation, but working with large municipal customers to save large quantities of energy seems like a much easier way to make money than dealing with millions of fickle homeowners.

The company is not yet profitable, but has sufficient cash not to need to raise new capital anytime soon.

Solidly profitable (4) Itron, Inc. (ITRI) is a leading supplier of electricity, gas, water, and heat meters worldwide.  For Itron, smart meters are simply an extension of existing product lines, and their existing business relationships with utilities should give them an advantage when competing with start-up rivals for utility business.  

Spanish company (5) Telvent Git S.A. (TLVT) is more than a smart grid company, it's also a smart water, smart transport, and smart pipeline company.  In short, they sell software and services to make all sorts of networks operate more efficiently, and have established business relationships with a broad range of utilities.  In addition to being profitable, I like the company's large exposure to transportation, because while making the electric grid smarter will do a lot to combat climate change, making our transportation system smarter will not only help with climate change, it will also help with peak oil.

Other articles in this series:

DISCLOSURE: Tom Konrad and/or his clients own AMSC, ELON, ITRI, and TLVT.

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.

July 17, 2009

Energy Storage on the Smart Grid Will Be 99.45% Cheap and 0.55% Cool

7.17.09 Storage Week John Petersen

Infocast’s Storage Week was all I had hoped it would be, and more. While I thoroughly enjoyed serving on three discussion panels and was warmly received by roughly 250 attendees, including executives of companies that I've occasionally criticized, the most important value for me came from the opportunity to hear four days of high-level presentations by industry executives, national thought leaders and policymakers who repeatedly stressed that:
  • From a utility perspective grid-based energy storage is the functional equivalent of an instantly dispatchable generating asset;
  • The combination of wind assets with cost effective load-shifting storage can improve internal rates of return by 50% or more;
  • The combination of solar assets with cost effective load-shifting storage can improve internal rates of return by 50% or more;
  • When it comes to grid-connected energy storage, cost, reliability, maintenance and cycle life will be the primary decision drivers.
Consensus was that an optimal smart grid configuration will need storage capacity equal to at least 5% of peak system load and areas that rely heavily on intermittent renewables like wind and solar will need a higher capacity to maximize the value of those assets.

In the example of California, the required annual storage build was estimated at 500 MW per year for the next 10 years. Of this total, 50 MW would need to be fast storage in the form of flywheels and Li-ion batteries and the 450 MW balance would be 4 to 6 hour storage in the form of pumped hydro, compressed air, flow batteries and advanced lead acid batteries.

The following table assumes that fast storage for frequency regulation will have an average discharge duration of 15 minutes and load shifting storage will have an average discharge duration of five hours. It shows how the aggregate annual storage build for both California and the U.S. as a whole will break down in terms of both MW of dispatchable power and MWh of stored energy.

State of California
MW Percent MWh Percent
Annual Fast Storage Build
50 10.00% 12.5 0.55%
Annual Load Shifting Build
450 90.00% 2,250 99.45%





Nationwide (8x California)




Annual Fast Storage Build 400
10%
100
0.55%
Annual Load Shifting Build 3,600
90%
18,000
99.45%

Using a quick and dirty pricing metric of $1 million per MW for fast storage devices including flywheels and Li-ion batteries the annual revenue potential of $400 million is impressive. Using an equally quick and dirty pricing metric of $500,000 per MWh for load shifting storage, the annual revenue potential of $9 billion is mind-boggling.

In the fast storage space, the leading contenders are Maxwell Technologies (MXWL), a leading manufacturer of supercapacitors; Active Power (ACPW), which builds low-speed flywheel systems for industrial power conditioning and UPS applications; Beacon Power (BCON), which builds high-speed flywheel systems for utility frequency regulation and recently snagged a DOE loan commitment for a 20 MW fast storage demonstration project; Altair Nanotechnologies (ALTI), which has built and deployed 2 MW of fast storage that is currently being tested by a major utility; and A123 Systems, which has also built and deployed several MW of fast storage for utility customers in the U.S. and overseas.

In the load shifting space, the leading contenders are Dresser Rand (DRC) which builds above ground compressed air systems, ZBB Energy (ZBB), which builds zinc-bromine flow batteries; lead-acid battery manufacturers like Enersys (ENS), Exide (XIDE) and C&D Technologies (CHP); and innovators like Axion Power (AXPW.OB) which is in the early stages of demonstrating the capabilities of its lead-carbon storage technologies.

The broader market has not yet come to grips with the realities that:
  • The combination of wind and storage yields better returns than wind as a stand-alone;
  • The combination of solar and storage yields better returns than solar as a stand-alone; and
  • While the fast storage developers have been grabbing all the headlines because of the push to develop PHEVs and EVs, the manufacturers of cost effective load shifting systems will lay claim to well over 90% of the anticipated revenue.
As investors in the $100+ billion wind and solar sectors come to understand the critical need for storage to maximize the economics of those intermittent renewables, interest in the $2 billion storage sector will surge. As storage sector investors come to understand the critical need for cost-effective load shifting storage, interest in established manufacturers of less glamorous technologies will also surge. It all goes back to my fundamental premise that for the next decade, cheap will beat cool.

I'm in transit from California to Europe and won't have access to electronic copies of the Storage Week presentation materials for a few days. So I apologize for the dearth of links to source materials. When those materials become available, I'll follow up with a more detailed series of articles that get into the grittier questions of which companies are best positioned to capitalize on explosive growth in both fast and load-shifting grid based energy storage.

For the first time in my career, I find myself on the leading edge of a trend that will be larger than most investors can begin to imagine. It's going to be a fun decade for investors who position their portfolios early because events like Storage Week and the anticipated IPO from A123 Systems are rapidly sending a clear signal to the broader market.

DISCLOSURE: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds a small long position in Exide (XIDE).

July 16, 2009

Our Smart Grid Stock List

Tom Konrad, Ph.D., CFA

I've been writing about the smart grid and its potential since before I joined AltEnergyStocks, in 2007, although at the time, I wasn't using the term: I mostly called it "Smart Metering."  Now, Smart Grid is a central part of federal stimulus plans, and the term is firmly ensconced in the popular lexicon.  GE even created a Super Bowl ad around the Smart Grid (video).

It was far past time to create a Smart Grid category in our Alternative Energy Stock List, but now we've done it.  The companies in the Smart Grid Stock List were previously categorized as both Energy Efficiency Stocks and Electric Grid Stocks.  Now, they are in the Smart Grid and Electric Grid categories, but only in the Energy Efficiency category if they also have a more conventional energy efficiency business.  The broader Electric Grid category contains both Transmission and Distribution companies, like the ones in my Transmission Shopping List, as well as companies more narrowly focused on the smart grid.  A few of the IT companies which have been moving into smart grid (such as IBM, Cisco, and Google) are in the Smart Grid category, but not in Electric Grid.

For readers who want something more than just a list of companies, I'm planning to pick my top five for a future Shopping list, but it will be a difficult choice to pick my five favorites... I like them all.  Smart grid is one of my favorite categories because of the enormous potential to help decarbonize the economy.  Successful adoption of smart grid technology will:

Sound too good to be true?  It isn't.  It's what happens when you start using your brain on a problem that you'd previously only attacked with brawn.  Hence the "Smart" part of Smart Grid.

Here's the link to our Smart Grid Stocks.

DISCLOSURE: Tom Konrad and/or his clients own GE.  He has a short position in GOOG.
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.

June 30, 2009

Clean Energy Stocks Shopping List: Five Electricity Transmission Stocks

We may be headed into a renewed market slump.  If so, it will pay to wait before buying, but when the time does come to buy, here are 5 electric transmission stocks I have my eye on.

Tom Konrad, Ph.D., CFA

On June 2, I wrote that I thought the market was near its peak.  That day, the S&P 500 closed at 944.74.  On June 12, it closed up 0.15% at 946.21, and has since trended down, currently trading down 5% as I write.  I expect further declines this year, either with the market heading straight down from here, or bouncing around for a while, possibly for a few months, before declining in earnest.

This article continues my Clean Energy Stocks Shopping List series, which I started with the intent of occupying myself while I wait for the market to fall.  Like most people, I find it difficult not to buy when I find a company I'm interested in, even if I don't like the valuation.  I find planning my future purchases lessens the need to use the cash I've been accumulating now, and possibly will be of some help to readers in the meantime.  So far, I've brought you five clean transport stocks, and five energy efficiency stocks.  I have enough others for about three more lists, which you will be able to find here as they are published.

When I'm done, you should have enough to put together a diversified portfolio of companies involved in what I consider the most promising clean energy sectors.  In other words, don't expect any Algae Biofuel stocks (I like the industry, but not the stocks) or Hydrogen Fuel Cell Stocks (I'm skeptical about the economics of the technology.)

I'm not skeptical about either the electric transmission industry or the technology.  As a century-old industry, it contains many mature, profitable companies, but the need to build out and enhance our existing (and rather decrepit) electric grid in order to integrate renewable energy means that there are also exciting opportunities for growth.  Here are five.

Equipment Providers

#1 General Cable (BGC) produces exactly what you'd expect: cable of all sorts, for electrical transmission, wiring, and communications.  If you believe (as I do) that the long term decline in the use of fossil fuels will mean the increasing electrification of the economy, General Cable is the one company I'd point to as most likely to benefit from the trend.   The company is solidly profitable, with a forward P/E of 10, almost $4 of cash per share, and strong operating cash flow.

#2 ABB Group (ABB) is a global technology  firm based in Switzerland with products focused on electrical transmission and distribution, and one of two global leaders in High Voltage Direct Current (HVDC) transmission (the other is Siemens (SI).)  HVDC is the best currently available technology for transporting large amounts of electricity over long distances, and is essential to the hoped for European Destertec Project, and would likely be necessary if we were to use concentrating solar power in the US Southwest as dispatchable power to balance variable renewable energy in the rest of the US.

On a more prosaic level, ABB also has technology to improve the efficiency of electricity distribution as well as transmission. The company currently trades at a P/E of 12.6, has $3 cash per share on the balance sheet, strong operating cash flow, and pays a dividend over 3%.

Service Providers

The companies which will contract to build out the new electric infrastructure seem most likely to be able to leverage the build-out to achieve high levels of growth, and hence large gains in stock price.  Here are three:

#3 Pike Electric (PIKE) performs service and upgrade of electric transmission and distribution throughout the US.   Although the company has a strong balance sheet and cash flow, analysts expect earnings to drop significantly next year.  If lower earnings materialize, we can expect significant price deterioration (especially in the context of an overall market decline,) and may be able to purchase this stock at an attractive valuation.  The forward P/E is currently over 17 at a stock price of $11.60.  The relatively high valuation makes Pike likely to be hit hard by a general market decline, leading to an excellent buying opportunity.

#4 MasTec (MTZ) not only builds and maintains transmission and distribution infrastructure, they also provide those services for fiber optic communications networks, as well as wind farms.  Mastec is less well capitalized than ABB and General Cable, but still has a strong balance sheet and cash flow, and it currently trades at a more attractive valuation than Pike, with a P/E of only 11.6.  As such, it's an interesting wind and transmission play.

#5 Quanta Services (PWR) No stock list of mine is complete without Quanta Services, which was once described to me by an industry insider as the company to call if you want to put steel in the ground on a transmission project.  Quanta has a strong balance sheet (strong cash flow, $2.65 cash per share, and a current ratio of 3.3,) but its high growth means that it trades at the relatively rich forward P/E ratio of 18.6.  Like Pike, a general stock market drop should hit Quanta disproportionately, providing an excellent buying opportunity.

DISCLOSURE: Tom Konrad and/or his clients own BGC, ABB, SI, PIKE, MTZ, and PWR.

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.

June 17, 2009

The Electric Grid Index

Charles Morand

A little while ago, we received the following request from a reader:

"[...] when are you [...] going to start an ETF or mutual fund called "Energy TS&E". T for transmission, S for storage, and E for efficiency. I guess you need an index first. I'm thinking Quanta, Amer Superconductor, Exide, Axion, Itron, Echelon, etc. There is no good one stop shop for this subsector. Sign me up."

While we don't plan on launching a licensable index or a mutual fund because of all the regulatory thicket we'd have to cut through, this request nonetheless led to a few internal exchanges about the merits of this idea and what could go into such an index/fund.  

Tom had the following to say:

"I [...] think it would make more sense to deal with each of these sectors separately, because storage has a much different risk profile than efficiency and transmission, and appeals to different investors."

Neither the electric grid (let alone the transmission subsector) nor energy storage, taken alone, features a sufficiently large universe of stocks to allow for the construction of a solid index and, in turn, the creation of a dedicated ETF or mutual fund.

The small number of firms for which either sector is material means that effectively all of the available stocks would have to be included in the index to achieved a level of diversification worth paying for, if such a level was even achievable. A small number of stocks also means that an investor might be able to reproduce the portfolio directly on his/her own at a lower cost than the ETF management fee.

Efficiency is somewhat different, seeing as so many activities and products - including some that fall under the grid umbrella - can be counted as 'efficiency'. Besides your garden variety electricity efficiency solutions such solid-state lighting, everything from insulation technology manufacturers to demand-side management service providers could be included. Of the three, efficiency stands the greatest chance of seeing its own ETF pop up in the near to medium term - in fact, I wouldn't be surprised if someone was already working on this.  

Nevertheless, this request and the subsequent discussion piqued my interest, and got me wondering what an Electric Grid Index might look like - I decided I would give it a shot.

The electric grid has received a significant amount of focus in the bailout package and has recently been on the political radar to a greater extent than at any other time in the past few decades.

Last week, the results of a survey of wind power firms revealed that "transmission or interconnection issues [are viewed] as the single greatest barrier to wind development in the United States. " Transmission is also a significant barrier to geothermal power development and, as utility-scale facilities gain in popularity, will definitely become so for solar PV as well.

In my view, the grid will be one of the strongest performing sub-sectors in alt energy over the next four years, because so much of America's renewable power potential depends on a significant expansion of domestic transmission and distribution capacity. At the same time, the growing popularity of smart grid technologies, as evidenced by the Obama administration's efforts to jump-start this sector, will most likely expand in the years ahead as utilties and large consumers become increasingly comfortable with the concept.

The Electric Grid Index

Last February, I wrote a post where I differentiated between what I called the Old World and the New World grids. In a nutshell, I ascribed the New World label to companies working on making the grid into an information-rich environment that can be managed dynamically by using two-way communication, aka the smart grid. Old World companies are firms working on more conventional areas such as cables, towers and maintenance.

I also added a new category: A Bit of Both. This idea came after a reader pointed out the importance of power electronics in enabling a smarter grid, and the need to not be so clear-cut when discussing the Old and the New Worlds. This category also contains firms that actually do do a bit of both.

In order to create a basic list of stocks for a smart grid index, I went back over past articles we wrote on the matter and pulled out a list of firms that had been identified as plays on the grid. I then read through their 2008 10-Ks, 20-Fs and/or annual reports and included only firms that derived 20% or greater of their revenue from the grid or power management activities.

I left out MW-scale storage although the case could certainly be made for adding it...or not. I also left out system operators such as ITC Holdings (ITC) and focused instead on product and service providers.

The following is the final list of grid companies I came up with.      
    
Name (Ticker) Market Cap
($US MM)
Dividend Yield (%) % '08 Sales Related to the Grid Core Business PE
New World
RuggedCom (RUGGF.PK) 275 0.00 100% Communication Equipment & Services 22.15
Comverge (COMV) 242 0.00 100% Communication Equipment & Services N/A
EnerNOC (ENOC) 458 0.00 100% Communication Equipment & Services N/A
Itron (ITRI) 2,146 0.00 N/A* Communication Equipment & Services 405.33
Echelon Corp. (ELON) 310 0.00 100% Communication Equipment & Services N/A
Telvent (TLVT) 702 0.00 ~27% Communication Equipment & Services 14.77
Old World
Composite Technologies (CPTC.OB) 99 0.00 ~44% Cables N/A
General Cable (BGC) 2,000 0.00 N/A* Cables 10.87
MasTec Inc. (MTZ) 930 0.00 N/A* Services 12.08
Quanta Services (PWR) 4,638 0.00 ~57% Services 28.73
Resin Systems (RSSYF.PK) 59 0.00 >90% Poles N/A
CVTech (CVTPF.PK) 74 0.00 >80% Services 9.25
Valmont Industries (VMI) 1,876 0.80 ~23% Poles 14.17
Stella-Jones (STLJF.PK) 255 1.54 ~36% Poles 9.31
Pike Electric Corp. (PIKE) 386 0.00 100% Services 11.42
A Bit of Both
ABB Group (ABB)37,9842.80~30%Multiple14.72
Siemens AG (SI) 65,944 1.90 N/A* Multiple 21.19
Schneider Electric (SBGSF.PK) 19,195 6.17 >50% Multiple 7.96
* Exact % not disclosed in filing but assumed significant based on other disclosures

Coming up with a simple list is easy enough. However, in order for this list to be considered an index in the true sense of the term, individual stocks have to be weighed according to certain criteria - the weight different stocks and sectors receive is critical to performance for this type of index.

Depending on who creates and index and for what purpose, methodologies for ascribing weights to different stocks can vary. In this case, since this is a purely fictional exercise, I originally opted for a simple capitalization-weighted methodology.

The problem I ran into with using straight capitalization-based weights is the huge discrepancy between the size of the A Bit of Both stocks and the rest: together, they account for nearly 90% of the list's capitalization. This means that even large movements in several other index components would have a marginal effect at best on index performance if those three did not move or moved in the opposite direction.

I thus decided to give each of the three categories (New World, Old World and A Bit of Both) and equal weight of 1/3, to measure each capitalization's weight within its own category only, and to do a weighted-average of those weights using 1/3. For example, Siemens accounts for 54% of its category's aggregate market cap, so its weight in the index is 0.54 * (1/3) = 17.85%.

The 1/3 weight is arbitrary. If I were to create an index like this for purposes of an ETF, my preference would be to rely heavily on business and fundamental information in deciding how to weigh individual stocks. However, given the time and cost involved in conducting solid fundamental analysis on 18 companies, this isn't something I would do for a simplified demonstration such as this one.

The category weights could be changed to reflect sectoral expectations. For instance, a less risk-averse investor could weigh the New World category more heavily as it is likely to generate stronger capital gains, although those will almost certainly come at the expense of lower volatility.

Name (Ticker) Market Cap
($US MM)
% Total % Own Category Weight Weighted Average (%)
New World
RuggedCom (RUGGF.PK) 2750.2071/32.22
Comverge (COMV) 242 0.18 6 1/3 1.95
EnerNOC (ENOC) 458 0.33 11 1/3 3.69
Itron (ITRI) 2,146 1.56 52 1/3 17.31
Echelon Corp. (ELON) 310 0.23 8 1/3 2.50
Telvent (TLVT) 702 0.51 17 1/3 5.66
Old World
Composite Technologies (CPTC.OB) 99 0.07 1 1/3 0.32
General Cable (BGC) 2,000 1.45 19 1/3 6.46
MasTec Inc. (MTZ) 930 0.68 9 1/3 3.00
Quanta Services (PWR) 4,638 3.37 45 1/3 14.98
Resin Systems (RSSYF.PK) 59 0.04 1 1/3 0.19
CVTech (CVTPF.PK) 74 0.05 1 1/3 0.24
Valmont Industries (VMI) 1,876 1.36 18 1/3 6.06
Stella-Jones (STLJF.PK) 255 0.19 2 1/3 0.82
Pike Electric Corp. (PIKE) 386 0.28 4 1/3 1.25
A Bit of Both
ABB Group (ABB)37,98427.61311/310.28
Siemens AG (SI) 65,944 47.93 54 1/3 17.85
Schneider Electric 19,195 13.95 16 1/3 5.20
TOTAL137,573100N/AN/A100

The index is set at 100 for now. I will measure performance periodically to see how I fare.

While it may not be practical for many investors to reproduce this index because of the number of stocks, I hope it provides a good base to start from. Tom is often a proponent of the portfolio approach to investing (i.e. taking small positions in several stocks to spread risk), and such lists can often provide a good starting point for those interested in following this approach.          

DISCLOSURE: Author is long ABB    






May 11, 2009

Storage: The Best Renewable Energy Integration Strategy?

Tom Konrad, Ph.D.

In order to electrify transportation, well need batteries, with ultracapacitors and compressed air playing supporting roles.  Based on cost, John has been making the case that the batteries for economical cars are more likely to be advanced lead-acid (PbA) than the media darling, Lithium-ion (Li-ion.)  I generally agree, especially since recycling Li-ion batteries is an expensive and difficult process, although I see a future where both cars and oil are simply more expensive, and we have far fewer of them.

But transportation is only one application for energy storage technologies.  Another is matching the electricity output of variable power sources such as wind and solar with demand, as well as providing standby power to accommodate sudden ramp-ups and ramp downs.

Storage for Grid-Tied Applications

Below is a chart I put together comparing the cost per kW (Power), cost per kWh (Energy) and Round-trip efficiency of a large range of technologies.  Both axes are log scale.   This slide will be part of a presentation I'll be giving at Solar 2009 on May 15th.  (I'll also be on this panel on the 13th.)  Technologies to the right can store energy cheaply, and are the best for matching variable energy output with demand.  Technologies near the top deliver high power at low cost, and so are best for accommodating sudden changes in supply or demand on the grid.  Larger bubbles represent higher round-trip efficiency, meaning that more of the stored power can be sent back to the grid.

There are many other important characteristics of storage technologies, such as cycle life, O&M costs, memory effects, response time, and size/weight, so the technologies which look best on this graph will not be the best for all applications.

Click to Enlarge

Batteries: Mostly for Cars

It's easy to note that lead-acid batteries dominate Lithium-ion batteries for grid tied applications: In a grid-tied application, the light weight of Li-ion batteries no longer makes any difference, and cost is much more important.  More important, however, it's also easy to note that neither the battery nor flow battery technologies are truly dominant in this context (note that I've lumped hydrogen electrolysis/fuel cell combinations (H2) with flow batteries in this context.  The bubble hidden behind NaS is ZnBr, a Zinc-Bromide flow battery, being commercialized by ZBB Energy (ZBB).)  

If I'd done this research a few years ago, I never would have recommended Vanadium Redox flow batteries (VRB) or Sodium Sulfur (NaS) in 2007, although a quick look at the chart makes clear why NGK Insulators (NGKIF.pk) is still selling NaS batteries while VRB Power declared bankruptcy not long after I sold it: NaS batteries produce much more power at the same cost.  They also have the advantage (not shown here) that they are small enough to be moved, and so can be used to defer transmission and distribution upgrades in multiple locations over the life of the battery.

Lead Costs More than Salt, Water, or Air

When it comes to dealing with the large scale power for grid tied applications, the best technologies are the ones with the cheapest storage media.  Thermal storage molten salt, while pumped hydro (PHES) uses water, and Compressed Air Energy Storage (CAES) uses air.  Demand Response and Transmission do even better by shifting power use in time or space, and dispensing with a storage medium altogether.  

The primacy of Demand Response and Transmission should not come as any surprise to regular readers, who will recall that Demand Response was the hero of the Texas Wind incident, while Transmission compares favorably to most storage technologies because it diversifies away many of the ups and downs of variable electricity supply and demand.

Pumped Hydro vs. Thermal Storage vs. CAES

Transmission is unfortunately difficult to permit and build, and demand response can only be used a few hours a year (at least until we get more responsive demand through smart grid investment.) This means that there will continue to be a large need for the three other forms of large scale, cheap energy storage.  Unfortunately, all three can only be used effectively in special situations.  Pumped hydro requires two adjacent reservoirs with a vertical drop between them, Thermal Storage works best with Concentrating Solar Power plants, especially in the tower configuration, and CAES requires an underground, air-tight cavern.  

While reservoirs and caverns can be built, doing so erodes the economics of the technologies.   It's worth noting that the economics of pumped hydro vary widely depending on the location, and so the apparent advantage of CAES only holds in some cases; the locations of the bubbles are based on averages of the highest and lowest costs in the literature.

Investments

For investors who see opportunity in integrating renewable electricity into the grid, the media fascination with battery technology is an opportunity.  They should focus on Demand Response and smart grid stocks such as EnerNOC (ENOC), Comverge (COMV), Itron (ITRI), Echelon (ELON), Telvent (TLVT), and RuggedCom (RUGGF.PK), Transmission stocks such as ABB Group (ABB), Quanta Services (PWR), General Cable (BGC), Pike Electric Corp (PIKE), ITC Holdings Corp (ITC), and Siemens (SI), before investing in traditional storage plays.

In many ways, this is fortunate, since Pumped Hydro, Thermal Storage, and CAES are all difficult for a stock market investor to get exposure to.

UPDATE: The full presentation comparing large scale energy storage technologies can be found here.

UPDATE 12/29/09- I came across better numbers for the cost of transmission, and updated the graphs here.

DISCLOSURE: Tom Konrad or his clients have long positions in ENOC, COMV, ITRI, ELON, TLVT, RUGGF, ABB, PWR, BGC, PIKE, ITC, and SI.

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.

March 23, 2009

Drawing the Right Lessons from the Texas "Wind" Emergency

On February 26, 2008, a drop in wind generation by about 1400 MW over ten minutes, coupled with an increase in demand of 4412 MW due to colder weather, and lower-than scheduled production from other power suppliers, led ERCOT, the Texas grid operator to cut 1100 MW of power to interruptible customers for about 90 minutes.  

Misconceptions

All these facts come from a Reuters article misleadingly titled "Loss of wind causes Texas power grid emergency."  I was dismayed a few weeks ago when this misleading reporting led the generally insightful Master Resource Report to conclude "This is a clear example of why solutions to storage and transmission are going to become increasingly critical as sources such as wind and solar become increasing parts of the generation mix.  This doesn't invalidate renewable power; it just means that the country has plenty of work to do and that there are plenty of investment opportunities besides just wind turbines and solar cells." [link to pdf]

It may be surprising to readers that I find anything objectionable in a call for more storage or transmission, although I'm a stronger proponent of transmission, which I consider more cost effective, even if there are far fewer barriers to adding storage.  

However, the lesson of the 2008 Texas emergency is that while we need more transmission, and, eventually, storage, there are other, cheaper and easier steps we can take to integrate wind and solar to considerably higher levels of penetration..

Not A "Wind" Emergency

The first thing to note about the incident is that the increase in electric demand was more than three times as large as the decrease in supply from wind.  Presumably, ERCOT had been dealing with such fluctuations in demand since long before wind came onto the system.  Part of the problem was that other power suppliers (presumably natural gas and coal, usually considered "reliable") were not delivering what they had promised.  Hence, the drop in wind production was probably only 20% of the overall problem, not 100%, as the headline led readers to believe.

Hero: The Smart Grid 

The next conclusion we can draw is that Demand Response (DR), in the form of interruptible service to large customers, prevented power outages.  Demand response an early form of the Smart Grid which is already working today.  It allows the grid operator to cut power consumption by other users who have previously agreed to such cuts in return for lower electricity rates or cash payments.  According to a 2005 study of DR programs from the American Council for an Energy Efficient Economy, the median cost of DR programs studied was $29 per kWh, and the average cost was $86 which compares quite favorably to the $500 or more per kW cost of a peaking gas turbine.   Demand Response was the hero of February 6, 2008, even if wind was not the villain.

Before we look for investments in energy storage or even transmission, we should be looking to even more cost effective resources for the integration of variable energy sources, such as Demand Response and other variations of the Smart Grid.  Both EnerNOC (ENOC) and Comverge (COMV) provide demand response services to utilities, and this is also one use for Smart Grid technology from such companies as Echelon (ELON), RuggedCom (RUGGF.PK), Telvent (TLVT), and Itron (ITRI).

Villain: The Dumb Grid

During the discussion at a January 21 seminar sponsored by the National Renewable Energy Laboratory and the National Oceanic and Atmospheric Administration, featuring speakers from wind forecasting companies 3Tier, WindLogics, and AWS Truewind, the speakers mentioned that the weather forecasters had been telling the system operator of the incoming cold front and likely drop in wind production, but that the system operators chose to make no preparations before the fact.  Had they done so, they could have ramped up standby generation before the cold front hit, and would not have needed to call on the interruptible power resources.

Given that much of the heating in Texas is electric, system operators must have known that a cold front would raise demand.  Why would system operators choose not to heed forecasters' warnings?  There may be many reasons, but in the end, they all probably come back to incentives.  Preparing for a predicted increase in demand would have been the intelligent response, but regulated utilities have very little incentive to use their resources intelligently.  After all, a regulated utility makes most of its profits based on an authorized return on capital based on the investments it can justify to the regulator as necessary to keep the system up and running.  If the utility is, for whatever reason, unable to use those resources effectively, it becomes easier to argue that more resources are needed, which will lead to more profit for utility shareholders, and a less stressful job for system operators..

In other words, regulated utilities have an incentive to use as little brainpower (for which they do not earn a return on capital) and as much capital investment as possible.   They have an incentive to be dumb.  Given such incentives, is it any surprise that they ignore warnings, and then blame the problem on the variability of wind?

Tom Konrad, Ph.D.

DISCLOSURE: Tom Konrad owns ENOC, COMV, ELON, RUGGF, and ITRI
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.

February 25, 2009

The Ontario Green Energy Act: What Can Alt Energy Legislations Do For Investors

Dedicated legislations have been at the core of some of the most impressive regional growth stories in alternative energy, most notably in Germany with the Renewable Energy Sources Act or in California with the various legislative solar initiatives. On Monday, the Canadian province of Ontario became the latest jurisdiction to join the fray as lawmakers introduced the Green Energy and Green Economy Act. Why should investors care? Because such legislations have been at the core of some of the most impressive regional growth stories in alternative energy. 

As a bit of a backgrounder on Ontario, there is currently about 800 MW of installed renewable power capacity (~95% wind) in the province with around 2,500 MW under power purchase agreement (PPA) and scheduled to be brought into commercial operations in the next few years. In late 2006, the province introduced a renewable power feed-in tariff incentive, the first one in North America. This incentive was suspended in May 2008 due to transmission constraints. By then, there were about 500 MW of solar capacity under PPA linked to the incentive, including one of the world's largest solar PV farms.

To put these numbers into perspective, California, the largest solar PV market in the US by quite a stretch, had around 500 MW of PV installed by the end of '07. Next came New Jersey at 69 MW and New York at 32 MW. None of the 500 MW under PPA in Ontario has yet reached commercial operation, and at least some of it will probably be cancelled given current credit conditions. Nevertheless, these figures provide a good idea of the market's potential is. The Canadian Solar Industries Association estimates that Ontario could install up to 16,000 MW of solar PV by 2025, with the potential on Toronto's rooftops alone estimated at 3,600 MW.   

The Green Energy and Green Economy Act

The Act targets three main areas: (1) renewable power generation; (2) energy efficiency; and (3) the smart grid.

1) Renewable Power Generation

Perhaps the most significant measures here are aimed at removing what had proven to be critical barriers to renewable energy projects reaching commercial operation in the province:

  1. Renewable energy projects meeting certain criteria will be guaranteed a connection to transmitters and distributors' networks and will be given priority access over other forms of power generation
  2. Transmitters and distributors will have to make the necessary network upgrades to allow for the connection of renewable power projects and the eventual expansion of renewable power capacity
  3. Renewable power projects will be exempt from all forms of municipal permit requirements to counter a growing trend of NIMBY groups lobbying their municipal councils to block renewable energy projects  
  4. A new office of Renewable Energy Facilitation has been created to help speed up the permitting process (e.g. environmental assessments, etc.)

On the revenue side, the legislation does the following:

  1. The feed-in tariff that had been suspended in May 2008 will be reintroduced once new rules have been designed (no timeline provided but Q2 2009 has been thrown around)
  2. A system of PPA auctions for large-scale renewable power projects that has been in operation since 2004 will be maintained 

Analysis

The measures aimed at removing barriers to renewable projects are significant. However, until the new rules around the feed-in tariff are released (e.g. pricing, eligible fuels, etc), the exact impact of the law will remain unclear. My own guess is that the government will be very aggressive with ramping up renewable energy installed capacity over the next five years as, as its name indicates, this law is also about the economy. If you believe the government, this bill is as much about creating a counter-cyclical effect as it is about cleaning up the environment. If my thesis is correct and this turns out to be a boon for developers, the following stocks should be watched:

Name Ticker Description Potential Upside Related to Legislation
Algonquin Power Income Fund AGQNF.PK Ontario-based renewable power developer with exposure to Ontario (income trust) V. High
Boralex BRLXF.PK Canadian renewable power developer with exposure to Ontario V. High
Canadian Power Developers CHDVF.PK Canadian renewable power developer with significant exposure to Ontario V. High
Great Lakes Hydro Income Fund GLHIF.PK Ontario-based hydro power developer (income trust) V. High
Innergex Renewable Energy Inc. INRGF.PK Canadian renewable power developer with exposure to Ontario V. High
Macquarie Power & Infrastructure Income Fund MCQPF.PK Ontario-based renewable power developer (income trust) V. High
ARISE Technologies Corporation APVNF.PK Ontario-based silicon and PV cell manufacturer with a module installation segment. The module installation segment is focused on the Ontario residential market V. High
Northland Power Income Fund NPIFF.PK Ontario-based power developer with some exposure to renewables (income trust) High
Brookfield Asset Management BAM Infrastructure development firm with exposure to Ontario renewables Medium
FPL FPL FPL Energy unit is one of the world's largest wind park owners and has exposure to Ontario wind Low

2) Energy Efficiency

The Act introduced a number of energy efficiency measures with a focus on building efficiency:

  1. No real property can be sold or leased for an extended period of time without undergoing an energy audit
  2. Public agencies will be required to come up with an energy conservation and demand management plan
  3. Public agencies will be required to consider energy efficiency when making capital investments or when acquiring goods and services (although the devil will be in the details here with more precise rules to come)
  4. Energy distributors will be required to meet efficiency and demand management targets (see the brackets above about the devil)
  5. The Building Code will be reviewed to include stronger efficiency measures

Analysis

Energy efficiency measures are clearly targeted at the building stock. There aren't really any good direct plays on this, and won't be until the government releases further information on what it intends to do with its own buildings. Building efficiency firms such as Johnson Controls (JCI) could benefit, although its unclear whether this would be needle-moving. 

3) The Smart Grid

Ontario has been somewhat of a leader in smart grid, with legislation passed back in 2005 requiring every home and business in the province to be equipped with a smart meter by 2010. Hydro One, the largest transmitter, has also begun smartening its network by embedding communication equipment from RuggedCom (RUGGF.PK). The Act contains provisions to expand smart grid capex. The Ontario Smart Grid Forum estimates that C$1.6 billion could be spent on a smart grid ramp up in Ontario over the initial five years of such a program. As I mentioned in a past article, while the absolute amount isn't huge, it is still a fair chunk of change for this emerging industry.

The smart grid measures are:

  1. A timeline for rolling out the smart grid and apportioning spending responsibilities to different players (e.g. transmitters, distributors, retailers) will be released
  2. Communication standards and other technical aspects will de defined through regulation
  3. The regulator (called the Ontario Energy Board, the equivalent of a PUC in the US) will be directed to take actions related to the implementation of the smart grid, although these actions aren't yet defined
Analysis

Once all the rules are released, the legislation will have the effect of formalizing a patchwork of initiatives already underway. In my view, significant smart grid capex can be expected in Ontario over the next few years with a focus on the transmission and distribution infrastructure (rather then end consumers). There are several companies large and small entering the world of smart grid. My personal favorite play on this legislation is RuggedCom (RUGGF.PK): (1) it has already won contracts here; (2) it is part of the home team (based in Ontario); (3) it already generates EBITDA; and (4) even though its stock has withstood the latest storm in equity markets, it's still trading at a reasonable trailing PE compared to peers.   

Conclusion

Many people in the investment world loathe government intervention into anything. However, alt energy has been and continues to be primarily driven by regulation and government policies. In the absence of government support schemes, industry growth rates would be a fraction of what they currently are, and solar PV would not be on the steep cost decline curve it's currently on. It is therefore critical to keep an eye on the policy side to know where growth opportunities will emerge next.

With this new Ontario legislation, my favorite play is the Canadian clean power IPP sector (stocks listed above). The smart grid initiatives will also be worth watching, although more clarity on the rules is required before potential winners can be identified.

DISCLOSURE: Charles Morand does not have a position in any of the stocks discussed above.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

February 18, 2009

Welcome To The New World

Perhaps ironically, it took one of the worst financial and economic crises of the past three decades to bring "the grid" into investor focus. To be sure, certain alt energy aficionados such as Tom have been on this topic for a long time (Tom is actually the one who introduced me to the grid as an investment theme). However, it is fair to say that most investors, including alt energy investors, have not historically paid the grid a huge deal of attention.

That is because most people outside of alt energy and VC circles held, until recently, the Old World view of the grid. In the Old World, the grid was a collection of transmission and distribution systems (i.e. transmission towers, utility posts and wires) connected together by the odd utility sub-station.  In the Old World, investments into the grid mostly took the form of maintenance capex by utilities, and there was little growth, at least in North America, beyond what was needed to keep up with economic and demographic expansion (2-3% per annum often offset by efficiency gains). Though antiquated and inefficient, the system mostly 'did the job' and the lack of coordination between various actors meant that no one would take the lead on massive investments required to upgrade the old infrastructure. In the Old World, the grid was nothing to write home about from an investment perspective.

Enter the New World, the world of the smart grid, where the electric grid doesn't stop at the connection with your house or office building, but can potentially extend all the way into nearly every electric device you use - if it can be plugged in, it can be made 'smart'. In the New World, IT capabilities are leveraged to optimize grid management. In effect, energy management, which used to rely on a closed system approach, is now integrated with the grid, opening a whole New World of possibilities. (I am admittedly not an expert in the technological ramifications of the smart grid and this post is not about the tech side. I find SmartGridNews.com to be a great source of info. I liked their reviews of various smart grid technologies)

The New World has actually been with us for some time. Smart grid pure plays such as Comverge (COMV), RuggedCom (RUGGF.PK) and EnerNOC (ENOC) all IPOed in Q2 2007, raising the profile of New World investment opportunities. However, in the broad world of alt energy investing, smart grid plays were often overshadowed by the mightier solar sector, in part because growth rates were far higher and in part because the smart grid business model is a bit arcane.

Fast forward to the 2008 US presidential run-off, where the leading candidate, Barak Obama, spoke repeatedly of the need to invest massively into the US power grid to make it smarter and more efficient. Most people probably can't remember the last time they heard a presidential candidate make the electric grid a central pillar of his/her energy policy. Nearly immediately following the election, the new President pumped, as part of his American Recovery and Reinvestment Act, $4.3 billion into mostly New World grid opportunities.

While this may seem small in comparison to the total size of the investment required to upgrade the grid (Old and New World) over the next couple of decades (The Brattle Group estimates that around $880 billion in transmission and distribution investment will be made by 2030), this amount is over 15x the combined 2008E sales of Comverge, RuggedCom and EnerNOC. Throw in Itron (ITRI), a $2 billion company that provides a number of utility products and services beyond smart meters, and the final package is still over 2.2x the combined 2008E revenue of all four companies. In other words, for this emerging sector, this is a fair chunk of change.

Besides the revenue that will flow in as a result of direct government expenditures, the impact of the American Recovery and Reinvestment Act will be felt for years to come as it jump-starts the industry. And the US isn't alone: the Canadian province of Ontario established a Smart Grid Forum that recently recommended spending C$1.6 billion over the next five years on smartening the grid there. Smart grid opportunities are also attracting large firms with no energy management background but expertise in complementary areas that can be leveraged.

Where does that leave investors? With the very real possibility that smart grid stocks will outperform the broader alt energy space over the next 12 months. Like other areas of alt energy, there are a growing number of ways to play the smart grid as larger cap firms with diversified revenue sources enter the space. The table below lists out some of the main publicly-traded plays on the smart grid. 

Smart Grid Stocks
Name Ticker Exposure to SG Mkt Cap ($mm) PE
RuggedCom RUGGF.PK Very High 252 18.88
Comverge COMV Very High 103 n/a
EnerNOC ENOC Very High 225 n/a
Itron ITRI Very High 1,810 66.39
Echelon Corp ELON Very High 287 n/a
Digi International DGII High 192 20.19
IBM IBM Medium 123,260 10.24
Cisco CSCO Medium 90,878 12.12
Google GOOG Low 110,110 26.24

To be sure, I am a little late on this one. Although I did discuss the potential for the smart grid to receive some focus in Obama's economic stimulus package in December, I initially believed that the Old World grid would receive as much if not more than the New World grid. In the end, Old World got next to nothing, which somewhat surprised me given its state of disrepair.

While I don't expect the smart grid to move the needle for the companies whose exposure is categorized as "medium" and "low" in the table above, my sense is that the "very highs" and the "high" will outperform alt energy stocks in general over the next 12 months. We will check again then!

DISCLOSURE: Charles Morand does not have a position in any of the stocks discussed above.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

February 14, 2009

Congress Approves Billions in Energy Storage Incentives

On Friday, the House of Representatives and Senate passed H.R. 1, the American Recovery and Reinvestment Act of 2009 and sent the bill to President Obama for his signature. The impact on companies that manufacture advanced batteries and other energy storage devices will be staggering. The principal energy storage appropriations include:

  • $2,000,000,000 for grants to manufacturers of advanced battery systems and vehicle batteries that are produced in the United States, including advanced lithium ion batteries, hybrid electrical systems, component manufacturers, and software designers;
     
  • $4,500,000,000 for grants for “Electricity Delivery and Energy Reliability” including activities to modernize the electric grid, include demand response equipment, enhance security and reliability of the energy infrastructure, energy storage research, development, demonstration and deployment, and facilitate recovery from disruptions to the energy supply;
     
  • $6,000,000,000 to pay the cost of guaranteed loans under a “Temporary Program for Rapid Deployment of Renewable Energy and Electric Power Transmission Projects;
     
  • ”$500,000,000 for research, labor exchange and job training projects that prepare workers for careers in energy efficiency and renewable energy; and
     
  • ”$300,000,000 to purchase high fuel economy motor vehicles including: hybrid vehicles; neighborhood electric vehicles; electric vehicles; and commercially available, plug-in hybrid vehicles

In addition, the final bill includes tax credits for purchasers of plug-in electric vehicles as follows:

  • For new plug-in electric vehicles, a base credit of $2,500 plus $417 for the first 5 kWh of battery capacity plus $417 for each additional kWh of battery capacity, up to a maximum of $7,500 per vehicle:
     
  • For new neighborhood electric vehicles, a credit of $2,500 per vehicle:
     
  • For plug-in EV conversions, a credit equal to 10% of the first $40,000 in conversion costs

Analyzing Congressional intent is difficult and predicting how regulatory agencies like the DOE will interpret that intent is even harder. Nevertheless, recent DOE publications and the text of the legislation provide some important clues about how the subsidies are likely to be distributed. So I’ll go ahead and climb out on a limb and offer one lawyer’s opinion of how things are likely to evolve.

There are substantial differences between the original House bill and the final version sent to the President. The original House bill included $2 billion in funding for renewable energy research and development and specifically allocated those funds to biomass ($800 million), geothermal ($400 million) and other ($800 million). It also authorized $1 billion in battery manufacturing grants and $1 billion for the cost of guaranteed loans for battery manufacturing. Most of the bells and whistles were eliminated before the final bill was sent to the President. Now we have a single $2 billion appropriation for battery manufacturing grants. I would characterize the final bill as far more results oriented than the original House bill.

In a recent article titled “DOE Reports That Lithium-ion Batteries Are Not Ready for Prime Time,” I reviewed the 2008 Annual Progress Report for the DOE’s Energy Storage Research and Development Vehicle Technologies Program. While DOE concluded that Li-ion technology was promising, it also noted that there were numerous technical barriers that prevented immediate commercialization of Li-ion batteries for use in automotive applications including cost, performance, abuse tolerance and life. Based on the conclusions, tone and tenor of the DOE report, it’s clear that the DOE views Li-ion as a promising R&D stage technology, but believes it is not a prime technology that’s ready for immediate commercialization.

The final bill sent to the President requires the DOE to include Li-ion battery developers in the class of eligible grant applicants. Without that requirement, I think there would have been a reasonable argument that Li-ion developers should be excluded from grant eligibility. While Congress clearly wants some funding for Li-ion battery developers, it’s clear that the battery manufacturing grants are not directed solely or even principally toward Li-ion technology. The Congress wants energy storage solutions that work today, not potential solutions that may work in 5 or 10 years. On balance, I expect the bulk of the battery manufacturing grants to go to companies that are manufacturing and selling existing products into established markets.

In another recent article titled “Alternative Energy Storage: Enabling the Smart Grid,” I reviewed two recent reports from the Department of Energy’s Electric Advisory Committee that discussed the critical enabling role that energy storage technology would play in the evolution of the Smart Grid. At the time of the original House bill, I speculated that some of the $4.5 billion appropriation for electricity delivery and energy reliability might ultimately be used for energy storage devices. Since the final bill sent to the President specifically added, “demand response equipment” to the list of authorized uses, and the final bill includes a new $6 billion appropriation for guaranteed loans to electric power transmission projects that should alleviate some pressure on the $4.5 billion in grant money, I think my earlier speculation can now be classified as certainty. I’m not courageous enough to predict the amount of electricity delivery and energy reliability grants that will ultimately be allocated to energy storage, but I will be surprised if the grant funds allocated to energy storage don’t exceed $1 billion.

I believe a total of $3 billion in battery manufacturing and electricity delivery and energy reliability grants can do an immense amount of good across broad sections of the energy storage landscape as long as the DOE sticks to legislative intent and funds companies that can manufacture and sell commercial products today. It all goes back to my core belief that we need to wake up in the morning, go to work with the tools we currently have available, solve our problems to the best of our abilities and be prepared to embrace new tools and new technologies when the R&D work is done and the commercial value is established.

I have no doubt that the energy storage sector is in for some very interesting times, but this is a jobs, productivity and manufacturing bill, not a research and development bill.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

February 06, 2009

Alternative Energy Storage: Enabling the Smart Grid

America’s electric power grid is subject to immense inefficiencies that arise from the interplay between centralized power generation, local power consumption and on demand utility service. To put things into a broad perspective, the nameplate capacity of U.S. generating facilities is about 1 million Megawatts (MW), so if all of our power plants ran 24/7 we would have a theoretical annual generating capacity of 8.7 billion Megawatt-hours (MWh). Since demand for electricity fluctuates on both a daily and seasonal basis, total electric power generation in 2007 was only 4.2 billion MWh, or less than 50% of nameplate capacity. The goal of the Smart Grid is to maximize the efficiency of existing generating facilities and accommodate the integration of renewable power resources. Since many better-qualified authors are writing volumes about transmission and distribution, demand management and renewable power technologies, I’ll limit this article to manufactured energy storage devices; enabling technologies that will be the beating heart of the Smart Grid for the next 10 to 20 years.

Last August I wrote Grid-based Energy Storage: Birth of a Giant, an introductory article that offered an overview of the potential uses for energy storage systems in the electric grid. At the time I confessed that the subject matter was a bit out of my depth, a problem that was compounded by a dearth of third-party analysis on specific applications. Mercifully, all that changed in December 2008 when the Department of Energy’s Electric Advisory Committee (EAC) published two reports that are must reads for investors that want to understand how the Smart Grid will develop, and position their investment portfolios to profit from cleantech, the sixth industrial revolution.

The first EAC report,“Smart Grid: Enabler of the New Energy Economy,” explains how the Smart Grid will use advanced technology to transform the energy production and distribution system into a more intelligent, resilient, reliable, self-balancing, and interactive network that enables enhanced economic growth, environmental stewardship, operational efficiencies, energy security, and consumer choice. The companion report, “Bottling Electricity: Storage as a Strategic Tool for Managing Variability and Capacity in the Modern Grid,” explains why the evolution of the Smart Grid will depend on cost effective energy storage, particularly in the early stages while other distribution and demand management solutions are being developed, adopted and implemented. This report divides Smart Grid energy storage applications into three functional classes: generation; transmission and distribution; and end-user, and then provides thumbnail descriptions of each potential energy storage application. Since my goal is to encourage readers to download and study the EAC reports and other source documents, this article will use summary tables to identify the major application classes and the existing and emerging manufactured energy storage devices that are expected to be useful in those applications.

I’ll apologize up front for giving short shrift to pumped hydro and compressed air energy storage. Both are highly efficient for storing massive amounts of energy and both are subject to physical and environmental constraints that limit where facilities can be built. More importantly, there are no pure-play public companies that focus on either storage technology, so spending a lot of time discussing cool technologies that you can’t invest in seems futile.

One of the most important concepts in any discussion of grid-based energy storage is discharge duration; or the optimal time required for a particular device to release its stored energy. Some grid-based applications require discharge durations measured in hours, others require discharge durations measured in minutes and still others require discharge durations measured in seconds. In general, manufactured energy storage devices that can store large amounts of energy are not good at discharging the stored energy quickly. Likewise, manufactured energy storage devices that can discharge energy quickly do not generally store large amounts of energy. Since the big challenge for utilities is to only provide slightly more power than customers need at any particular moment in time, they have to focus on peaks and valleys, rather than the averages. That's why a comprehensive solution will require a multi-pronged approach that uses a variety of manufactured energy storage devices to meet particular needs.

The core data in the following table comes from a July 2008 Sandia National Laboratories report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program. While the original Sandia table focused on the current and projected capital costs for manufactured energy storage devices that can be used in solar power projects, the basic cost structure applies to all Smart Grid applications. Since the EAC’s Bottling Electricity report states that the principal purchase decision metrics in Smart Grid applications will be installed cost, reliability, discharge duration and cycle life, I’ve reordered the Sandia data to create a cost hierarchy and provide summary information for each type of storage device. More detailed information on the advantages, disadvantages, commercial status, current research and development and potential applications for each type of manufactured energy storage device can be found in the SEGIS report.

Click for pdf version

The following table is my attempt to integrate the cost and performance data from the SEGIS report with the Smart Grid application information in the EAC’s energy storage report. My goal is to identify the principal technologies that might be useful in each application and highlight the technologies that seem most likely to prove cost-effective. Since the EAC’s report highlights the need for substantial additional research, development and testing to better identify the optimal technology choices, the table is only one man’s informed view through a cloudy crystal ball.

Click for pdf version

At first blush, the percentages of generating capacity that could be satisfied by energy storage systems seem pretty modest, a mere couple of percentage points here and there with higher margins for alternative power installations. But those tiny percentages become massive potential revenue numbers when you consider that the capital cost of energy storage installations ranges from $150,000 to $1.3 million per MWh. Since the principal competitors in the energy storage sector are small compared with similarly positioned companies in other sectors, I believe energy storage is likely to be a veritable investment tsunami that will offer extraordinary returns.

Most of the buzz in the alternative energy sector focuses on renewable power, demand management technology, advanced power transmission systems and batteries for electric vehicles. In the process, the media has largely overlooked the reality that energy storage devices are essential enabling technologies for both transportation and the Smart Grid. A number of analysts are predicting that annual global demand for energy storage devices could grow from $25 billion to $100 billion over the next decade. Most estimates of future growth in the automotive market talk about battery sales the $15 to $20 billion range. The much larger growth will come from using energy storage technologies to support the development and evolution of the Smart Grid. While size and weight may matter when it comes to automotive applications, they will be meaningless in grid-based applications where installed cost, reliability, discharge duration and cycle life are the critical metrics.

There are two pure-play public companies in the flywheel sector. Active Power (ACPW) manufactures systems that use low-speed flywheel technology to provide backup power for server farms and a wide variety of commercial and industrial installations. Since Active Power’s technology is modular, scaling systems to provide Smart Grid support should be relatively simple and I expect Active Power to be an early beneficiary of the trend toward grid-based energy storage. Beacon Power (BCON) has recently begun field-testing of utility scale governor response and frequency regulation systems. While Beacon will likely require a couple years of testing before utilities are willing to commence wide-scale implementation of Beacon’s technology, its stock offers significant long-term potential.

There are five pure-play public companies in the advanced lead acid battery group including Exide Technologies (XIDE), Enersys (ENS), C&D Technologies (CHP), Ultralife Batteries (ULBI) and Axion Power International (AXPW.OB). Each of these companies has proven products that can be rapidly integrated into storage systems for the Smart Grid. Moreover, Axion’s pioneering work on lead-carbon devices promises a level of performance, power and cycle-life durability that has not previously existed in the lead-acid world. In addition to its activities in the transportation sector that have resulted in a couple of significant grants, Axion is involved in two utility scale demonstration projects. Since lead-acid is frequently perceived as old-tech, the group trades at a significant discount to comparable companies that focus on other advanced battery technologies. I believe the market valuation metrics will normalize as the Smart Grid opportunities become more widely understood.

There are three pure-play public companies in the lithium ion group that have expressed an interest in the Smart Grid market. Altair Nanotechnologies (ALTI) has shipped a utility scale frequency regulation system for testing and both Ener1 (HEV) and Valence Technologies (VLNC) have taken preliminary steps to evaluate the potential for using their technologies in utility scale applications. Since size and weight are not mission critical issues in utility scale installations, I expect the cost of Li-ion technology to be a significant impediment. However, there are limited Smart Grid applications like frequency regulation that could benefit from extreme high performance batteries.

The only pure-play public company actively involved in the commercialization of Zinc-Bromine flow batteries is ZBB Energy (ZBB) which has recently partnered with Eaton for the global distribution of its flow battery systems.

Foreign companies that have active plans to manufacture products for the utility sector include France’s SAFT Groupe (SGPEF.PK), which has partnered with ABB (ABB) for large-format Li-ion devices, and Japan’s NGK Insulators Ltd. (NGKIF.PK).


DISCLOSURE: John Petersen is a former director of and holds a large long position in Axion Power International (AXPW.OB), a leading U.S. developer of lead-carbon batteries, and also holds small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

December 18, 2008

Smart Grid Stocks For The Obama Stimulus Package

A few weeks ago, I wrote about how a new Obama administration would renew with Keynesianism (i.e. large-scale counter-cyclical infrastructure spending) but with a green twist to: (a) get the US economy out of its funk and (b) propel America into the 21st Century by providing a massive push for its green industries. I discussed certain rail stocks and electric grid stocks that could benefit as a result. By-and-large, I've been right on both counts about the President-elect's strategy (i.e. Keynesian and green), but I did forget to mention an important part of the plan's focus: energy efficiency and the smart grid. Tom did discuss energy efficiency.

The smart grid, however, is increasingly being thrown around as a priority of the Obama plan insofar as the transmission system is concerned. It's thus not just about expanding transmission capacity but also about making the transmission infrastructure smarter and more efficient.

Stocks for the Smart Grid Build-out       

I'm therefore adding to my two previous lists some potential plays on large-scale smart grid expenditures.

EnerNOC (ENOC). EnerNOC designs, among other things, demand response solutions for grid operators and utilities. The company is earning-less at the moment. 

Itron (ITRI). This company is a leading maker of smart meters, the key tool on the consumer end of a smart grid. ITRI is a stock that I've found richly-priced for as long as I've followed the alt energy sector, and at a trailing PE of about 70x, I continue to find it very expensive.

Comverge (COMV). Comverge also makes smart meters and works with utilities to design smart grid solutions revolving around demand response. It's EnerNOC's direct competitor. The company is also earning-less.

RuggedCom (RUGGF.PK). RuggedCom, as its name indicates, designs communication applications for rugged environments such as electric utility substations. That communication equipment embedded at various points of the grid  is also critical in building a smart transmission and distribution system. This is a company that already makes money and trades at a reasonable PE of around 17x (reasonable given this sector's growth potential).     


DISCLOSURE: Charles Morand does not have a position in any of the securities discussed above.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

December 16, 2008

Ten Solid, Clean Companies Ready For Stimulus, and Five That Aren't

by Tom Konrad

Last February, I wrote "[Since] I expect the Fed-induced reprieve to be fairly short lived, [here are] ten solid companies I'd be happy to buy more of if and when the bottom really falls out of the market."  When I wrote those words, the Dow Jones Industrial Average was over 12,700.  Now, it's around 8,500, and I doubt anyone remembers the "Fed-induced reprieve" I was referring to.  The "bottom fell out" in September and October.   

On October 12, with the DJIA at 8451, I wrote "I don’t know where the market will go from here, but I now feel that we've seen the worst of what is likely to happen, even if the market has farther to fall."  With the market gyrating wildly but basically treading water since then, I still feel that many companies (if not the market as a whole) have seen their lows.   However, like my partner Charles, I'm interested in investing in companies which are likely to benefit from the stimulus.   I think energy efficiency stocks and electric grid infrastructure stocks are likely to be good bets, but I'm leery of any companies which depend on the consumer.

This is a reexamination of those companies in the new context.  The company names link to the articles where they were included in the series.

Building Retrofits

One of the major points which the President-Elect outlined for his stimulus plan was an energy efficiency overhaul for government buildings and schools.  Hence companies which sell services and equipment for building retrofits should be well placed to take advantage of these programs. Such companies include Johnson Controls (JCI), General Electric (GE), Owens Corning (OC),  Philips (PHG), United Technologies (UTX), Waste Management (WMI), and Honeywell, Inc. (HON).

Grid Infrastructure

During his campaign, Obama put much emphasis on the Smart Grid, but less on long distance power transmission, which I believe to be at least as important.  Fortunately, Steven Chu, Obama's pick to head the Department of Energy, is a strong advocate of transmission, and it also has support from Senate Majority Leader Harry Reid.  I am now fairly confident that, even if the initial stimulus package does not contain large spending on transmission, a more robust national electric grid is in our future.  From my list of Solid, Clean picks, those companies best positioned to benefit from this sort of spending are Quanta Services (PWR), General Cable (BGC), Siemens (SI), The ABB Group (ABB), and National Grid (NGG).  Quanta and General Cable perhaps the best positioned of these.

All of these were included in my partner Charles' list of companies well placed to benefit from electric infrastructure spending.  Given Obama's enthusiasm for the smart grid, it might also be worthwhile to consider these metering and energy management stocks.

Roads and Rail

Any spending package is likely to include considerable spending on roads, and, many of us hope, rail as well.  Not being a fan of the car, I generally don't pick road-building stocks, but one of my favorite rail picks, Trinity Industries (TRN), owns a leading producers of concrete, aggregates, and asphalt in Texas and neighboring states and the only full-line US manufacturer of highway guardrail and crash cushions, meaning that they are very well placed to benefit from the stimulus. My other rail pick, Greenbrier (GBX), seems less well placed because they are primarily in railcar leasing, which I don't expect to get immediate benefit.

Consumer Goods

Although General Electric (GE) and Philips (PHG) may benefit from building retrofits, they are likely to be weighed down by their exposure to the suddenly frugal consumer.  My solar pick Sharp (SHCAY.PK), also has this problem, without many obvious ways to cash in on other spending.

Others

My remaining February picks, John Deere (DE), and Applied Materials (AMAT) don't have any obvious way to cash in from a stimulus package, but don't seem overly exposed to consumers, either.

DISCLOSURE: Tom Konrad or his clients have long positions in JCI, GE, OC, PHG, WMI, HON, PWR, BGC, SI, ABB, NGG, TRN, GBX, DE, and AMAT.

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.

 

December 14, 2008

How Are We Doing On Our Stimulus Plan Stocks So Far?

A few weeks ago, I wrote a series of two articles on the yet-to-be-unveiled Obama stimulus package for the economy, arguing that things pointed in the direction of massive infrastructure spending with a green twist. I argued that this would benefit a certain categories of rail-related stocks and electric grid stocks. How am I doing relative to the market as a whole, which has had several positive trading days for the past while on the back of the eventual stimulus plan?   

Railway Stocks

I discussed four railway stocks in an article published on October 18. On October 17, the Dow closed at 8,852.22 and the S&P 500 at 940.55. Last Friday, December 12, they respectively closed at 8,629.68 and 879.73 for losses of 2.51% and 6.47% over that period. My stocks performed as follows:

Railway Stocks: Oct. 17 to Dec. 12 (Closing pr.)
Company Oct. 17 Dec. 12 Δ %
Koppers Holdings 20.28 21.99 8.43
LB Foster 22.89 31.68 38.40
Stella Jones 20.18 13.25 (34.34)
Global Railway Indust. 1.00 0.75 (25.00)

Not bad. Stella Jones and Global Railways are Canadian companies and their primary listings are on the TSX, so they are not directly comparable to Koppers Holdings and LB Fosters which trade primarily on US exchanges. Nevertheless, I chose to include both Canadian companies and they both underperformed pretty badly, so my railway recommendations were good as far as the US went but mediocre overall.

Electric Grid Stocks

I discussed ten electric grid stocks on November 2. The last trading day before that was October 31. On that day, the Dow closed at 9,336.93 and the S&P 500 at 968.75. Last Friday, they respectively closed at at 8,629.68 and 879.73 for losses of 7.57% and 9.19% over that period. My grid stocks performed as follows:

Grid Stocks: Oct. 31 to Dec. 12 (Closing pr.)
Company Oct. 31 Dec. 12 Δ %
ABB Group 13.15 13.80 4.94
Allegheny Technologies 26.54 24.05 (9.38)
Composite Tech 0.29 0.39 34.48
General Cable 17.08 16.97 (0.64)
MasTec Inc. 8.72 8.78 0.69
Quanta Services 19.76 18.13 (8.25)
Resin Systems 0.15 0.26 73.33
Schneider Electric 50.75 71.00 39.90
Siemens 60.15 63.92 6.27
Valmont Industries 54.78 57.46 4.89

A little better. Only one of my picks, Allegheny Tech, underperformed both benchmark indexes. If you ignore the two penny stocks (Composite Tech and Resin Systems), which most folks aren't touching at the moment, my picks performed overall decently, with five in positive territory, one that underperformed both indexes, one that underperformed only the Dow and one that's in negative territory but still outperformed the Dow and the S&P 500.   

What's Next?   

Of course none of the stimulus money has been spent or even approved yet, so at this stage in the game all of this remains speculation. Although I did not recommend any these stocks specifically, my thematic choices appear to be performing decently and may thus provide decent sub-sets for picking individual plays on the stimulus plan. I will reassess both sets of stocks once the Obama administration is in power and the stimulus strategy is being implemented. 


DISCLOSURE: Charles Morand is long ABB.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

December 07, 2008

Comparing Electricity Storage and Transmission

Electricity Storage and Transmission are naturally complementary, and more of both will be needed.  But given limited time and resources, where should those of us who want to see as much renewable electricity on the grid as soon as possible concentrate our efforts?  The choice is not immediately clear.

Dennis Ray, ED of Power Systems Engineering Research Center (PSERC) was quoted [pdf, p.11] as saying “Regardless of contractual arrangements that are subject to environmental regulation, the ultimate dispatch pattern that will determine the actual emissions is largely dependent on transmission constraints and reliability considerations.”

Horses for Courses

At a basic level, the preference of transmission over storage will depend on your goals.  For those interested in energy self-sufficiency and distributed generation, improved transmission runs contrary to their goals.  

The related goal of energy security can cut both ways: while a more integrated national grid might be more vulnerable to large scale blackouts, its greater size would make it less vulnerable to disturbances caused by the loss of any one source of generation.  Since transmission can either cause or prevent blackouts, a smarter, more fault tolerant grid seems a better way to combat blackouts than a less connected, more Balkanized grid.

When it comes to goals of increasing the penetration of renewable energy into the grid, electricity storage will likely be essential at high levels of penetration, and new transmission is essential to bring electricity from areas where renewable resources are plentiful to where they are plentiful to population and load centers.  

Relative Value

Leaving aside necessary new transmission to bring renewable electricity to market, and electricity storage which will likely be necessary to reach high degrees of grid penetration for renewable electricity, there is considerable scope for both electricity storage and a more robust national grid to make it cheaper and easier to allow quick renewable electricity integration.

 Unfortunately, comparing transmission and storage is very much apples and oranges.  Storage, in essence, takes electricity produced now and stores if for use later (transfer in time), while transmission takes electricity produced here to where it's needed there (transfer in space).  The relative value of transferring electricity in time and in space depends on the relative price of electricity here and now, to the price of electricity used there and then, as well as the cost in losses from the transfer.

In the balkanized North American grid, we have both daily fluctuation in price and wide geographical price differences, as well as differences in price fluctuations in timing.  These variations will make storage relatively more valuable in a location which is far from other parts of the grid, and which sees high daily variation in electricity prices due to variable supply and/or load.  A common example of this is that it is often cheaper to build a completely off-grid home if the home is more than a half mile from existing electricity lines.

In contrast, the low cost of connecting to grid service means that no one is envisioning building off-grid homes where electricity service already exists.  Note that policymakers are talking about Net Zero Energy Homes (i.e. homes which both import and export electricity from the grid,) not true Zero Energy Homes, which would supply all their own energy all the time.

In a 2005 study "Improving the Value of Wind Generation through Back-up Generation and Storage" from the California Energy Commission (CEC Study) evaluating the use of storage to allow wind to operate as a firm resource found that "even under fairly optimistic assumptions, the energy storage approach is unlikely to perform as well as operating under an Intermittent Resources."  If the economics of wind cannot be improved through the direct use of storage, a more robust transmission system will have to achieve benefits at significantly lower costs in order to improve wind economics.

A Simple Example

In order to directly compare the benefits of transmission and storage amid all these variables, I start with a simplified example where the two are more or less comparable.  Traveling from West to East is in many ways analogous to traveling forward in time as you cross into new time zones.  It's always an hour later in New York than it is in Chicago.  

Let's assume then that we have a single transmission line connecting two similar areas of the grid, where the marginal costs of electricity have identical patterns throughout the day, but located in time zones an hour apart. Sending electricity from West to East would then have the same economic value as storing the electricity for an hour in the Western grid, and releasing it an hour later.  Sending electricity from East to West would have the same economic value as discharging the same amount of electricity from storage, and then re-charging an hour later.

If, for simplicity, we assume that the electricity storage and transmission line have the same capacity, then the transmission line can operate similarly to electricity storage with capacity large enough to charge or discharge discharging continuously for two hours.  The two-hour capacity is necessary to compensate for the ability of the transmission line to move power into the past (East to West) as well as the future (West to East)

Still Apples and Oranges?

Some readers may protest that electricity storage has the advantage of charging when electricity costs are low (usually at night), and not discharging until prices peak (usually in the afternoon or evening.)  This actually makes less difference than might be expected, because the transmission line can be operating continuously, and the sum of one-hour differences in price will equal the difference between the peak price and the price in the overnight trough.  In other words, transmission makes up for the smaller price differentials with increased volume of electricity transferred.  

On the other hand, the value of transmission deriving from different prices between locales are assumed to be negligible in this example.  A look at a map of average electricity prices in the United States

Figure 4 is a large U.S. map showing the U.S. electric industry residential average retail price of electricity by State for 2003 in cents per kilowatthour. For more information, contact the National Energy Information Center at 202-586-8800.

shows that most East-West transmission lines across time zones will also benefit from highly significant differences in average electricity prices.  Since my example completely ignores these differences, my simple example is likely to greatly underestimate the value of transmission relative to storage.  

What Does it Cost?

According to the Electricity Storage Association,  the best storage technologies other than pumped hydropower (which I exclude from this analysis because new pumped hydropower developments are severely limited due to environmental and water rights issues) can store electricity for an incremental cost of about 2-5 cents per kilowatt-hour.  

In contrast, Wikipedia puts the cost of "[l]ong-distance transmission of electricity (thousands of miles) [at] US$ 0.005 to 0.02 per kilowatt-hour."  A one time-zone transmission line needs to be long enough to cover 15 degrees of longitude.  This is slightly over 1000 miles at the equator, but gets smaller as you move to higher latitudes.  In the United States, this varies between approximately 800 and 900 miles.  The shorter distance should put the cost of transmission at the low end of the range above, or 0.5 cents per kWh, or about a quarter to a fifth the cost of storage.

In my simple example, the cost of transmission per kWh will have to be increased to compensate for the greater number of kWh transferred, since a storage system would likely only be cycled once per day (for two hours of charge or discharge), while the transmission system will be operating whenever the hour-to-hour price differentials are high enough to make up for line losses.

A look at hourly prices for electricity in Ontario for December 3rd (the day I am writing this) show that prices are rising or falling significantly about 16 hours a day, meaning we expect the transmission line to handle about 8 times as many kWh as the electricity storage.  Hence the incremental costs for transmission may need to be increased from the above estimates to reflect the greater incremental costs due to line losses.  However, all the "cents per kWh" numbers above contain assumptions about frequency of usage to allocate capital, maintenance, and electricity losses between kWh used.  Storage technology for grid stabilization is most likely assumed to cycle approximately once per day, while this paper uses the assumption that a transmission line will be operated at 65% capacity, similar to the line in my example.  Therefore, if the cost for transmission needs to be scaled up to reflect the higher usage, it should likely be increased by a factor significantly below 8, and perhaps not at all.

Taking this together, the value of the ability of the transmission line to act like electricity storage should be between 1 and 4 cents per kWh, still slightly below the 2 to 5 cents per kWh for most storage technologies.  If we assume that there are any significant other benefits to transmission (such as increased diversification of power supplies and the ability to buy low and sell high between different regions, as discussed above), electricity transmission becomes the clear winner where it can be built.

Too Simple?

Clearly, my comparison for a trans-time-zone transmission line and electricity storage is still far too simple to capture the full benefits of either technology.  However, in an age when storage technologies are still mostly experimental while transmission technologies are well-established, it seems clear to me that our first efforts should be to capture those large-scale gains we can with a robust national grid.  With President-Elect Obama promising "green" infrastructure spending to jumpstart the economy, neglecting electricity transmission would be a tragic mistake.

What's Stopping Us?

To a believer in free markets, it's probably quite surprising that such large economic opportunities exist.  Similar to the untapped opportunities in energy efficiency, market barriers have crippled the national electric grid.  The most obvious barriers are those of people who object to how they look.  Because of the need for long, contiguous corridors, negotiation with individual landowners has delayed many projects for years.  For many large projects, the power of eminent domain is essential.  This is why T. Boone Pickens combined his wind plan with plans for a water pipeline from the Ogallala Aquifer.  In Texas, water projects have eminent domain, while electricity projects do not.  

There are also significant regulatory barriers.  Electricity deregulation in many states meant that utilities often had no incentive to invest in new transmission infrastructure[pdf].  Furthermore, electricity planning is done state-by-state and region by region, with the North America carved up into nine independent regions.  

Currently these problems are only being addressed on a state and regional basis.  A robust national grid will require all these problems to be addressed at a national level.  One approach might be for Congress to create a national transmission planning authority with the right of eminent domain, or the right to use the right of ways along the interstate highways system.

Is that too much to hope?

Tom Konrad

November 16, 2008

Demand Planning: The Future of Demand Side Management

Electric utilities have a process by which they project future expected demand for electricity, and then find resources, either new electric generation or energy efficiency (Demand Side Management, or DSM) resources to meet that expected demand, or reduce that demand.  Progressive utilities and utility regulators now include DSM among the mix of resources as a matter of course.  According to Martin Kushler, of the American Council for an Energy Efficient Economy (ACEEE) who spoke at the Southwest Regional Energy Efficiency Workshop about an upcoming report from ACEEE, DSM resources cost an average of 3 cents per kWh of energy saved, much lower than the typical 10 cents per kWh for new supply side resources.  Since saving energy is not only considerably cheaper but also cleaner than new generation, including renewables, DSM resources deserve pride of place in resource planning.

Bringing DSM into resource planning has required that utility regulators change utility incentives to assure that utilities will not be undermining their own profits.  In many states, this has been a slow revolution moving from traditional "least cost" planning, which focused on achieving the lowest possible cost per unit of electricity delivered, to a focus on reducing overall energy bills (either by reducing kWh used, or minimizing the price per kWh.)  This goes against traditional utility instincts, which like most businesses would like to expand by increasing sales, but can be achieved by paying for reliable service, or giving incentives for efficiency.

However, there has always been one aspect of DSM which utilities have little problem with, which are various measures to reduce peak loads, either through Demand Response (payments to customers in return for turning off equipment during peak times) and peak shaving (efficiency measures which reduce peak load by shifting loads to other times of the day.)  Reducing peak load is in the utility's interest because it improves system reliability without significantly reducing total sales or expensive expenditures on peaking plants which are only used for a tiny fraction of the year.

Utility-Think

The traditional thinking breaks down demand into a base load piece, which is basically the least amount used at any time during the year, and any demand above that level.  Traditionally, utilities sought to meet this demand with a mixture of base load (which runs nearly all the time) and dispatchable generation (which can be controlled, and is brought on as necessary).  This thinking has run into problems as intermittent generation, such as wind and solar.  

Typically, utilities express these problems as problems with intermittent technologies, calling them "unreliable," which they are if you define "reliable" as only those resources which are on 90% of the time, or which can be called on at will.  That is not the definition of reliability most of us use: most people would call something reliable if it's there when you expect it to be.  With the colloquial definition, the rising and setting of the sun is about as reliable as anything gets, and the reliability of solar and wind power also follow predictable daily and seasonal cycles, limited only by our ability to predict cloudiness and windiness.  

Admittedly, weather prediction is not the most reliable of sciences, especially when attempting to predict weather in small areas or gusts of wind or shadows from clouds in small areas.  However, geographic diversification can smooth the fluctuations in generation from gusts of wind or shadows of clouds in an electric system with multiple solar or wind facilities spread over a broader area.  The remaining unpredictability of generation for such a diversified system should be manageable by a system which has no trouble coping with customers' unpredictable and wildly fluctuating demands for electricity.

A typical "reliable" combined-cycle gas turbine [pdf], takes 3 hours to start from cold, and can ramp up or down only 7% in power output per minute.  On this time scale weathermen tend to be fairly accurate over broad regions and a few hours ahead; weathermen earn their reputation for unreliability due to the surprises which arise in forecasts for a day or two ahead, and even here improvements are on the way.  For minutes ahead, the wind speed around the field should give operators a good idea of the strength of wind approaching it.

Implications for DSM

The same narrow focus on dispatchable and base load generation also leads to a focus on only two types of demand management in electric utility DSM programs.  These programs are almost universally evaluated on (and hence focus on achieving) three things:

  1. Overall energy reduction (kWh savings)
  2. Peak load reduction (usage at peak times)
  3. Demand response (load reduction which can be called upon in times of need.)  

As I argued in my article on Wind Power and Heat Pumps, there are other valuable aspects of managing demand than just these three factors.  While electricity is most expensive to generate at times of peak use, the costs vary greatly throughout the rest of the year as well.  In addition to the load on the system, the cost of natural gas is considerably higher in the winter than the summer, meaning that saving the same kWh of energy at the same level of load is worth more in the winter than in the summer, so long as the kWh would have been generated using the same amount of natural gas at the two times.

To be fair, the cost/benefit tests used to evaluate the effectiveness of DSM measures often do take into account such cost factors as the fuel cost I point to above, but in my experience, it is a very imprecise process, with very little attention given to timing of the savings ("load shape") beyond an attempt to quantify the coincidence with peak.  At a discussion with Xcel Energy (NYSE:XEL) where they were soliciting feedback from stakeholders for the goals of a DSM Potential Study, they did not intend to ask the contractor for load shape information of various measures evaluated until I raised the issue.

Demand Planning

Over the longer term, as more electricity is generated by intermittent sources, load shape information will become increasingly important.  Rather than a focus on reducing peak load, the focus will need to shift to reducing load when it exceeds available intermittent resources, and increasing useful use of electricity when renewable energy is most abundant.  At even relatively small penetrations, solar generation can exceed demand on sunny mornings when the temperature is moderate, while wind can exceed demand on windy nights, especially in the winter.  Even before we add enough renewables to the system that they begin to exceed demand at these times, we need to be thinking about shifting future demand to those times of relative plenty, and from those times of relative scarcity.  

Such shift can easily be accomplished with electricity storage, but such storage can be quite expensive.  A more economic option would be encouraging customer choices today which influence the patterns of future load.  Even if we can't predict how windy it will be a week from now, we know, climate change notwithstanding, the daily and annual patterns of sun and wind five, ten, and twenty years from now.  We also can reasonably expect that both wind and solar electric generation will be much higher than it is today.  That extra generation will be added as part of the utilities normal process of Resource Planning, in which DSM is now finding its place.  The next logical step is Demand Planning, using utility DSM programs and other tools to better meet the available future electric resource with future electric demand, supplying useful electric services to make our lives better.

Tom Konrad

November 02, 2008

Keynes Meets Carson, And How You Can Invest It (Part 2)

Two weeks ago, I brought you the first of a series of two articles on how you can play the clean infrastructure build-out that could come as a result of an Obama victory today. In that article, I made the point that the political and economic ideology that had prevailed in America over the past 30 years, economic laisser-faire, had been severely undermined by the recent credit meltdown and what now looks like it will be the worse economic shock in a generation or more. I further argued that the increasing sidelining of the "small government" discourse in American politics in the wake of this crisis would provide the impetus for an overt return to a Keynesian approach to dealing with recessions, whereby the government would directly undertake expenditures in the economy to jump-start aggregate demand. Finally, I linked this to Barack Obama's environmental and clean energy credentials, and argued that under his watch, a massive, federally-mandated infrastructure spending program would certainly contain environmental and clean energy components.

Much has happened since I wrote that first article. Firstly, Allan Greenspan, arguably the most influential free-market thinker of the past four decades, shocked the world by admitting that the ideology on which he had relied for the better part of his professional life had been proven "flawed" by the crisis. This admission represents the loss of a major pillar for the intellectual edifice of the Free Market. Second, state and municipal officials' calls for an economic bailout package grew louder last week, with demands ranging from infrastructure spending to direct help in meeting budgetary shortfalls. Thirdly, a plethora of metrics are now pointing toward a significant softening of the economy in the coming quarters, not the least of which is a record drop in consumer sentiment. Lastly, barring a major onslaught of the Bradley Effect, Obama looks nearly certain to win the presidential contest, and there is a very real possibility that the Democrats could emerge with a filibuster-proof majority in the Senate, giving the new president a significant amount of leeway in moving swiftly on an counter-cyclical spending agenda.

In light of what I just highlighted above, I continue to believe that clean infrastructure on the back of government intervention is a potentially interesting theme. There are, of course, some pretty significant risks to this thesis. Firstly, the US is in no fiscal position to launch into a multi-billion dollar economic bailout effort. Second, although credit markets are slowly thawing, my commercial and investment banker friends will readily share that accessing capital for companies remains a daunting task, government contract or not. Lastly, local content provisions aimed at boosting the domestic multiplier effect could eliminate many foreign companies from being eligible for money.

Stocks For The Clean Infrastructure Build-out, Part 2 - Electricity Transmission & Distribution

In the first article of this series, I discussed rail power stocks. In this article, I discuss stocks in the second major area of infrastructure that alt energy investors have an interest in: electricity transmission and distribution. As with the first instalment, I did not do an extensive amount of research on most of these companies, so I welcome any insight readers may have. As with rail stocks, I looked for firms that would benefit from spending programs - i.e. suppliers and contractors - rather than companies that operate transmission systems. A decline in industrial production and a weak economy in the US could spell lower volumes for power generators and distributors in certain states with a high concentration of heavy industries.

The ABB Group (ABB) - Financial statements here. ABB has exposure to a number of areas related to transmission and distribution systems. The company makes cables, transformers and various other products related to power electronics and management. ABB is also a leader in providing power equipment for wind farms, including in the emerging area of offshore wind. This is a stock that has gotten blasted in the past few months on worries over significantly weaker infrastructure spending around the globe, and is down about 60% from its high in April of this year. ABB now trades at a last-twelve-month (LTM) PE of around 6.8x, which is cheap by historical standards.

Allegheny Technologies, Inc. (ATI) - Financial statements here. Allegheny is not as pure a play on transmission as ABB is, but it nevertheless produces some products with grid applications. Among them are a number of specialty alloys and metals for transformers and efficient grids. Allegheny also produces iron castings for wind turbines. At a TTM PE of about 4.5x, this is also a down-and-out stock that has taken a beating. 

Composite Technology Corporation (CPTC.OB) - Financial statements here. Composite is commercializing an innovative transmission cable solution, and has a wind power division that produces utility-scale turbines. However, this is an earning-less stock and those aren't for the faint of heart in the current market environment.

General Cable (BGC) - Financial statements here. This company that makes a range of cables, including transmission and distribution cables of different voltages and underground cables. This is a very direct play on cables, as the name indicates. At an LTM of about 3.8x, this stock is trading squarely in cheap territory.

MasTec Inc. (MTZ) - Financial statements here. MasTec is a subcontractor to the utilities and communication industries, building, installing and maintaining electricity transmission infrastructure. The company is earning-less.

Quanta Services (PWR) - Financial statements here. Quanta is also a contractor to the power transmission and distribution industry, with services including infrastructure design, installation and maintenance. At an LTM PE 23.81x, this is a stock that would be too expensive for me in the current market environment, especially that it doesn't pay a dividend.  

Resin Systems (RSSYF.OB or RS.TO) - Financial statements here. Resin Systems makes composite utility poles for electricity transmission and distribution. Composite materials aren't ubiquitous for utility poles just yet, with wood, concrete and steel still dominating. However, as in other applications, composites probably hold a decent amount of potential. Here, we have an earning-less company trying to set new standards - probably a tall order in this environment.

Schneider Electric (SBGSF.PK) - Financial Statements here. Schneider provides a range of products related to electricity management, distribution and transmission. It is a direct competitor of ABB's. One interesting factoid about Schneider is that it recently acquired Xantrex, a leading maker of power inverters and converters for the wind and solar industries. At an LTM PE of 6.6x, Schneider is valued similarly to ABB...no big surprise here.   

Siemens (SI) - Financial statements here. Siemens makes a range of products for the power transmission and distribution sector, including switchgear, transformer and substations. The company is also a leading manufacturer of utility-scale wind turbine. It is currently trading at a TTM PE of 5.4x.

Valmont Industries (VMI) - Financial statements here. Valmont makes transmission and distribution poles from concrete, steel or a mix of the two. 

DISCLOSURE: Charles Morand has a position in ABB.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

     

       

    

          

 

             

October 28, 2008

Wise Energy Use Stocks, Part 6: Smartgrid Pioneers

This is the final article on the companies in the Wise Energy Use index.  I believe that the current turmoil has given stock pickers an opportunity to buy well capitalized firms which make money by helping people save money on energy.    The industry is poised to do well in hard financial times, but companies with weak balance sheets may not survive.  In this series, I try to separate the wheat from the chaff.   I generally liked the efficient lighting, smart metering and energy management, and global services companies in the index, but wasn't thrilled by any of the electric vehicle picks.  

Although the Smart Grid is something which is definitely necessary to use our electricity more wisely, it's also something of a research project: we don't really know what it's going to look like when it gets here.  What it does look like and which companies profit will be highly dependant on future regulation, so while many of the smart grid projects pursued by the following companies are quite admirable, I have to wonder if they will do much for any of the company's bottom lines.

Duke Energy (NYSE:DUK).  Duke has a current ratio of just over 1, which is lower than I would like with its cash from operations only about a quarter of its total debt, and a slightly negative levered free cash flow.  However, since Duke is in part a regulated utility with very stable operations, a less solid balance sheet could potentially be tolerated, although I'd want to look deeper into the company's structure to see just how this affects the riskiness of the company as a whole before investing.  The pilot project in smart grid technology is interesting, but not much of a reason to invest.

Xcel Energy (NYSE:XEL).  I'm very familiar with Xcel, which is my electric and gas utility in Colorado, as well as a company I deal with at the Colorado Public Utilities Commission (PUC).  Because of my personal involvement as an expert witness in Demand Side Management cases for the Energy Efficiency Business Coalition, I believe that the current program the PUC adopted as a result affords Xcel the opportunity to slightly increase their profit margins by aggressively adopting energy efficiency, benefiting both Xcel and its customers.  Therefore, I'm also a small shareholder (I consider the Smart Grid pilot in Boulder to be unlikely to affect the bottom line any time soon.)  The company also leads the country for the amount of wind power delivered to customers.  Although the current ratio is only 0.8, and operating cash flow is a fraction of total debt, as a regulated utility profits are relatively stable.  I have also heard from company employees (water-cooler talk, essentially, but this could be confirmed by a review of company financial statements) that the company has been taking every opportunity they had over the last year to raise new debt financing, in anticipation of tightening credit markets. 

Whirlpool Corp (NYSE:WHR). As a manufacturer of consumer durable goods, albeit appliances ready for the Smart Grid, Whirlpool's revenues are likely to be hurt by an extended downturn.  Therefore, although the current ratio is 1.2 and operating cash flow would cover the company's entire debt in three years if it were not to decrease, I would still be uncomfortable holding this company.

Samsung Electronics.  Samsung does not have a US listing, but Energy Tech Stocks chose to add it to the index because it's looking into the same unpromising business of selling Smart Grid-enabled appliances to consumers as is Whirlpool. As I'm reluctant to invest in any company hoping to sell durable goods to consumers, I decided not to hunt down the financial statements in order to examine the company's liquidity.

Freescale Semiconductor (NYSE:FSL).  With a current ratio of about 3.5, and enough operating cash flow to cover all debt in a year, this company seems like a better bet to gain from putting chips in appliances than the appliance makers themselves, since each smart grid chip will be a new sale for Freescale, but simply replace another appliance sale for Whirlpool and Samsung.

DISCLOSURE: Tom Konrad owns XEL.

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.  

October 18, 2008

Keynes Meets Carson, And How You Can Invest It (Part 1)

I'm not sure whether John Maynard Keynes, the father of Keynesian economics and an ardent proponent of government interventionism during hard economic times, and Rachel Carson, the mother of modern environmentalism and the author whose work is credited for the eventual creation of the EPA, ever met during their lifetimes. But if current voter sentiment holds until November 4, their ideas could soon converge and form the basis of government policy for at least the next four years. Let me explain.

First, John Maynard Keynes. There is no doubt that the deliberate and coordinated nationalization of financial services institutions across the West marks a new low for neoconservative economic thinking. This line of thinking holds that government should play as small a role as possible in the economy, and leave spending decisions to individuals and firms. Proponents of this philosophy argue that the best fiscal move a government can ever make is to return money to its citizens and corporations through tax cuts, who will then spend that money most efficiently. The Keynesian approach, on the other hand, is premised on the idea that it is not only OK but even desirable for governments to step in and directly incur large expenditures in difficult times to jump-start the economy.

Until the credit crisis hit, the Keynesian view had all but disappeared from Washington, and small and unobtrusive government was all the rage. However, in the wake of the economic and financial havoc wrecked by what many view as too much withdrawal of government from the economy, it appears as though its has become politically-acceptable for American lawmakers to overtly push for a more activist state. What form will this take, according to proponents? In old Keynesian fashion, large-scale infrastructure investments to create jobs and kick-start aggregate demand. While it is not especially surprising to hear academics argue for this form of government intervention, it's quite something to see Democratic politicians so emboldened by recent polls that they feel they can safely write about it in op-eds. The current crisis, it appears, has cast serious doubts in the minds of a growing number of voters on the ability of the free market to deliver wealth and well being for everyone, thus setting the political stage for a return to a more interventionist state in America.

Second, Rachel Carson. Obama's environmental credentials are strong to be sure. He has remained steadfast in his support of clean energy as a cornerstone of his broader energy policy, even in the face of overwhelming public support for domestic drilling and falling fossil fuel prices. It is therefore no wonder that in cleantech-addicted Silicon Valley, generally a place where big government is seen as a break on innovation and entrepreneurship, a number of high-profile VCs and their employees are supporting Obama. AltEnergyStocks.com officially endorsed Obama last week specifically for his credentials on alternative energy and energy efficiency. While some of Obama's motivations for being in favor of clean energy have to do with energy independence and economic development, it is fair to say that he is also strongly motivated by his own environmental values and his belief that climate change must be addressed.

What does this all mean for investors? As the macro-economic consequences of the credit crisis continue to spread, I expect an Obama victory to result in some form of an activist government strategy to boost employment and the economy. This activist program will revolve around massive expenditures in large-scale infrastructure projects, and if Obama can help it there will likely be an environmental angle to the program. If what politicians are currently saying is a true indication of what they intend to do, rail transportation is likely to be a major beneficiary. In the first of this two-part series on how investors can play the build-out in clean infrastructure, I present four stocks I came across while doing research on this.

Besides rail transport, the other major area of infrastructure alt energy investors care about is electricity transmission. Given Obama's promises on clean energy and the environment, the amount of press the Pickens Plan is receiving, and the state of America's transmission system, it is not unreasonable to expect that Washington could seize this opportunity to direct massive investments into this area as well. In the second part of this series, I will discuss potential plays on transmission.

Stocks For The Clean Infrastructure Build-out, Part 1 - Rail Transport

When doing research on this topic, I looked for companies that would benefit from investments in the rail infrastructure network, rather than companies linked to running or manufacturing/maintaining trains and cars. A severe economic downturn coupled with lower gasoline prices would reduce demand for rail transport, so this is not an area I'm particularly bullish on for the next year or so. In the long run, however, I believe that the renaissance of North American rail driven by high energy prices, tighter environmental regulation and an increasingly clogged highway network that's running out of space to expand, will be a strong theme to watch for alt energy investors.

I did not run any numbers or do an extensive amount of due diligence on the firms below, so if you have any information to share please go ahead.

Koppers Holdings (KOP). Financial statements here. At upwards of 45%, Koppers holds the largest market share in the North American railway tie business. Railway ties are the wooden beams that support the rails. Koppers also makes utility poles, and could thus benefit from investments in electricity transmission. One interesting thing about Koppers is that it runs a biomass power plant that burns recycled railway ties and utility poles (I found that out while checking the website. They have a video about it). At a PE of around 6.3x last year's earnings, this stock is trading in cheap territory.

LB Foster (FSTR). Financial statements here. LB Foster's rail division sells rail and other related products to a range of industries including passenger and freight railroads, rail transit, ports and others. One interesting feature of this company is that it also recycles and re-sells used rail. This stock is currently trading at a trailing 12-month PE of around 2.2x, which is very cheap by most measures. I haven't looked closely into this firm so I'm not sure why it would be trading at such a discount to its peers, even in difficult market conditions.

Stella Jones (STLJF.PK or SJ.TO). Financial statements here. At about 20%, this company has the second largest market share in the North American railway tie market after Koppers, and it has been an aggressive consolidator of the fragmented treated wood market. The company also has a 70% market share of the Canadian railway tie market, another jurisdiction where the government is weighing the merits of infrastructure spending as a counter-cyclical measure. Stella Jones is also active in wooden utility poles and could benefit from spending programs in electricity transmission. One of the major negatives with this stock is illiquidity: the largest shareholder owns about 62% of shares outstanding, and volumes tend to be extremely light. At a trailing 12-month PE of around 9.8x, Stella Jones is reasonably priced, although increased debt levels recently on the back of five acquisitions in five years could be a concern.

Global Railway Industries Limited (GRWIF.PK or GBI.TO). Financial statements here. Most of the company's business is in the sale of locomotive and other train components. However, it also sells a range of railway track and signal products. This stock is currently trading at around 10x last year's earnings, so it is the most expensive of the four.

DISCLOSURE: Charles Morand does not have a position in any of the stocks listed above.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

October 16, 2008

Wise Energy Use Stocks Part 4: Metering and Energy Management

This is a continuation of my look into which companies in the Wise Energy Use index seem to have the financial strength to survive a prolonged slowdown.  I generally liked the efficient lighting companies in the index, but wasn't thrilled by any of the electric vehicle picks. This article looks at the energy management and metering companies described here, many of which were also featured in my article on smart metering.

Many of these companies sell their products to utilities, not consumers, so their revenues should be less vulnerable to a drying up of consumer credit than most. 

Itron, Inc. (NASD: ITRI).  Metering company Itron has a lowish current ratio (.93), but positive operating and free cash flow. It also sells its products into the utility market, not to consumers, giving it a relatively stable revenue base in a downturn.

Echelon (NASD:ELON).  Energy management company Echelon also sells into the utility market, has a strong current ratio over 5, and while operating cash flow is negative, it is less than 4% of cash on hand.  

Woodward Governor (NASD: WGOV).  Energy control company Woodward Governor sells into a wide variety of industry, aerospace, and energy companies.  Some of these will be exposed to a slowing economy, but certainly not as much as consumers, and some are relatively stable (utilities and military.)  The company has a comfortable current ratio of 3.3, and positive cash from operations and levered free cash flow.

EnerNOC (NASD:ENOC).  Demand Response company EnerNOC also sells into the relatively stable utility market.  Although still losing money, their current ratio is a relatively comfortable 2.8 and they have four years of operating cash loss and two years of levered free cash loss in cash on hand.

Energy Recovery (NASD: ERII). Energy Recovery was a new company to me.  According to Energy Tech Stocks, they provide "power to water desalination plants. Experts say Energy Recovery’s equipment provides significant cost savings over its competitors."  Desalinization plants should be a relatively stable market, even in a downturn.  The company has a solid current ratio of 3, but very little cash on hand; most of their current assets are in the form of accounts receivable and they have a small negative operating cash flow.  Doing a little more digging, I see that these numbers are from before the company's well-timed July 8 IPO, so the balance sheet now looks much better than would be expected from the last quarterly report.  I still need to do more digging, but Energy Recovery is going on my list of stocks for further research.

DISCLOSURE: Tom Konrad owns ITRI, ELON, WGOV, and ENOC.

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.  

October 08, 2008

My Portfolio's Latest Casualty And Addition

The Casualty

Last Monday, I discussed how I had recently reviewed Railpower Tech with a view to potentially adding to my position on grounds that: (a) the company had a fair amount of cash in the bank, which reduced the need to go to capital markets for financing for a while; and (b) that it was getting badly battered by general market conditions, potentially offering an attractive entry point. Although my portfolio has taken a beating in recent weeks, I remain ready to take small positions in stocks if I feel they are being unfairly bashed, including in penny stocks. The current situation is bad to be sure, but I don't think we are at the point yet where every small and medium business faces certain bankruptcy.

I noted in the article that the reason why I decided not to commit any more money to Railpower for the moment was the lack of contracts being signed given the operating leverage the firm was taking on by building a new factory. Unfortunately, this exact problem forced Railpower to materially alter its plans, and on Monday evening it announced it was canceling construction of the plant on grounds that new orders were not coming in (PDF). I fully exited my position on Tuesday morning at a pretty handsome loss on a percentage basis, although luckily my position was very small and the cash loss wasn't needle-moving.

With my portfolio, I keep a log and always record the reasons why I enter and exit positions and what I've learned from different investments. What are main lessons I took away from this one? First, as money rarity spreads into non-financial industries, capital expenditures, especially for big-ticket items, will be some of the first things to be delayed or canceled. Prudence is therefore in order with firms that derive a large portion of their revenue from the capital expenditures of other firms. However, as pointed out by Tom yesterday, it is not impossible that the government may try to invest in infrastructure as a counter-cyclical measure.

The second thing I noted down was that in uncertain times, it is cautious to start out a position small and see how things develop. If the market turns in your favor, you can build up your position and the only real cost is an opportunity cost. If you missed something in your analysis or if the market ceases to pay attention to fundamental value as it is currently doing, you can exit the position at a smaller cash loss or you can try to weather the storm without loosing sleep over it.

Lastly, the balance sheet weighs a lot more heavily in my analysis in tough times in three main ways: (1) the cash position - it's gotta very strong; (2) debt levels - there has to be little or no debt and ideally refinancing isn't needed in the near-term; and (3) the value of tangible assets per share must compare favorably to share price (notably with the Price-to-Book-Value ratio). For penny stocks, I would look for firms with no debt, a completely depressed Price-to-Book ratio and assets that can be readily sold off to unlock some shareholder value should the going get too rough.

The Addition

Last Thursday, I purchased ABB Ltd. (NYSE:ABB) for the first time. I am down quite substantially since but it doesn't bother me very much. This is a long-term buy (3 to 5 years) that I had had my eyes on for quite some time but that I had always found too rich on a PE and Price-to-Book basis. ABB, a stock Tom has discussed on several occasions, is a prime play on the transmission infrastructure build-out and energy efficiency. I also applied my rule and took a very small position, which I stand ready to increase.

The Positive News

A stock that I've held for quite some time now, AAER Inc. (AAE.V or AAERF.PK), an emerging Canadian maker of utility-scale wind turbines, finally signed its first major contract on Monday. It is to deliver 100MW of turbines to a large Canadian wind project.

The next step in closing this transaction is for both parties to show they have secured financing within three months. This could prove tough in the current environment, so this is not a done deal just yet. However, if AAER can pull this through successfully, it could be the beginning of what patient investors such as myself have been waiting for for a long time - a buildup of the order book. The supply/demand situation for large turbines continues to be heavily skewed in favor of turbine companies and AAER should in principle be able to find customers.

Ironically, after the stock experienced a 40% pop last Friday probably because the news was leaked, I put in a sell order to exist most of my position Monday morning in case this was just an aberration. The company asked for a trading halt and I was never able to sell before the news came out. I wrote down in my log that I had been quite lucky on this one.


DISCLOSURE: The author is long ABB and AAE.V and does not have a position in RPWRF.PK

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

October 07, 2008

The Light at the End of the Tunnel is Energy Efficient

The Solar Investment Tax Credit has been extended, and the market for mortgage debt "rescued," but neither renewable energy nor the rest of the economy are out of the woods.  We'll probably be feeling the effects of the financial imbalances which have built up in our economy for years to come.

While the extension of the tax credit will help renewable energy technologies raise funding, the headwinds from the continued fallout of the structured finance and real estate bubble will be blowing in the other direction.  This will be a problem both for developers of new technologies, and project developers.  On the other hand, changes in the ITC (allowing it to offset the AMT, and removal of the public utility exemption) allow new investors, such as property and casualty insurers, into tax equity investing.  These investors are likely to be more cautious, but they are likely to be there.

The good news is that we already have the technology we need to decarbonize the economy.  The key now is adapting our regulatory structure and infrastructure to accept the technologies we already have.  Unarguably, project finance has become more difficult with the drying up of many pools of capital, but that is not the end of the story.  

Too Much Money

When money was relatively cheap, investors grew careless choosing their investments, most dramatically in structured mortgage products, but also in other sectors.  Now investors are more likely to careful about where they put their money.  For marginal or speculative companies, this is bad news, but it could be an advantage for dull but profitable businesses which might have been overlooked previously. 

The first steps towards decarbonizing out economy do not need to be high tech; they need to be hard work.  Energy efficiency is cheap (in fact, it usually pays for itself in just a few years, if not months,) but often requires new ways of thinking.  Investors and politicians have been quick to talk up photovoltaic companies.  Using the energy we already have more efficiently seldom received more than lip service.

I think that's likely to change, now that money is scarce.  In politics, it's no secret to anyone that the economy is hurting.  Even John McCain figured it out a couple of weeks ago.  This means that politicians are going to be looking for ways to help workers and create new jobs.  But with money scarce, there will be a push to do as much as they can with as few taxpayer dollars as they can.  

Energy Efficiency programs are an obvious option.  Most energy efficiency measures save far more money in fuel costs than they cost to implement.  This means that programs to promote energy efficiency put more money in peoples' pockets than they cost to implement.  This stimulates economic growth and jobs, all while reducing carbon emissions.  Typically, many opportunities to save energy at low cost are missed because people are too busy or in too much of a hurry chasing the big score to spend time thinking about saving a few dollars a week by sealing their house or driving sensibly.

Policy can do a lot to promote energy efficiency, through utility energy efficiency programs, independent programs with mandates to help consumers save energy, as well as labeling and information schemes such as Energy Star, and incorporating energy efficiency into building codes and other standards, such as the CAFE standard for automobiles.

Because few consumers consider energy usage in their purchasing decisions, such legislative measures as those outlined above save consumers more money than they cost to implement, and boost the economy because less money is spent over time on imported energy, therefore more can be spent on goods produced locally, keeping the money in the local economy.  Even in energy producing states, less money spent on locally produced energy means that more energy can be exported, also helping the local economy.

Transmission for Economic Transformation

Another traditional way for government to fight a slow economy is infrastructure spending.  As I've long argued, in order to reduce our carbon emissions, we need better energy infrastructure far more than we need new energy technologies.  Right now, our electrical grid is outdated and Balkanized.  Just as the national highway system contributed as much as one-third of US economic growth in the 1950s by facilitating the transport of goods across the country, a national electric transmission system would contribute to national growth by lowering electricity prices in areas without abundant cheap generation, and adding export income in areas with inexpensive generation.  A national transmission network, by providing export opportunities, would allow wind penetration in under populated, windy areas to grow beyond the needs of the local utility.  A strong transmission backbone, combined with electricity demand responsive to price signals, and electricity and heat storage are how Denmark hopes to go from 20% to 50% wind penetration.

Price responsive electricity demand (which I discuss in my articles on the one-house grid and wind and heat pumps) and and a better transmission network both make the electricity market closer to the free market ideal. Any economist will tell you that improving price signals in a market or broadening the pool of possible buyers will improve market efficiency.  Efficient markets bring economic gains, which is why transmission investments (not to mention investments in smart metering to improve the price response of demand) are not only wins for renewable energy, but wins for the economy.

Might a slowing economy make political authorities see the potential of improving our electricity transmission?  Transmission advocate Charles Benjamin of Western Resource Advocates thinks it might.  At the Second Annual Concentrating Solar Power Summit, he told the story of how he persuaded the Republican Public Utilities Chairmen to support a transmission authority.  Key to his argument was the fact that electricity rates in East Kansas were six times the rates in West Kansas, so it was clear how West Kansas residents were losing out due to lack of transmission from one side of the state to the other.

Mr. Benjamin is currently making progress getting a similar transmission authority in Nevada, despite the fact that the local utility hates the idea.   The key to this battle is bringing politicians to the realization that what is good for the utility is not necessarily good for the public, and that he was having success pitching transmission as an economic development tool.  

Rather than a hindrance, Mr. Benjamin thinks the current economic crisis is making the case for improved transmission in Nevada easier, not harder.  Google CEO Eric Schmidt seems to agree.

Those of us who want to see the whole nation have access to plentiful renewable energy can hope that the same will hold true in our nation's capitol.

September 15, 2008

Wind and Heat Pumps: A Winning Combination

This article has been cross-posted on The Oil Drum.

Last month, I brought you some nice maps showing when and where good wind resources are found in the US.  Now I've found something better: a visual comparison of electrical load with wind farm production[pdf file], published by the Western Area Power Administration in 2006.  The study compared electricity production from five wind farms in Northern Colorado, Southwestern Nebraska, and Central Wyoming in 2004, 2005, and the start of 2006, compared with electricity consumption in the same area over the same time period.

Comparison of Wind Production to Electricity Demand

I've copied four of the most representative graphs below.

The first and third heat graphs below show electricity production at the five wind farms studied in 2004 and 2005, respectively.  The Second and fourth show electricity demand in the surrounding territory.  Red(blue) denotes areas of high(low) production or demand. 

All Farms 2004.jpg wacm load 2004.jpg All Farms 2005.jpg wacm load 2005.jpg

For wind advocates, these are probably rather scary graphs.  The first thing you probably noticed was the big blue patches of wind production during summer peak demand, roughly 10am to 10pm in June, July, and August.   This is why wind is referred to as an "energy resource" not a "capacity resource."  Right when demand is highest (namely hot summer afternoons), the wind is least likely to be blowing.

On Second Thought - How Much Backup Do You Need?

That is just the first impression, and while it is a true impression, it's also an oversimplification.  If you look at the scale, you will notice that the blues on the wind production graphs actually represent wind generating at 10% to 15% of nameplate capacity.  If you factor in the fact that a normal capacity factor for wind is about 25-40%, that means that even on these hot summer afternoons, the farms are generating at one-third to one-half of their "normal" output.  This means that, contrary to popular misconception, wind does not require a "100% back-up with natural gas."   It is true that wind is less reliable than baseload power plants such as coal and nuclear, which typically run about 90% of the time, but in an apples-to-apples comparison, a 100 MW coal or nuclear plant will produce as much energy over the course of a year as a 270 MW wind farm.  During the peak summer months, the coal plant will need some backup power in case of an unscheduled shut down due to lack available coal (this happened in Colorado in 2005 due to problems with dust in rail tracks) or lack of available cooling water during a heatwave, and when a coal or nuclear plant goes down, it goes all the way down, so the 100 MW baseload plant has a small chance of needing 90 MW of backup to produce at its "normal" rate of power production.  On the other hand, the wind farm will be operating at (a conservative) third of its "normal" capacity, producing about 30MW.  To bring that up to it's normal capacity for the year, it will need 60MW of back-up power.  

In other words, because some part of a large distributed group of wind farms is always producing some power, it will never go completely down.  A large baseload power plant, on the other hand, is completely down about 10% of the time (although less during peak summer months, because utilities schedule maintenance in off seasons.)

Pick Farms to Match Your Load

Another point worth noting, is that the wind has different annual patterns in different locations.  The smallest (8.4 MW out of 139MW) of the five farms in the study was "Wind Farm B" in central Wyoming.  If you look at the following two heat maps below for 2004 and 2005, which show the production of just this wind farm, you will note that during the peak summer demand, this farm was producing at over 50% of "normal" capacity for much of the summer peak.

Wyoming Wind 2004.jpg Wyoming Wind 2005.jpg

Since we know what electricity demand looks like, if we plan new wind farms (and adequate transmission), we can choose to build wind farms that produce more power when we most need it.  If all the farms in the example in the last section had more favorable production patterns like Farm B, even less back-up generation would be needed to bring them up to "normal" capacity.

For instance, in the Texas Competitive Renewable Energy Zones study [.pdf 7.64MB] wind in the coastal area (along Texas's southern gulf coast) was found to be a much better match for the ERCOT load shape than wind in other areas, although the average capacity factor was considerably lower than panhandle wind.  See chart below.

 TX CREZ Hourly Capacity July.jpg

Hence, careful selection of wind farms can lead to wind production with higher capacity during peak loads, and correspondingly less need for dispactchable power.  Although Texas is currently focusing on developing wind farms in West Texas and the Panhandle because of their high capacity factors and correspondingly high annual energy output, the power from coastal wind farms is likely to become increasingly valuable as wind reaches higher penetration.

It's Not All About Summer Peak

Statements about wind's need for large dispacthable backup generation because of low capacity factors during peak times contain am implicit assumption that electricity demand is fixed.  This assumption is both false and pernicious, because shifting demand can be done cheaply, and often produces multiple benefits.  While it is true that most large scale electricity storage technologies, such as pumped hydropower, compressed air energy storage, and utility scale batteries are expensive or limited to a few available sites (pumped hydro,) technologies which shift the demand curve are not.

If you look back at the first set of four heat maps, you will note that wind actually does a quite good job serving the winter peak.  In 2004 (a year with a moderate summer) winter peak demand actually exceeded summer peak.  

Capacity during winter peak has some advantages over summer peak.  First of all, natural gas prices are higher during the winter, because natural gas is used extensively for home heating as well as power generation.  In February 2006, Xcel Energy had a series of major power outages in Northern Colorado which they blamed on insufficient natural gas in storage due to an unusually cold temperatures.  Yet as this heat map   All Farms 2006.jpg

shows, wind farms in the region were operating at 40-60% capacity factors (i.e. well above "normal" production) for January and February.  Note that the blue at the end of the year was due to lack of data, not lack of production.  Had there been more wind farms installed, this would have had a large impact on the amount of natural gas needed for electrical generation, and the outages would not have happened.   I don't have data to back it up, but my personal experience leads me to believe that cold winters in the great plains are also particularly windy winters, meaning that winter wind capacity is ideally suited to displace natural gas needed for heating.

How Heat Pumps Fit In

Which brings me to the title of this article: why heat pumps are an excellent fit with wind generation.  In my article on how to invest in the Pickens Plan, I mentioned that ground-source heat pumps (GHP) can displace gas used for heating with a smaller amount of electricity from wind.   Since a GHP is both an efficient air conditioner as well as an efficient heat source, it not only reduces natural gas used for heating, but also reduces electricity used for cooling in hot summer months, which in turn reduces summer peak loads.  

Deployment of GHPs does three things to make energy supplies fit energy demand:

  1. Winter electricity usage is increased just when wind capacities are highest.
  2. Summer electricity consumption is decreased when wind capacities are lowest.
  3. Use of natural gas for heating is reduced during times of peak gas demand.

GHPs, because of their extreme efficiency, also have the benefit of saving users a lot of money.

The Dual Fuel Option

Unfortunately, GHPs have not been widely adopted, due to the difficulties of installing the buried heat exchange loops, especially in urban areas (although some utility programs have been very successful.)  When I bought a house, it was in a New Urbanist development with very small lots which was close to my work.  While this saves me countless gallons of gasoline, it meant that I was unable to use a heat pump.  I opted instead for the most efficient natural gas furnace available from my homebuilder, in combination with the most efficient air-source heat pump.  Unlike GHPs, air-source heat pumps lack a ground loop, meaning that they only work efficiently when temperatures are above about 40F.  In my dual-fuel system, the heat pump heats my house during milder weather (which is frequent in Denver winters), and the natural gas furnace takes over when it is cold.   Since the heat pump is only slightly more expensive than the air conditioner I would have bought anyway, the dual fuel system will pay for itself rapidly, especially when natural gas prices are high.

From the perspective of the electric grid, my electric usage is higher and my natural gas usage is lower during the heating season, when gas demand is high and wind farms are at their most productive.  So while a dual fuel house is much less of a strain on the energy infrastructure than one with a furnace and an air conditioner, it also saves the homeowner money for a much smaller investment.  In addition, while the need for a ground loop makes a GHP nearly impossible to retrofit to an existing home, an air source heat pump is an option for anyone considering replacing or installing an air conditioner, and has the added advantage of having a back-up heat source during a natural gas outage.

Another retrofit option I hope to see available soon is a hybrid ground/air source heat pump [pdf].  These systems combine a short ground loop with an air heat exchanger.  By using the air exchanger during milder weather, only a smaller ground source loop is needed for use during more extreme conditions, reducing the up-front costs compared to a GHP, but without the performance loss of an air source heat pump.  A startup called Co-Energies has developed a way to retrofit existing air conditioners into hybrid heat pumps; see slides 33 and later of this PowerPoint.

Electricity Demand Can Shift

Heat pumps are just one option for changing the shape of the electricity demand curve.  Many such efficiency measures can do so.  Other examples are improved home sealing and insulation, which typically pay for themselves in a couple years or less, and, because air conditioners work less hard in the summer, reduce summer peak loads.  Wind is undoubtedly a tricky sort of electricity to use in the existing grid, but the fallacy that demand is fixed makes the problem seem much harder than it needs to be.

August 20, 2008

How to Invest in the Pickens Plan

A friend recently asked me how to invest in the Pickens Plan.  I named a stock (see below).

He then surprised me by saying "You are the fifth person I've asked, and no one else knew how.  Several said it could not be done."

You can invest in T. Boone Pickens's plan.  Here's how:

The Plan

T. Boone's plan is both simple and audacious.  

  1. We will build wind farms all over the Great Plains.
  2. Build the necessary transmission to get that electricity to cities, displacing natural gas used in electricity generation for the use in automobiles.  
  3. This will give us an alternative, clean transportation fuel, to replace oil, which has peaked.  
  4. It will also cause an economic revival for rural America.

There are investments available for you to profit from all of these steps (so long as they are more successful than is currently expected by the market.)  Most of the links below are to articles about how the company fits into the clean energy picture.

1. Wind Farm Investments

To profit from the massive build out of wind farms, look no further than wind turbine manufacturers, and other wind related stocks. 

2. Transmission Investments

We've been pushing transmission investments at this blog for a long time.  It's nice to have an oilman hop on our bandwagon.  Here are some of our top picks.

3. Natural Gas

  • The most direct investment in the Plan is natural gas fueling stations.  Clean Energy Fuels (NASD:CLNE), operates fueling stations for natural gas fleets, as well as providing fueling stations to the public.  T. Boone owns about 37% of the company personally, serves on the board, and founded the predecessor company in 1997.   His wife owns another 7%.  Although he just recently hit the media with it, T Boone has been thinking about peak oil for a long time. (This is the stock I told my friend about.)

4. Rural Resurgence

  • Massive wind investment should be good for real estate values in rural towns in windy areas, mainly the great plains.  You don't have to buy the land that the wind farm is on to benefit; the economic revival should help land values in towns nearby, too.  The workers have to live, eat, shop, and sleep somewhere, and county tax rolls will benefit, leading to improved public services.
  • Another way to play the same trend would be to invest in a Midwestern REIT, such as Investors Real Estate Trust (NASD:IRET).  While this should profit by an improving Midwestern economy, I'd prefer a REIT with a rural focus, but have been unable to find one.

Quibbles

DISCLOSURE: Tom Konrad and/or his clients own ZOLT, GE, ABB, SI, CPTC, ITC, NGG, PWR, CLNE, OC, WFIFF, .

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.

July 27, 2008

Equus: A Solar Inverter Play For Free!

Equus Total Return (NYSE: EQS) is a closed-end fund that trades at a 42% discount to its net asset value (NAV). The fund invests primarily in both debt and equity instruments of small-caps and private companies. Each quarter, management must report the fair value of its net assets, but the stock market value of Equus is much lower than that of its net assets. Here's a chart showing Equus' discount to its net assets for the last five years:





As we can see, Equus is used to trading at a discount to its NAV, but recent negativity across the US market has taken it to even newer lows relative to what it owns.

One of Equus' key holdings (in fact, it makes up almost one third of its portfolio) is an equity position in Infinia Corporation. Infinia is a company aspiring to mass produce a low-cost solar power converter. The fair value of one of Equus' investments in Infinia (based on follow-up venture capital investments) recently jumped from $3 million to over $20 million, as the company demonstrated a prototype late last year that converts solar energy into electricity at twice the efficiency and at a lower cost than existing products.

One way to look at a purchase of Equus' stock at this discount level is that for the price of one share at $6.90, you're getting all of its other assets (which are worth about $8.30/sh) for a slight discount, and on top of that you're getting the investment in Infinia (valued at $3.50/sh) for free! Of course, before jumping in blindly you'll want to make sure you read Equus' latest reports along with its financial statements and their notes, as we've discussed here.

In reading these reports, I found that Equus does carry some debt on its balance sheet, which is somewhat rare for a fund. This has the effect of amplifying any changes in the values of their investments, both to the upside and the downside (the effect of leverage).

Furthermore, most of the investments are in companies that aren't public, and therefore Equus is not as liquid as those funds that invest only in the stock market (undoubtedly, this liquidity premium contributes to the larger than average historical discount we see in the chart above). The lack of market quotations also makes it more difficult for management to value each of it's holdings. Infinia is one such example, as it doesn't trade on the stock market and so it's not available for an individual investor to buy. Although the drawback is that Equus' investments are illiquid, it provides an investor the opportunity to get into a company like Infinia when it would otherwise be limited to venture capital firms.

The discount is a bonus that makes this an intriguing play from a value investing point of view.


Saj Karsan is a guest contributor on AltEnergyStocks.com. Saj is a value investor at Barel-Karsan, and can be regularly found writing for Barel-Karsan's blog.

DISCLOSURE: The author does not have a position in EQS

DISCLAIMER: The author is not a registered investment advisor. 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.


July 15, 2008

Hammond Power Solutions: A Cheap Power Regulation Play?

We have discussed on several occasions the investment opportunities related to power regulation and renewable energy. I have also recently written about the value approach to investing.

I came across a stock today that I believed fell into both categories: power regulation (transformers) and value. The stock is Hammond Power Solutions (HPS-A.TO or HMDPF.PK), a firm that makes transformers for a number of applications, including wind turbines.

While revenue and earnings have been ramping up quite nicely over the past four years, the stock price has been trending mostly laterally (albeit in a volatile manner) over the past 12 months, with the result that Hammond currently trades at about 9.7x 2007 earnings. A PE of below 10 almost always draws my attention, especially for a company with exposure to one of my favorite areas of alt energy.

Interestingly enough, one of my former classmates who runs his own value investing blog had come across the same stock earlier. Here is his take on Hammond Power Solutions. I thought it was an interesting analysis and provides insight into how the balance sheet can be used to spot a value stock. Enjoy!

In Hammond's case, the question therefore is: does the company have a unique competitive advantage that will lead investors to multiply its earnings beyond 10x in the future? If so, this could be a value play.

DISCLOSURE: The author does have not a position in Hammond

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

July 06, 2008

Investment Ideas From the One-House Grid

In June, I wrote how intermittent power sources such as photovoltaics and wind would have to compete with baseload technologies such as IGCC "Clean Coal" and nuclear for capacity on the grid.  The key problem is that neither baseload technologies nor intermittent technologies are able to match themselves to the fluctuations of demand.  This creates a need for technologies which can fill the varying gaps between supply from these sources, and normal energy use.  From the comments, it seems like I was not completely clear how intermittent and baseload power cause problems for each other, so I will start with a simplified example, which I will use to illustrate the various strategies for dealing with the problem.  I see investment potential in all of these strategies.

The One-House Grid: An Illustration

Suppose that the entire grid were just one house, and it was the utility's job to make sure that there was always enough power to run all the gadgets that anyone in the house was using.  Even in the middle of the night when everyone is asleep, there will still be some power usage: running clocks, the VCR, charging cell phones for use the next day, and maybe the porch light.  That is the minimum load of the house, and traditionally utilities have met this demand with baseload power.  In contrast, there will probably also be a moment on hot summer afternoon when the air conditioner is running full blast, the refrigerator kicks on, dad is watching football on his 60" plasma TV, dinner is cooking in the electric oven, and 15 other appliances are on somewhere or other.  This is peak load, and the difference between the minimum load and peak would traditionally be met with dispatchable generation, which, until recently, mostly means gas turbines.  

In addition, some dispatchable generation will always be kept running below full capacity in order to maintain power quality and availability as appliances are turned on and off throughout the day.  These ancillary services [pdf] are called load-following reserves (maintaining availability) and voltage and frequency regulation (power quality,) and both require fuel, even if the actual energy provided is negligible.  Ancillary services are like your car's engine idling at a stop light so that you can start quickly when the light changes.  They're necessary to keep the system running, and they use fuel, but they don't actually get you anywhere.  Also like idling engines, options like hybrids exist which can save much of the energy cost (see below.)

Add a Solar Panel

Suppose we now add a photovoltaic system and a wind turbine on the roof.  Most people with solar systems know, that if you want to spin your meter backwards (i.e. produce more energy than you are using) the best time to do it will be in the late morning, while it is still cool, but it's bright enough that the panels (which actually produce more power from the same amount of light when they are cool) are producing near their peak output.  

With grid-connected solar, spinning your meter backwards may be fun, or at least get you bragging rights.  However, in my fictional one-house grid, we now have a new minimum demand: demand will be negative (we're going to have to find something to do with the excess electricity) because there is no other grid to sell it back to.  Peak demand will also be reduced, because on the hot summer day, the PV will also be producing power.  The result is that the one-house gird with a PV system will no longer need any baseload generation (since minimum demand is now negative), and it will probably also need less dispatchable generation, because peak demand will also have been reduced, most likely by more than minimum load. Not only will peak demand have been reduced, but it will also have shifted to the early evening when the PV is producing little electricity, but cooling, cooking, and football watching needs are still high.

Adding a wind turbine to the roof has a similar effect.  Now, the meter will also be spinning backwards on windy nights, and demand is reduced whenever it's windy, which will in turn save fuel and reduce the need to run the remaining dispatchable generation..  However, if the climate is similar to that here in Denver, on the hottest days of the year, the wind will typically be minimal, so there will be little further reduction in peak load, so nearly the same total amount of dispatchable generation will be needed, although it will not be in use as often.

Consequences

As the above illustration shows, the oft-repeated shibboleth that we "need" baseload generation is not only misleading, but also counter-productive.  Adding baseload generation will simply increase the number of hours per year that intermittent sources of power exceed net demand.  I too, formerly believed we needed baseload.  I no longer do, although some level of baseload power in the grid is no doubt inevitable, at the very least produced by renewable sources such as geothermal and electricity generation from industrial waste heat.

Solutions

Returning to our one-house grid thought experiment, a number of options present themselves.

  1. Storage.   In the real world, if you build a house off the grid, you will add batteries so that you can still run your lights when the sun isn't shining and the wind isn't blowing.  
  2. Transmission.  Suppose our one-house grid has a neighbor, running his own one-house grid.  While generation from their PV and wind systems will be similar (but not identical), demand at the two houses is likely to be different.  By diversifying the electric demand, average demand will double, but peak load will increase by somewhat less, and minimum load will more than double.   This reduced volatility of electrical load brought by connecting two homes is analogous to the reduced volatility of a portfolio of two securities, rather than just one.  Unless the electrical load of the two homes is perfectly correlated, there will be benefits in terms of a reduction in the overall amount of dispatchable generation needed to service the same total load.  Our knowledge of the principles of diversification will correctly lead us to the intuition that connecting dissimilar users of electricity will lead to greater diversification benefits than similar users.  If residential, commercial, and industrial users are all on the same grid, the same average electric demand will be easier to serve than if only residential or only industrial customers were connected, because a residential user will have lower correlation of demand with most industrial users than with other residential users.
  3. Demand-Response.  My sister lives in an old house, and the kitchen is on an old, low amperage circuit breaker.  If she ran both the microwave and the toaster at the same time, it would trip the breaker and she would have to trudge outside to turn it back on.  Needless to say, she quickly stopped using the toaster and the microwave at the same time, and thereby reduced the peak load in her kitchen.  Demand response involves getting electric customers to agree ahead of time to refrain from using high-wattage appliances during times of high electric demand.  In the one-house grid example above, dad might choose to record the football game and watch it later in that evening.
  4. Energy Efficiency.  Another way to reduce volatility of demand is simply to reduce overall demand.  If dad had decided to buy an LCD TV rather than a Plasma TV, the demand from his 60" TV might have been reduced by as much as 200-300 watts, depending on the models, and this in turn would have reduced peak load.

Investments

Each of the above solutions leads to an investment, and as intermittent power sources grow as a percentage of total generation, the needs for these solutions will increase.  Below is a selection of companies working to provide each of the above solutions to the overall problem of matching electrical supply and demand.

Electricity Storage

Electricity storage can serve several related needs of the grid.  First, it can absorb excess supply of power at times of otherwise low demand, which means that intermittent and baseload sources of power do not need to be curtailed, even though they are producing power at near zero marginal cost.  Second, when charged, energy storage can provide ancillary services to the grid, by supplying power to meet short term spikes in demand or drops in supply, and absorbing power if intermittent generation ramps up unexpectedly, or demand suddenly drops.  According to Paul Denholm of the National Renewable Energy Lab, the revenues from these ancillary services are significant, and should not be discounted in any economic assessment of an energy storage technology.  Finally, storage can help to shave peak load by supplying power from off-peak charging.

I have previously written about investments in large scale batteries for the electric grid, but when I did so I neglected to consider the value of ancillary services.  Since I wrote that article, both VRB Power (VRBPF.PK) and NGK Insulators have continued to sell their respective solutions to utilities, telecoms, and other consortia.  However, these technologies are still searching for general market acceptance.  Beacon Power (BCON) recently commissioned a 20 MW flywheel based plant to supply frequency regulation services to the New York grid, which will primarily be used for frequency regulation.  Given the enormous potential of demand response and electricity transmission to improve long-term electricity price volatility, I am currently much more bullish about companies using energy storage primarily to provide ancillary services over large scale storage.  Because of that, I have recently increased my investments in Beacon, Maxwell Technologies (MXWL) and Active Power (ACPW).  

Maxwell's ultracapacitors can be used in various power quality applications, as well as a high power, low energy supplement to batteries in hybrid electric vehicles. (As a side note, high power is more of a concern in hybrids than pure electric vehicles, because the smaller battery pack has difficulty producing enough power for rapid acceleration.)

Active Power, like Beacon, uses flywheel technology, selling mostly into the customer side, rather than utility side of the market.  However, as the market for ancillary services grows and becomes more sophisticated, I could see Active Power's UPS systems selling ancillary services to the grid, in addition to their primary function of protecting data centers and other sensitive equipment from temporary power outages.

Transmission

I've written extensively about investments in electricity transmission and distribution.  My top picks are ABB Group (ABB) and Siemens (SI), Composite Technology Corporation (CPTC.OB), ITC Holdings Corp (ITC), Quanta Services (PWR), General Cable (BGC), and National Grid (NGG).  Geographic diversification of electric supply and demand is as essential as financial diversification in your portfolio.

Demand-Response

I haven't written about demand-response aggregator EnerNOC (ENOC) since before its IPO in March 2007, but that doesn't mean I'm no longer interested.  EnerNOC, along with Demand-Response/Smartgrid companies Comverge (COMV) and Echelon (ELON) all became quite expensive on a wave of investor euphoria in 2007, which is why I was not buying or writing about them much at the time.  That has now changed, with all three losing about 70% from their peaks, and making them look relatively valuable.  I have been taking positions in all three over the last few months.

Energy Efficiency

Unfortunately, few pure-play energy efficiency companies exist.  The recently named Waterfurnace Renewable Energy (WFIFF.PK) is one I've recently been adding to my portfolios.  I've previously written about Flir, Inc (FLIR), a thermal imaging company which I do not currently own due to valuation concerns, a pair of LED companies, Cree (CREE) and Lighting Science Group (LSCG.OB) , and a number of energy efficiency related conglomerates.

DISCLOSURE: Tom Konrad and/or his clients have long positions in VRBPF, BCON, ACPW, ABB, SI, CPTC, ITC, PWR, BGC, NGG, ENCO, COMV, ELON, WFIFF, CREE, LSCG.

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.

June 22, 2008

Is There Any Value In Stella Jones?

Value Investing

A few months ago, I discussed my encounter with Warren Buffett, and promised that I would eventually analyze a stock using the value investing (VI) approach.

While I can`t say that I qualify as a hardcore value investor, there are many things about the VI approach that have influenced my thinking. For instance, I tend to stay away from very high PE stocks and momentum plays. While I take positions in firms with no earnings, they are generally relatively "unknown" or are past star stocks that investors have moved on from. I like the idea of investing in companies that have fallen below the radar, but that I believe have the potential to get back on it, either because they are fundamentally undervalued or because I believe they can execute on their business strategies and have a unique value proposition. However, I can't say that I have the discipline of a hardcore value investor, and will sometimes be swayed by a good story even though quantitative analysis dictates I perhaps shouldn't.

The value analysis I will conduct today is based on the methodology outlined in the book Value Investing: From Graham to Buffett and Beyond. If you are interested in finding out more about value investing, this is the perfect guide. It explains the philosophical approach to value investing, and provides enough information for you to build your own value analysis model in a spreadsheet. I will not go into a huge deal of methodological detail here, as this article is long enough as it is. I instead encourage you to buy the book (or any similar book) and read it.

Value Investing: The Three Sources Of Value

There are three key components to value to the VI approach: Net Asset Value (NAV), Earnings Power Value (EPV), and Growth.

Net Asset Value

NAV is the replacement value of the firm's assets minus its liabilities - this is therefore a balance sheet analysis. The way the value investor looks at the balance sheet and a firm's assets is in terms of what it would cost a competitor to come in and reproduce the firm's business. The firm is looked at as a going concern, and the balance sheet is therefore not a measure what one could fetch if they liquidated the assets, but rather the cost of matching the firm's position in a market. Certain adjustments must therefore be made to the balance sheet:

1) The gross value of capital assets (e.g. PP&E) is employed instead of their net value, and in certain cases such as land, those values are actually grossed up to reflect the fact that acquiring land today would be more expensive than at some time in the past. What assets are grossed up and by how much requires knowledge of the industry. For instance, machinery may be less expensive to acquire today for similar levels of economic output than it was 10 years ago because of technological improvements. In this case, the gross value would actually be brought down by an appropriate factor (eg. gross value x 0.8 or 0.7).

2) New assets are created for the product portfolio and customer relations. This is a way to account for the competitive edge represented by technological leadership and well-established relationships with key customers. The quick and dirty way to create those items is to take a realistic percentage of SG&A, and multiply it by the number of years it would take to reproduce the asset. For instance, assuming a company with a large market share spends half of its SG&A on sales and marketing, one could take 50% of SG&A and multiply that figure by 3, reflecting the fact that it would take about 3 years at this level of marketing and sales expenditure to match the level of customer loyalty.

3) Creating a liability for stock options outstanding in cases where this is material for companies

Now remember, this is just a rough guide to approaching replacement value analysis, and requires a good deal of judgment and knowledge. There are more things one could do, but those are the major items. Again, this approach comes from the book, and an analyst with plenty of experience in one industry could tinker more or differently.

Earnings Power Value

EPV essentially measures the cash generation potential of a firm's assets via an income statement analysis. Earnings are adjusted to come up with something akin to a free cash flow, which is then discounted and compared to the adjusted value of assets, or NAV.

In a situation of market equilibrium with ample competition, EPV should equal NAV for all market participants - the adjusted earnings of companies are just sufficient to replace assets, and revenue growth doesn't create any incremental value as the asset base grows by a proportional amount. In such a situation, the return on invested capital (ROIC) equals the weighted average cost of capital (WACC). I will expand on this later.

Just like for NAV, adjustments are made to the income statement. Changes are:

1) Take at a 5-year avg EBIT margin

2) Apply that margin to current year revenue to smooth out any unusual events

4) Take out taxes

5) There a couple more adjustments needed that are discussed in the Growth section below, but that I will leave out for now

You then take this number as a numerator and, using the firm's WACC, do a straight perpetuity assuming no growth. From the resulting figure you subtract debt and excess cash (i.e. greater than 1% of sales), and this gives you the firm's earnings power.

If this figure is equal to NAV, the cashflows from the firm`s assets after investors are paid at the rate they require are just sufficient to replace those assets, and no incremental value is created. If EPV is smaller than NAV, then managers are actually destroying value, and the asset base needs to shrink to meet EPV.

If EPV is greater then NAV, then the firm is able to replace its assets and create an additional return for investors over and above what is already captured in the discount rate - ROIC is greater than WACC and return on equity (ROE) is greater than the cost of equity. In end, equity holders are really the prime beneficiaries from this situation, as debt holders`returns are capped.

Growth

Value investors typically don't like to include growth assumptions in their models, because they believe that in most cases firms whose EPVs are larger than NAVs won`t be able to sustain that position because of competition, and therefore that the long-term equilibrium lays with EPV = NAV. Remember, in this case, ROIC = WACC, and sales growth does not create any incremental value as it just goes to pay for more assets.

The only time value investors actually compute growth is when a firm's EPV is greater than its NAV and they believe that the firm has a so-called moat, or a competitive advantage that can't be undone (think of Microsoft and its position in the operating systems market). Only in such a case would value investors actually pay for growth, and include it in their valuation (more on this later). Barring the existence of a moat, competitors will eventually notice the value creation potential of a given industry, will enter, and will force equilibrium through competition - all EPVs will equal NAVs.

In #5 above, the other two adjustments needed when computing EPV are to account for maintenance SG&A and maintenance capex. In other words, some of the SG&A expenditures and some of the capital expenditures are made to maintain and replace the existing assets, while some are made to grow sales. Since we are only interested in what it costs a going concern to maintain its existing asset base, we add back a percentage of depreciation and SG&A (between 25% and 50% - again, this is a matter of judgment and industry knowledge) to make up for the fact that some of this expenditure went to fund growth and shouldn't be accounted for.

Closing Remarks On The Value Approach

There are thus two main types of value plays (excluding growth, to be discussed later):

1) Asset-based --> If NAV/shr is larger than share price, is there a high probability that investors will eventually wake up to that fact and that the two will converge, creating a capital gain? If so, you have a value play on your hands and are paying for undervalued assets.

2) Earnings Power-based --> If EPV > NAV, does the company have the means to prevent competition from eating away at its margins – in other words, is there a moat around its market position? If so, is EPV/shr lower than share price? If you can answer yes to both questions, you also have a value play on your hands but you are paying for sustainable earnings power.

There are more adjustments to the financial statements and more nuances to those adjustments than I’ve presented here. However, in the interest of length, there is only so much I can get into. I just wanted to provide a high-level picture of how value investors approaches valuation and security analysis. As I mentioned earlier, I would strongly encourage those interested to read more about it on their own. In the end, what your VI valuation yields is a result of your particular assumptions, which by the way holds true for any type of valuation.

The Search Process

In theory, VI is a bottom-up approach, meaning that one typically starts the search for stocks by looking at fundamental ratios, and only worries about the industry and qualitative factors if the investment makes sense quantitatively. The two preferred ratios are the price-to-earnings (PE) ratio and the price-to-book-value-per-share (P/BVPS) ratio, and the preferred valuation levels are typically around 15x for PE and 1 to 1.3x for P/BVPS.

However, I’m not entirely sure how it is actually done in practice. For my part, I start at the industry level and then work my way down to valuation, and I don’t let a PE above 15x or a P/BVPS of over 1.3x discourage me from pushing on.

Stella Jones

The company I chose to analyze for this article is Stella Jones (STLJF.PK or SJ.TO), which is a treated wood product manufacturer. The company’s main business segments are railway ties (35% of 2007 sales) and utility poles (48%). The remainder is made up of other treated wood products, but those are the two key segments. SJ thus has significant exposure to two sectors I believe are very well-positioned to benefit from the transition to a green economy: rail transport and the electricity grid.




Both the railway ties and the utility poles industries are fragmented in North America…or at least in the US. In Canada, SJ has been an aggressive buyer, consolidating the market. It now has a roughly 70% market share in both industries in Canada, and following a recent acquisition in the US now holds upwards of a 20% market share in railway ties, which places it second there in terms of market share. As you will see below, SJ has done a great job of integrating acquisitions so far, and is considered by analysts to be in a strong position to consolidate the US market, starting in the east and southeast. As can be noted from the share price performance over the past five years, this expansion hasn’t gone unnoticed, and this has been a great ride for shareholders who were there early.

The company currently trades in the FY2007 17x PE ($2.04/shr) and 3.4x P/BVPS ($10.35) ranges, so on the latter metric it certainly seems rich for a value investor. The reason why this company drew my attention is that the stock has seemingly halted a largely uninterrupted 4-year run over the past 12 months. The reason is simple: the company is based in Canada but has operations in the US, and it has been hit hard by a rapid increase in the value of the Canadian dollar. While SJ has some natural hedges in the form of facilities in the US, and uses derivatives to control its forex exposure, this hasn’t proven enough and SJ missed it targets in Q4 ’07.

Value Investors will typically like a stock whose underlying business is intact but in which, for one reason or another, the market has lost interest. This qualifies as one of those. Already liking the sector and the company’s positioning in it, the pullback in share price led me to want take my analysis further.

Despite completing five acquisitions in five years, SJ has managed to steadily improve margins as well as a key profitability ratios.



The capacity of Stella-Jones to acquire and successfully integrate businesses at this rate while continuing to improve returns for capital providers is a signal that the management team is likely very strong. While margins and other ratios will certainly not continue to improve at this rate indefinitely, SJ’s track record speaks volume as to its ability to be a successful consolidator in the US treated wood market.

Value Investing Valuation

NAV

Through my NAV adjustments, I ended up adding about $29 million in net assets, mostly as a result of adjustments to capital assets and the addition of a $15 million customer relations asset. As explained above, I took two years of 50% of 2007 SG&A (or full 2007 SG&A) as what it would cost a competitor in terms of marketing and sales expenditures to come and establish the market position SJ has achieved, especially in the Canadian market.

I did not push too much on this analysis because I knew that, at a non-adjusted BVPS of $10.35, no realistic adjustments would bring NAV anywhere close to the $35 figure the stock is trading at. Looking at the company’s margin and profitability ratio improvements over the past five years, I knew this was an earnings-power story and not an undervalued asset story.

EPV

My income statement analysis yielded more interesting results. Following the earnings adjustment approach above, I got an EPV of about $24 per share.

I discounted the company’s adjusted earnings at 11.15%, using a before-tax cost of debt of 8% and a cost of equity of 16%. The target capital structure for this firm likely lays at around 45% debt-to-total cap. About 60% of the stock is held by one shareholder, so I added a percentage point of liquidity premium to the 15% cost of equity I had originally come up with. The choice of a discount rate, however, varies widely from person to person, so this is by no means the only "right" discount rate.

Still, at $24/shr, we are still far from the ~$35 the stock is currently trading at, indicating that much of Stella Jones' potential is already priced in.

Growth

I believe Stella Jones has a moat, in the form of a high market share in Canada and the ability to consolidate at least a part of the US market on a back of a successful integration strategy to date. Moreover, my understanding is that wood is not about to be displaced as the primary material for railway ties and utility poles, because the cost of alternatives is plain too high.

As you can see if you compare SJ's profitability ratios to the cost of capital I came up with, the company is creating additional value for its stockholders, and there is a good bit of room to absorb any error on my part in computing that cost of capital. It would therefore seem reasonable to want to price in some growth, as discussed above.

In order to value growth, value investors (at least the ones who wrote the book :) use a matrix called the Growth Value Multiplier matrix. The GVM matrix outputs a number by which EPV is multiplied to get the value of growth for the firm.



The two axes on the matrix are the expected long-term sustainable growth rate over the cost of capital (g/K), and the ROIC over your cost of capital (ROIC/K). How does this all make sense? Believe me, the algebra works, and if you are familiar with the Gordon Growth Model the vertical axis should make sense. I'm not going to lay out the algebra here however, both because that would take too long and because this isn't my model, and I doubt the authors would be happy with me giving away too much.

So how does one use this matrix? First, a reasonable long-term growth rate must be determined, which can't be too much greater than the economy as a whole given that the underlying algebra assumes a perpetuity formula. In this case, I picked 4%, which places SJ between 0.25 and 0.5 on the vertical axis. I used a 16% ROIC as the long-term figure to reflect further marginal improvements on 2007 but not much more, which divided by the WACC at 11.17% lends SJ on 1.43, close enough to 1.5. Given the position on both axes, it would be reasonable to assume a multiplier of 1.2.

Multiplying the EPV/shr by 1.2 yields an intrinsic value of about $28.60/shr, still short of $35. And I haven't even worked in a margin of safety, which is a way to hedge risk in case the valuation is off or if one misses a major qualitative factor. Typically, the intrinsic value arrived at is multiplied by something like 66%, and if the share price is still below the resulting figure, it's a buy. Needless to say, we're not even close here.

Where Do We Go From Here

Any way you slice it using the VI approach, SJ's past achievements and future potential are fully priced in...and then some. The story remains pretty attractive, and although I didn't delve too much into the qualitative side, it's hard not to see a gem of a company here. The sell-side analyst notes I read on SJ are all positive with 12-month targets implying pretty respectable returns, all based on forward multiples (I didn't see a DCF, and I suspect it's partly because with reasonable assumptions you couldn't justify very elevated share price levels).

For the time being, however, I'm going to be disciplined and hold off on this one. SJ has essentially flat-lined over the past year, and it could be that some of the hype is gone - as I pointed out earlier, it wouldn't be realistic to assume a doubling of margins every five years in perpetuity.

Value Investing as a philosophy provides a good way of thinking about a business and its potential. However, I'm told by practitioners that you sometimes have to sit on the sidelines for long periods of time in hot markets, as you just can't find securities that meet the stringent value criteria. For my part, as stated initially, I can't claim to have the discipline of a true value investor, and maybe I'll end up owning SJ sooner than I think...


DISCLOSURE: The author does not a position in any of stocks discussed in this article


DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.


June 15, 2008

Are Solar PV and Wind Incompatible with Nuclear and IGCC?

Paul Denholm, a Senior Analyst at the National Renewable Energy Lab (NREL), sees an upcoming struggle between renewable sources of electricity such as photovoltaics (PV) and wind with low-carbon baseload alternatives for space on the low carbon grid of the future.  These baseload alternatives are nuclear and Internal Gasification Combined Cycle coal plants with Carbon Capture and Sequestration (IGCC w/ CCS, refereed to by advocates as "Clean Coal).

This may come as a shock to advocates of the idea that Global Warming is such a big problem that we will need all forms of low carbon electricity, because the heart of that argument is that the choice between nuclear and IGCC w/CCS (if and when it's available) is that the decision is not one of "either-or" but "and."

PV Curtailment

In his seminar at NREL's Strategic Energy Analysis and Applications Center, Dr. Denholm showed what could happen with only an 11% penetration of photovoltaics on a cool, sunny Spring day.

PV Coincidence With Load - Spring

Source: The Role of Energy Storage in the Modern Low-Carbon Grid - .PPT 7MB

Electricity demand in the Spring is typically low, and likely to be lower on weekends, because there is no need for air conditioning, nor much lighting on a sunny day.  The graph above shows a day where PV (even at only 11% penetration) would actually be producing more energy than the total demand on the grid.  While worries about the cost of integration  and even curtailment are well known and studied [pdf] in the context of wind power, integration has typically not been considered a problem with photovoltaics.  In fact, PV is generally considered to bring integration benefits, given the good correlation of PV output with summer peak loads.

The above chart is just a simulation, and PV is a long way from 11% penetration anywhere, but PV curtailment lurks in our future.  A combination of wind and photovoltaics will simply reach that limit sooner (as wind already has.)

The Problem With Baseload

If PV curtailment is not yet a problem because of low penetration, the more baseload power we have, the more difficult it will be to integrate intermittent power sources into the grid.  Unlike Natural Gas Combined Cycle plants, IGCC and Nuclear, like current coal plants, have very little flexibility in how much power they generate.  This means that the more baseload generation there is on the grid, the less "room" there will be between baseload power and current demand for electricity from intermittent sources.  So while higher penetrations of dispatchable power such as natural gas aid the profitability of wind and solar, higher penetrations of coal and nuclear power reduce their profitability.  And vice-versa: a grid with high penetration of intermittent sources will make proposals for new baseload power less attractive, since intermittent power lowers the minimum electricity demand on the grid, effectively reducing the market for baseload power.

Why IGCC is Baseload

I was a bit surprised that Dr. Denholm spoke of IGCC woth CCS as a baseload technology.  Although I consider "Clean Coal" an expensive distraction, I had thought that one advantage of the technology would be to make coal dispatchable.  My thought was that, since IGCC first involves producing syngas (a mix of carbon monoxide and hydrogen) by gasifying coal, and then burning the syngas in a turbine very similar to the natural gas turbines used today (which are dispatchable), it would not be too difficult to separate the steps, and store the syngas for later combustion.  When I asked, he replied that adding storage is an "extremely tricky" problem, because the current technology relies on hot gas cleanup to achieve high efficiencies.  

Squaring the Circle

It's not surprising that we hear about the baseload-intermittent power conflict from Dr. Denholm: his expertise is energy storage.  Energy storage has the potential to mediate between the fluctuations of load and intermittent power, and difficulty of shutting down baseload power plants for short periods.  I've discussed investments in large scale energy storage, but there are also opportunities for smaller scale and shorter time span operations which I will explore in later articles.

UPDATE: As promised: Investments to mediate between intermittent loads, and intermittent power.

Tom Konrad

March 09, 2008

Is Composite Technology Corporation Still a Buy?

by Tom Konrad

When I asked, Alternative Energy Stocks readers overwhelmingly wanted me to take another look at Composite Technology Corp. (OTC BB:CPTC.OB)  I've discussed CPTC several times over the last year, and consider it my most speculative pick in electricity transmission and distribution.  True to the nature of a speculative stock with no current earnings which is still trying to establish markets for its products, the stock price has been all over the map.cptc.png

The reader interest is doubtless due to the recent sharp decline since mid January.  I personally sold a portion of my and client positions when the stock was in the $1.75-$2.00 range, and repurchased it for some accounts around $1.30 (including my own.)  These accounts are currently showing a loss of around 30-35%, not counting the gains taken last year.

I actually have not been watching the recent decline, but seeing the stock at $0.82 today makes me wonder: should I buy more?  Should I take a tax loss for those accounts that could use one?  Has something happened to make the stock look worse, or is the current decline just the effect of falling markets on what has always been a very speculative stock?

Those Pesky Banks

Two weeks ago, I was talking to a friend who acts as a CFO for small wind developers.  Unprompted, he mentioned that banks would not finance CPTC's DeWind turbines because of their lack of track record, which is a gigantic barrier to incorporating them in a US windfarm.  My friend made the same comment about  AAER Inc [TSE:AAE], a company which AltEnergyStocks Editor Charles Morand bought last year (He still owns it, and says he bought if for other reasons, but is not overly concerned about turbine financing.)  In general, I have not been paying nearly as much attention to CPTC's wind division, because I'm more interested in the transmission play, and I had assumed that, given the long backlog for turbine orders from major manufacturers, DeWind would find places to sell as many turbines as Westinghouse can manufacture for them.  This financing difficulty is not news to investors who have been following DeWind, but it raised the question of how many turbines they will be able to sell until they build more of a track record in such places as the Czech Republic.

However, since this is not news, it can't account for the stock's decline.  CPTC does seem to be making accepted progress towards getting these turbines tested and certified, which should do something to ameliorate banks' reluctance to finance DeWind turbines.  They are currently waiting on two reports from the National Renewable Energy Laboratory and the Department of Energy, as well as negotiating with insurance companies which would insure the turbines to allow bank financing.   

Uncertainty among investors as to the results of the DOE and NREL certifications are likely to be the cause of some of the decline.  This sort of uncertainty can feed on itself in down markets like the one we are currently experiencing, but that leads to buying opportunities for brave investors.

Latest Earnings Release

The Feb 11 December quarter earnings release certainly provides no explanation for the recent decline (although the decline began a full month before the release, so it would require the leak of insider information if it had.)  With revenues having doubled from the 2006 December quarter, and up 40% from the previous quarter, the expectation would be that the stock would also be up.  Both the DeWind and ACCC Cable divisions seem to be making headway towards broader market acceptance.

In contrast, operating cash flow for that quarter was almost $14 million in spending, mostly due to a large increase in inventory.  With cash on the books of only $11.5 million, their balance sheet looks weak, so failure to convert those inventories to cash could lead to a liquidity crunch in the coming quarters.  This might lead to a dilutive stock offering, which would probably be bad for current shareholders, unless it were in order to finance an increase in orders.

The company currently does not anticipate needing new cash until June, but seems determined to avoid further dilution if at all possible, mostly by relying on customer payments to fund inventory growth.  This adds both uncertainty, but also means that any gains are likely to be much more profound.

Conclusion

I like what I see.  The company has made considerable progress over the last year, and the stock is staying at the same price.  As the ACCC conductor begins to make a significant contribution to the bottom line, and its turbine certification continues as expected, the company seems likely to maintain current revenue growth rates.  At some point, barring too many unforeseen hiccups, investor greed sparked by rapid revenue growth should overcome uncertainty.

UPDATE: Shortly after publication, two readers pointed out that I'd missed the most likely cause of the sell off: selling by Millenium Partners, to pay an SEC fine.  All the more reason to buy, if the reason for selling has nothing to do with the company.  One of these readers gave the following detailed reasoning:

One issue that I noticed you did not cover is the selling by Merriman (Englander) of Twelve million shares to cover a 148 million fine by the SEC.  This can explain the dropoff in share price.  The market maker that handled the sale of the shares is ARCA, I believe.  If you notice, when ARCA appears to be off the ask, the stock has a tendency to go up.

Good enough for me.  I just bought some more.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CPTC.  Charles Morand owns AAE.

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.

February 25, 2008

Ten Solid Clean Energy Companies to Buy on the Cheap: #2 National Grid (NGG)

Like Quanta Services, (#8 in this series), National Grid PLC (NYSE:NGG) allows investors to participate in the massive build out of electricity transmission and distribution infrastructure necessitated by years of neglect and the growing need to decarbonize our electric infrastructure.  See the article linked above for more detail on these two forces driving the sector.

National GridHaving its origins in British electricity deregulation in the 1990s, Nation Grid is a regulated utility in Britain and the United States, and operates high pressure gas pipelines and high voltage transmission in Britain, and electricity transmission and natural gas distribution in the Northeastern US.  The US operations were acquired with the purchase of Keyspan and the gas distribution network of Southern Company in 2007, as well as some smaller previous aquisitions.  They also own some electricity generation assets (mainly acquired as part of Keyspan)

Comparables

The only pure play publicly owned electricity transmission and distribution utility I'm aware of is ITC Holdings (NYSE:ITC), a company I recommended in my article on transmission stocks last April.   Since then, the stock has risen almost 30%, and I now think that it looks expensive, compared to NGG and Quanta Services, which is why it did not make it into this series.  In contrast, NGG trades at a forward P/E of around 13.3, below the utility industry average, with a dividend of 3.2%.

Environment

As a European company based in Britain, management understands dealing with regulators and customers who are far more concerned with Climate Change and renewable energy than those of it's recently acquired US operations.  I expect that the British experience will be a valuable asset to the US based operation as we see carbon regulations in the US (something I expect early in the next Presidential administration, considering that Congress and all the leading Presidential candidates support it), and as the United States begins to catch up with the Europeans in our level of environmental awareness and demand for lean energy sources.

National Grid's leadership can be seen in their initiatives, such as their inclusion the Dow Jones Sustainability indexes, and their award winning energy efficiency programs.

Valuation

As a regulated utility (with 95% of revenues from regulated businesses,) large price appreciation is unlikely, but given National Grid's position and expertise in transmission and distribution, a P/E below industry averages makes the stock seem a solid, safe bet, especially in uncertain economic times.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in NGG, ITC, PWR.

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.

February 07, 2008

Ten Solid Clean Energy Companies to Buy on the Cheap: #8 Quanta Services, Inc. (PWR)

It may be a stretch to call a company with a P/E ratio in the high 30s "cheap," but in the case of Quanta Services (NYSE:PWR), it's a bargain.  

I won't repeat myself about why electric transmission and distribution (T&D) investments are a good bet.  Put simply, the grid has been long neglected, and improved long distance transmission is essential to bringing large scale renewables such as solar and wind onto the grid.

How does Quanta fit in?  They build transmission line for utilities.  When I ask industry insiders what company is best placed to actually string the wires or lay the cable, the answer is Quanta Services (the answer used to be InfraSource, until that company was acquired by Quanta.)

According to a recent article in the January/February issue of EnergyBiz (this particular article, on p.56 of the print version, does not seem to be online), Northeast Utilities (NU) signed a 6 year contract with Quanta in order to assure themselves access to T&D contracting services which they expect to be in short supply.  According to Jim Muntz, a Senior Vice President at NU, "There are only a few contractors who have the capability to do contracts on this scale, so we determined that before it's taken away from us, we would have to lock up their services for a number of years."

Another reason to expect growth in the industry comes from the same article.  According to Tim Hope, a vice president of operations at ABB (another excellent transmission investment), "While other parts of the utility's operations... looked to outsourcing solutions, T&D seems to be one of the last departments to embrace the concept."  This means that the market for outsourced T&D can not only grow as utilities invest more, but also as they increasingly turn to outsourcing, either due to regulatory pressure or because of insufficient internal resources.

While I might have preferred the pure-play electric T&D opportunity of Infrasource before the merger, Quanta's strategy of becoming a one-stop shop for infrastructure in natural gas, telecommunication, and broadband cable as well as power should serve it well if these industries continue to converge.  The strategy may also allow the power division to draw on additional workers with similar skills from telecoms and cable, if or when the skills shortage outlined above takes hold.

Doesn't that make a high-thirties P/E start to sound cheap?  It does to Cramer and an analyst at Morgan Stanley. I'm hoping the current market decline will make even cheaper.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in PWR, ABB.

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.

January 20, 2008

No New Transmission Means Little Renewable Energy

I'm a fan of investing in electricity transmission, both because the grid in the US is in a sad state of repair, and because considerable expansions to the grid will be needed to take large scale renewable energy (especially concentrating solar and wind) from the lightly inhabited areas with renewable energy resources to population and demand centers.

Unfortunately, the need  for new transmission can put renewable energy advocates at odds with more traditional environmentalists, who are concerned about the local damage to views and habitat caused by new transmission lines.  Cases in point are opposition which looks like it will prevent a proposed new line in West Virginia, and opposition to the "Green Path" transmission line which was proposed to allow geothermal, solar, and wind development in the Salton Sea area of Southern California.

If new transmission is not built, we won't be able to wean ourselves from fossil fuels quickly, and the global effects of climate change will cause more disruption to ecosystems than any number of transmission towers would.

Investors Take Note

No matter where you stand in the debate, the issue is a serious one for Renewable Energy and Transmission investors.  If the lines don't get built, neither will the clean energy generation.  For transmission investors, opposition to new lines means that the US grid will have to make current rights of way work harder and transmit more electricity, since fewer new lines will be built than if there were no opposition to new transmission.

Transmission investors concerned about NIMBY opposition should tilt their portfolios more towards technologies that allow for line upgrades than towards builders of new lines.  This can be by either upgrading the existing lines with higher capacity technology, or by managing the grid better.  

I can think of three companies which might be insulated from a lack of new rights-of-way, because they have technology for upgrading the existing grid.  First, there is Composite Technology Corp., which was my #4 Speculative pick for 2008. In that article I describe Composite Technology's (OTC BB:CPTC) ACCC cable which can be used to replace conventional conductors to upgrade power lines without the need to make any alterations to the towers.  This can lead to as much as a doubling of the capacity of an existing transmission corridor at very low cost to the transmission owner.

For larger scale upgrades needed for very long distance transmission, as well as for new long distance transmission lines, the technology of choice is likely to be High Voltage DC Transmission (HVDC). The top suppliers of  HVDC technology are The ABB Group (NYSE:ABB), and Siemens (NYSE:SI). See this article about ABB's HVDC technology for more information.

I'm looking for more ideas in this area.  I love the desert, and don't want to see any more new transmission towers than absolutely necessary.  On the other hand, I don't want to see more and more of our land turned into desert because of Climate Change.

DISCLOSURE: Tom Konrad  and/or his clients have long positions in ABB, SI, and CPTC.

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.

 

December 30, 2007

Ten Alternative Energy Speculations for 2008: Batteries, CHP, and Transmission

This article is a continuation of my Ten Alternative Energy Speculations for 2008, with picks #8, 9, and10 published last Thursday.  If you haven't already, please read the introduction of that article before buying any of the stock picks that follow.  These companies are likely to be highly volatile, and large positions are not appropriate for many investors.   My least risky picks (#8,9, and #10) are part of that same article; my most speculative plays (#1-3) will are here.

#7 Electro Energy, Inc. (NasdaqCM:EEEI) $0.68

Electro Energy has risen 36% in the month and a half since I last wrote about it.  But the reasons to own it are still strong, and the rising share price should actually help the company raise the money they need to ramp up production.  See this article and the one linked to above for my reasons to like this stock.  

More recently, EEEI briefly rose to over $1 because of some excitement generated by their participation in an electric vehicle symposium.  My guess is that year end tax loss selling has brought the stock back down since then.  If I'm right, we can expect it to rebound again the next time they get attention from the press.  In any case, we can expect a lot of volatility.

#6 Capstone Microturbine (NasdaqGM:CPST) $1.62, and

#5 FuelCell Energy Inc. (NasdaqGM:FCEL) $10.30

I'm bullish on both these companies because I'm bullish on distributed generation and Combined Heat and Power (CHP) technologies.  My intuition is that 2008 or 2009 will be the year that distributed generation and CHP grab the attention of Wall Street, the way thin-film PV stole the show in 2007.  Both FuelCell and Capstone stand to benefit.  They may even get a boost from making ethanol production more efficient

Regular readers may be surprised that I am recommending a fuel cell stock, since I call Hydrogen Fuel Cell Vehicles "a politically inspired boondoggle."  But there are more types of fuel cells than hydrogen: molten carbonate or solid oxide fuel cells.  FCEL makes a variant of  molten carbonate fuel cell, called the Direct Fuel Cell (DFC), a different beast than the hydrogen  fuel cells, because it can work without an external mechanism to reform the hydrogen.  

FuelCell's DFCs burn methane rather than hydrogen, and are very tolerant not only of low heat content methane (which is often produced in anaerobic digestion or wastewater treatment.)  Note that on page 10 of this EPA study [.pdf] of combined heat and power installations at wastewater treatment plants, a 300kW fuel cell requires a less expensive fuel treatment pressurization facility than a much smaller microturbine system. This is almost certainly due to the lower need for fuel pressurization.

Biogas can be a particularly tricky fuel given the presence of impurities such as H2S and siloxanes which build up as deposits in combustion chambers.  Microturbines, fuel cells, and internal combustion engines need fuel treatment if siloxanes (which are usually present in waste water treatment plants as a byproduct of deodorants) are present.  Fuel cells and reciprocating engines also require the removal of H2S.  Nevertheless, wastewater treatment facilities combine an abundant source of free fuel (biogas) with a need for heating, and so present excellent opportunities for CHP.

Fuel cells are more efficient (47% fuel to electricity conversion) than comparably sized microturbines (30-35%) or internal combustion generators (about 40%), which not only translates into fuel savings (or higher electricity output), but also leads to only 85% or less CO2 emissions than the less expensive (per kW) or internal combustion generators.  Both microturbines and fuel cells get a large system efficiency boost when the heat is also used; both FuelCell and Capstone claim that their products can reach 80% overall efficiency in a CHP context, while the relatively small size of microturbines and fuel cells are particularly well suited to small scale industrial facilities and commercial buildings.

Rising fuel prices make efficient generation important and new fuel sources such as biogas and other waste gasses (such as the Ford plant using a DFC to make electricity from paint fumes) will present opportunities for both DFCs and microturbines in CHP and distributed generation applications.  While DFCs have the advantage of working well on low energy content gas, microturbines are better suited to many projects due to their smaller size, and more fuel flexibility.  Microturbines are much more tolerant of a wide variety of fuels, and can even handle the H2S in digester gas, as noted above.  Capstone sells versions which can run on liquid fuels such as diesel, propane, and kerosene.  While fuel cells also have this capability, they are less tolerant of impurities, and FuelCell does not currently sell products for these markets.  

One final advantage for microturbines is their ability to ramp up and down quickly, meaning they can used in remote locations with irregular fuel supplies, or when demand for electricity is not constant.   DFCs are less able to ramp up and down because of the need to maintain a high temperature in the fuel cell stacks, so they will only be used when they can be always on, but their ability to supplement biogas with natural gas from the pipeline system still means that they can be used with fuel of variable availability.

FuelCell's DFC and Capstone's microturbines should be able to compete effectively with internal combustion engines in distributed generation applications, since reciprocating engines are too large for many potential projects.  Rising energy prices and tightening emissions limits should allow DFCs to slowly increase their market share in a rapidly growing market.  Incidentally, there has also been a successful test of a fuel cell/microturbine hybrid system [.pdf], with a Capstone turbine generating electricity from the waste heat of a fuel cell.

Capstone finished 2008 with a year-end surge because of new rules which streamline the installation of microturbines in New York City, but could easily continue higher, if I am right about distributed generation taking off.  The new NYC guidelines could easily be one sign of the beginning of this trend.  On the other hand, I wouldn't be surprised to see a small price retreat in January.  It may be wise to wait a couple weeks and see what happens with CPST.

#4 Composite Technology Corp. (OTC BB:CPTC) $1.37

I first recommended CPTC last April in an article about how electricity transmission is essential for renewable energy on a large scale.  At the time I focused on how transmission helps even out the variability of wind power, but transmission is going to be if anything more essential to the development of Concentrating Solar Power (CSP).  While a 100x100 mile square of Southwest Desert theoretically receives enough sun to generate electricity for the entire US, and that electricity could meet both peaking and baseload needs with thermal storage, if the population centers in the East and California are to be served, it will require a massive transmission build out.  

I don't expect Southwest CSP to ever supply all our electricity needs, but I do expect that this abundant, storable electricity will start to be used for more than just the local needs of the desert Southwest within the next decade.  Even this much smaller vision will require a large upgrade to our transmission infrastructure, as will the growing penetration of wind as a percentage of utility resource bases.  CPTC's Aluminum Conductor Composite Core (ACCC) is gaining acceptance in China (which is building out its electric infrastructure much faster than we are building ours.)  I expect the US to follow (although just the China play could be enough to keep the stock rising.)  In the US, I see an opportunity for ACCC with utilities that want to move more power down existing rights of way.  Many utilities need to upgrade their transmission after decades of relative neglect, and the added demands of higher wind penetration and the possibility of long range transmission of CSP power only enhance this need.

Using ACCC instead of traditional (Aluminum Conductor Steel Reinforced) power cables allows the same line to carry higher currents (up to 2x as much) with less sagging in hot weather, and line losses are reduced by as much as a third under all conditions.  For high usage lines, a straight retrofit with ACCC can have good financial returns for a utility based solely on the lower line losses. 

CPTC also has a wind division, which like all turbine manufacturers should, in my opinion, be able to sell all the turbines they can build for the foreseeable future, which should greatly help CPTC with their ongoing operating cash flow as they ramp up production of their D8.2 turbines.  However, they are not profitable, and much of their turbine technology is assembled through patents licensed from other companies, and these revenues are vulnerable to a declining dollar and other foreign currency exchange risks.  CPTC will not become profitable in the near future, and will almost certainly have to return to the capital markets for additional capital.  If their products catch on, it should be easy for them to raise capital on favorable terms; if they don't, we can expect massive dilution.

In all, the "Risk Factors" section of their most recent annual report is long and many of the risks (including multiple lawsuits) are not trivial.  Perhaps the most serious risk is the United States' utility industry's resistance to change, which may lead to a complete unwillingness to use ACCC, despite its superior properties.  This is a big if, and I expect to long term inventors returns to be excellent if they persuade utilities to adopt their technology, and miserable if utilities stick to the way they have always done things.

Three more speculative picks available here.

DISCLOSURE: Tom Konrad and/or his clients have long positions in EEEI, FCEL, CPST, and CPTC.

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.

September 09, 2007

The Grid Impacts of Net Metering

Net metering describes the requirement that an electric utility buy electricity from any of its customers that generate their own electricity (usually with some sort of renewable energy, such as solar or wind) at the same price that they sell it to the customer.  That seems fair, doesn't it?

The Utility Perspective

It doesn't seem fair to the utility.  Utilities do more than just generate and sell electricity to customers.  They also are responsible for transmission (delivering the electricity) and reliability (making sure that the lights work when you flip the switch.)

Taking just the reliability requirement, suppose that a homeowner, call him Sol, wants to install a solar photovoltaic (PV) system on his roof and sell the electricity back to the grid when he was not using it himself.  But suppose Sol had a reliability requirement.  For instance, suppose that whenever Ted, one of his neighbors,  turned on the TV, Sol had to make sure the PV system was working, or the TV would not turn on.  Also suppose Ted knows where Sol lives, and that Ted likes to watch TV at night. 

Ted would probably grow quite unhappy with Sol quite rapidly, and would definitely complain, and might even start pay Sol an unfriendly visit at uncomfortable hours.  Sol would probably think twice about signing up for net metering under those rules.  

Utilities aren't enthusiastic about net metering, either.

The Benefits of Grid-Tied Solar

The example above is something of a straw man.  Unlike Sol in my example, with net metering, utilities are not being asked to do something which they are incapable of doing.  In fact, utilities balance load and demand all the time, and so long as net metered systems only account for a small fraction of a utility's total demand, they are un likely to be a strain on the grid.

In fact, because PV panels usually produce power on hot, sunny afternoons when peak load is driven by air conditioning, solar homes often provide a net benefit to the grid [.pdf] for which the customers are not paid, because most utility customers are charged a flat rate per kWh, which does not take into account the higher value of electricity at times of peak demand.

WFPV.GIF
Peak reduction from near Zero Energy Homes with West-facing PV (blue) for Sacramento Municipal Utility District. Slide 19

The ideal orientation for PV depends on the utility's load profile.  West-facing PV will be better for some, while south facing will be better for others.  

What about Small Wind?

Not all distributed generation is south- or west-facing PV, however, and other forms of generation such as small wind often produce power at times unrelated to peak.  If the distributed generation customer is charged a flat rate for electricity, the costs of servicing the customer may come to exceed what he pays for service.  This is especially likely for a customer with a small wind turbine which may produce very little of its power at high priced peak load times, and a lot at times of low load.  This requires the utility to transmit the power a long distance to where it may be needed, as well as run its least expensive generation at less than full capacity in order to accommodate the extra power generated by distributed wind.  

Many environmentalists will read "least expensive generation" in the line above and think "that's exactly what we want... least expensive generation means coal plants, and it would be wonderful if a utility had to shut those down."  

While coal is the least expensive form of generation for most utilities today, but it may not be for long, and not only because of the cost of pricing un carbon emissions.  In terms of marginal cost of generation (the cost of producing an extra kWh of power) wind is already cheaper than coal because there is no fuel cost.  I no longer recall where I heard this anecdote, but I believe that last winter (2005-6), on an extremely windy weekend in Europe, electricity was trading for free on the wholesale market, and many utilities were shutting their coal plants down.  North America still lags Europe in terms of wind penetration, yet utilities in windy areas are likely to get to high wind penetrations first, and these are precisely the areas to which small wind is also most suited.  In the not so distant future, I can easily see a scenario where a rural utility with a high degree of wind generation of its own might have to shut down some of its wind turbines in the middle of a windy night because of net-metered small wind, forcing the utility to pay retail rates for electricity it would otherwise have gotten for free, and then having to pay to transmit that power somewhere it might actually be used.

The Bigger Picture

This is not to say that small wind is bad and west-facing PV is good, just that each impose different costs or benefits on the system as a whole.  Wind can also be good for a system.  In February of 2006, an unseasonable cold snap caused power outages in Denver in part due to unexpectedly large demand for natural gas for heating.  Cold winter nights also happen to be when the wind blows hardest and most consistently on the northeastern Colorado plains, so a small wind turbine on net metering would have actually helped to reduce the severity of the controlled rolling blackouts Xcel ordered.  If the 400 MW Peetz wind farm (now in phase II of construction) had been operational in February 2006, I think it is unlikely that the blackout would have happened at all.

 windPerformance.bmp
Graph from Trans-Elect, LLC using data from NREL Wind Performance Projections.  Note that the capacity factor for Peetz in NE Colorado is over 60% in the month of February, when the blackouts occurred, and capacity factor is also highest at night.  The other lines are wind regimes from SE Wyoming and Lamar in SE Colorado.

Having Customers Pay for Costs and Benefits

Net metering is an implicit subsidy for distributed generation, because the net metered customer gains the benefits of the utility's grid (reliability and transmission of electricity) without having to pay for it.  In addition, some forms of net metered generation are given greater benefits than others when electricity is metered at a flat rate.  If the price of electricity varied depending upon the load on the system (Time of Use pricing), then properly oriented PV would often be paid more than it under a flat rate system, and people would be encouraged to orient their solar panels for maximum system benefit, rather than maximum electrical output.   

As for the implicit subsidy of unpaid-for transmission, I believe it should be abolished, and replaced by an explicit subsidy large enough to reflect the social benefits of distributed generation other than increased grid stability, which is accounted for with time of use pricing.  

California Solar Initiative: A Note of Caution

When California mandated that solar customers had to sign up for time of use metering in order to earn solar rebates, solar installers felt that they were not given enough support to understand the new rules (which included a lot more than the switch to TOU.)  Non-specialist customer confusion was understandably greater, and TOU pricing became the focus of a minority of solar customers who were actually charged more than they would have been under flat rates (because their solar system too small to offset enough of their air-conditioning driven usage during the peak period).  The California Public Utilities Commission (CPUC) removed the TOU pricing requirement because of the outcry.

The fact that the CPUC backed down is a tragedy.  In a very real sense, the solar customers who were hurt by the switch to the TOU tariff were the ones who had been receiving an unfair subsidy in the flat-rate system: they used a disproportionate amount of power during peak times, so much so that the benefits of solar systems were too small to replace the lost implicit subsidy.  Customers who suddenly had to pay something closer to the true cost of their electricity usage found that they were paying more than they had been, despite their new solar panels.  They unsurprisingly clamored to get back onto the flat rate where they were able to take advantage of the market inefficiencies which subsidize their air-conditioning chilled lifestyles.

Such homeowners would do a lot more for the environment if, instead of splashing out money on a PV system, they had made their homes tighter and switched to more efficient air conditioning.  For instance, the hyper-efficient Coolerado Cooler (The commercial version of which is sold as the Delphi HMX) works best in the hot, dry climates which were worst hurt by the time of use rates.  As I have said many times, PV holds an unhealthy fascination for people, to the point that money which would do far more good spend on energy efficiency improvements is effectively wasted on solar.  If we are truly more interested in solving the world's climate problems, we will spend limited government rebate money subsidizing energy efficiency improvements with large net benefit for the grid that also reduce carbon emissions, rather than subsidizing expensive solar systems for a fraction of the benefit.

Conclusions

Net metering is definitely advancing.  On August 21, I attended a Colorado Public Utilities Commission (PUC) hearing on distributed generation, and it seemed clear to me that some form of statewide net metering would likely become law in the Colorado in the next legislative session.  See my notes from that meeting for more detail.  I did bring up the possibility of combining net metering with TOU pricing in the meeting.  However, that and other good ideas from participants (including inverted tiered block pricing) or using solar rebates to subsidized increased energy efficiency will probably require considerably more advocacy if they are to make it into law.  

On the bright side, the Colorado Governor's Energy Office did suggest that the PUC investigate west-facing PV as part of a net metering program.  They are likely to be listened to, although inclusion in the final package from the state legislature is chancier. 

The California experience shows that the complexity of such schemes means that care will have to be taken with design, and educational outreach is important.  If the California consumers were helped with efficiency improvements before they installed solar, there would likely have been much less of a backlash, and the efficiency improvements would have done a lot more good than the solar PV systems which would have served as the carrot to induce the efficiency improvements.

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.

August 23, 2007

Hither and Yon: Transmission and Biofuels

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.

July 16, 2007

ABB: Improving Transmission and Distribution Efficiency

Diamond in the Rough

Alternative energy stocks are usually exciting, development stage companies with break-through technology which just might to totally transform the way we live.  Unfortunately, that's a better description of a speculative lottery ticket style company than a solid investment which will provide solid, long-term capital gains.  So it's always a pleasure to find a company whose products are so commonplace that we don't even notice them, even when we see them every day, and yet is involved in essential work to reduce our dependence on fossil fuels. 

A Diamond in the Rough

I took this picture in a new subdivision near me.  They are scattered unobtrusively in back alleys, and painted a dark green to fade into the background.  This is a transformer, which takes high voltage electricity and converts it into the lower voltage that runs your refrigerator and lights your compact fluorescent bulbs.  It's also made by The ABB Group, a glaring omission from my article on transmission stocks as a way to invest in wind energy.  That omission was due to the fact that, while I knew they are heavily involved in electricity Transmission and Distribution (T&D), I had no idea that they were anything other than what you might expect when looking at all those boring green boxes with the scary warning labels.

T&D Technologies

That changed when I read last weeks Renewable Energy Insider column about improving T&D efficiency by Bob Fesmire, an ABB spokesman, and listened to an interview with him on the Inside Renewable Energy podcast.  He mentioned ABB's FACTS (Flexible A/C Transmission Systems - also supplied by Blue Chip Alternative Energy Portfolio pick Siemens (NYSE:SI)) which improve the carrying capacity of existing transmission lines (which is very important because of the difficulty and expense of expanding existing lines in urban areas, and of building new transmission lines anywhere), as well as Gas-Insulated Substations (GIS) which allow utilities to upgrade substations in dense urban areas with a smaller footprint and less noise than the original (also supplied by Toshiba (TOSBF.PK) and Mitsubishi Electric, among others.)  Finally, they also have a strong presence in High Voltage DC transmission, which many energy advocates are arguing will be essential for a modern grid which will allow us to bring concentrating solar power from the US Southwest to the rest of the country as well as bringing North African Concentrating Solar power to Europe.

Efficiency High-flyer

ABB clearly does not have the T&D efficiency space to itself, but it is hard to imagine a future in which it wouldn't be a player in upgrading our T&D infrastructure.

 ABB Chart

As you see from the chart, ABB has been on a tear.  With a P/E ratio of 32 and a dividend yield of just 0.8%, this is not a value pick.  Nevertheless, it has the same P/E as its larger and more diversified competitor Siemens (but without the cloud of the bribery scandal, which Siemens is trying to put behind itself).  


Transmission Investment vs. Retail Electricity Sales
Source: IEEE

T&D investment has been lagging in the United States for decades, and politicians and public utilities commissions are starting to take this long-term underinvestment seriously.  Hence, it is not unreasonable to assume that annual transmission spending in the US will increase to at least 1975 levels, and possibly much higher in the next couple of years, with ABB's US revenues doubling as well.  European T&D spending is also increasing in order to ease the adoption of renewable electricity generation, but is unlikely to increase as much, as they have not neglected their grid to the same extent as has the United States.  To me, this implies annual revenue and earnings growth even in in excess of the 25% currently predicted by analysts, making the 32 P/E look reasonable.

Given that most alternative energy picks don't have earnings at all, and those that do have even higher valuations, ABB deserves a look.  I expect to buy more for my clients and myself on any decent pullback.

Speculative investors interested in T&D might also consider American Superconductor (NasdaqGM:AMSC.)  As the name implies, they hope to use high temperature superconductors to increase the capacity and efficiency of the grid, as well as providing enabling power electronics for wind farms.  Earnings are negative, but revenue is growing at 30-50% a year, and the stock has been on a tear since they secured Department of Homeland Security money for a superconducting cable to help shore up New York City's grid.  In other words, they're an exciting, early stage company with break-through technology which just might totally transform the way we get electricity. 

DISCLOSURE: Tom Konrad  and/or his clients have positions in these companies mentioned here: ABB, SI.

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.

April 08, 2007

Transmission Stocks: Bringing Wind Power to Where it's Needed

Last week, Charles told us to expect wind power industry suppliers to benefit from shortages in wind turbine components. Owens Corning (NYSE:OC) which I mentioned in my Blue Chip Alternative Energy Portfolio fits nicely into this category with their composites for turbine blades, as do the power converter stocks I mentioned two weeks ago.

As essential to wind power as any of these is improved power transmission. The National Wind Coordinating Collaborative states,

Electrical transmission facilities connecting windy areas and load centers are sometimes non-existent or minimal. Even in cases where a good wind resource has nearby transmission, that transmission often has limited capacity to transport additional energy. In fact, transmission facilities throughout much of the country are strained, and this problem is acute at specific points of congestion. The expansion of wind power is hampered by this situation, but the associated problem is not confined to wind. Instead, it is a general problem of concern to many in the electric power sector.

While the need for long distance transmission often holds up the construction of wind farms for logistical reasons (there is no incentive to erect wind turbines if you cannot get the power to market), it is unlikely to prevent investment in renewables for financial reasons. The ERCOT Competitive Renewable Energy Zones Study found that the necessary investment in transmission for the high resource zones they identified in Texas ranged from a low of 1.5% to about 12% of the cost of the generation, which will only change the overall economics of any project in marginal cases. Some of these transmission improvements will also be likely to improve system reliability, and so the full cost is unlikely to be considered totally attributable to the wind projects.

As a less expensive but unavoidable investment for new renewable energy projects, transmission improvements are well positioned to be profitable investments in our energy infrastructure as the US shifts to more sustainable electrical supplies.

The FERC opens up Transmission

Politicians and regulators are beginning recognize the necessity of new transmission. This started with the Energy Policy Act of 1992 (EPAct), which opened access to the transmission grid to allow power to be delivered from one generator to another utility.  The Federal Energy Regulatory Commission (FERC) Order 888 laid out laid out the terms under which this was implemented. Order 888 fell short of providing the necessary incentives for investment in transmission and access for renewables, and in December of 2000, the FERC issued order 2000 and 2000-A which require transmission-owning companies under FERC's jurisdiction to file either proposals to form Regional Transmission Organizations (RTOs) or progress reports on the development of RTO proposals. RTOs will have sole responsibility for operation and expansion of the transmission system, maintaining short-term reliability, establishing and managing tariffs, and responding to requests for service.

The credible threat of RTOs in competitive bidding for projects acts as an incentive for utilities to stop delaying necessary investment in transmission, and make such investments quickly at the lowest possible costs.  This should benefit investors in the companies best able to build transmission efficiently and quickly.

Action at the State Level

My own Governor, Bill Ritter recently signed Colorado Senate Bill 100, which requires electric utilities subject to rate regulation to identify high-potential wind-energy locations by undertaking biennial reviews to designate “Energy Resource Zones��? where transmission constraints hinder the delivery of electricity. Texas passed a similar law in 2005, and, as a result, there are several competing proposals for transmission to bring wind power from Texas' remote, windy areas to where it is needed, such as the proposed "Panhandle Loop".

Transmission is not only necessary for large scale wind installation, it also goes a long way (pun intended) towards dealing with wind power's most oft-cited drawback: the wind seldom blows when you need it. Typically, the wind blows at night, and the overall capacity factor for most wind turbines is around 30%. But long distance transmission allows wind from different areas to be combined, allowing benefits similar to the diversification that we investment advisors are always pushing for our client's portfolios. The more wind farms that are built over a wider geographical location, the more reliable wind energy is, and it is transmission that ties it all together.

In the Great Plains, wind typically blows at night in the winter... but winter peak load in California is typically in the evening: due to the time difference, midwest winter wind is on-peak; a more robust transmission system will bring the power from where and when it is cheap to where and when it is needed. Minnesota has also passed enabling legislation to study and develop plans for transmission network enhancement to support Renewable Energy Standards.

In the United States, the grid is characterized by decades of under-investment, with the established operators having insufficient incentives to invest, and as a consequence, having until recently rested on their laurels, treating their existing transmission assets as a sinecure. Therefore, I expect the best investments to be those transmission owners who have shown the ability to upgrade their networks quickly and effectively, with the rest likely to lose out to upstart RTOs which will increasingly be able to win projects from incumbent utilities. There will also be a political aspect to these potential returns: states still have fairly broad authority to implement FERC rules, and the actions of state legislators in utilities commissions will undoubtedly have significant impacts on the decisions and profitability of building new transmission.

States which seem particularly supportive of new transmission include the perennial leader, California, along with New Mexico, and the states mentioned above. Ohio, Virginia and Washington are have long been leaders.

The Best Companies

I see three distinct ways to invest in the coming transmission building boom. We can invest in owners who have shown a willingness and ability to invest effectively in transmission; we can invest in the contractors who do the actual building of new transmission, or we can invest in suppliers of pieces of the transmission puzzle.

Among owners, the undisputed US leader is ITC Holdings Corp. (NYSE: ITC). ITC was created three years ago when DTE Energy decided to spin off their transmission assets (2600 miles of lines.) ITC CEO Joseph Welch has run the company since, and has since acquired the transmission properties of Michigan Electric (6800 miles), and is expected to close a deal for 6800 miles of lines from Intrastate Power and Light late this year. Welch recognizes that ITC's assets have suffered from over two decades of neglect, and expects to spend in excess of $1 billion in upgrades over the next 5 to six years. Given that transmission qualifies for a regulated rate of return, a high rate of investment is a good thing in a transmission organization.  ITC seems committed to acquiring more assets and upgrading what it has, which I believe will be good for investors.  It's current territory (in Michigan, Iowa, and Minnesota) also has lots of potential for wind development, which creates the need for even more transmission development. I'd love to see the acquire or develop assets in northern Illinois and Indiana to tie the system together and connect windy Iowa with power-hungry Chicago. The downside: ITC is up 50% since the Michigan Electric deal last summer. In situations like this, I usually sell put options to generate income if the stock does not pull back, or to pick the company up on the cheap if it does.

The company known for their ability to build new transmission rapidly and inexpensively is InfraSource Services (NYSE: IFS). It has recently agreed to be acquired by Quanta Services Inc. (NYSE: PWR) in an all-stock transaction. Given that both companies are up over 80% since last summer, and acquiring companies often have earnings hiccups as they struggle to integrate the acquisition, most investors would probably do well to wait for a pullback, and buy stock in the merged company after a disappointing earnings report or two.

Among suppliers, I like bulletin board traded Composite Technology Corp (OTC BB: CPTC), which is also up about 90% since last summer, but that is less worrying to me in a microcap company... that sort of volatility comes with the territory. CTC makes an Aluminum Conductor Composite Core cable which they claim can double the current carrying capacity of existing lines, or significantly lower costs for new lines. As a bonus for renewable energy investors, their DeWind subsidiary also manufactures support structures for wind turbines. They recently announced their first contract to supply turbines to XRG in Minnesota. A larger cable supplier is General Cable Corp (NYSE:BGC) which sells not only high voltage cable for electricity transmission as well as telecommunication applications. It has had a similar run-up in the stock price and trades at a rather high multiple for an industrial business.
[UPDATE: I said that DeWind "manufactures support structures for wind turbines." This is not strictly true, and it's a lot more complex than that... see comments.]

Conclusion

All in all, an investor looking to get into transmission today is confronted by rather high multiples for industrial businesses.  Given the good potential growth in the industry, these companies may not turn out to be overvalued, even at current prices, but I prefer to wait for a pull-back on most of them. For those concerned about missing a continued rise, I would advise putting in only a fraction of the amount you hope to invest now, and slowly buying more whenever one of the stock pulls back to a level you are more comfortable with (or using my naked puts strategy, if you understand the risks involved with options and can get sufficient options trading approval from your broker.)

DISCLOSURE: Tom Konrad and/or his clients have positions in the following stocks mentioned here: CPTC.OB.

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.

Thanks to Lynn Greene for her help with the research for this article.


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