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.



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.



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.



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.

Posted by John Petersen at 09:42 AM | Permalink | Comments (0)

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.



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.

Posted by John Petersen at 10:07 AM | Permalink | Comments (0)

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. 


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.

Posted by Tom Konrad at 01:01 AM | Permalink | Comments (0)

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.

Posted by Tom Konrad at 11:24 AM | Permalink | Comments (0)

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.

Posted by Tom Konrad at 01:16 AM | Permalink | Comments (0)

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.



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.

Posted by Tom Konrad at 12:49 PM | Permalink | Comments (0)

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 charging (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.

Posted by Tom Konrad at 06:51 PM | Permalink | Comments (0)

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.)

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,


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.)


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.)


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.

Posted by Tom Konrad at 10:19 PM | Permalink | Comments (6)

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.



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.



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.

Posted by John Petersen at 11:50 AM | Permalink | Comments (16)

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.



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.



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.

Posted by John Petersen at 11:09 AM | Permalink | Comments (0)

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!



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.

Posted by Guest Contributor at 01:03 AM | Permalink | Comments (0)

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 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

Posted by Guest Contributor at 10:24 PM | Permalink | Comments (0)

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.

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.

Posted by Guest Contributor at 06:31 PM | Permalink | Comments (1)

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.

Posted by Tom Konrad at 10:41 PM | Permalink | Comments (0)

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.

In "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.

Posted by Tom Konrad at 02:20 PM | Permalink | Comments (0)

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.

Posted by Tom Konrad at 08:51 PM | Permalink | Comments (0)

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.



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.

Posted by John Petersen at 02:19 PM | Permalink | Comments (0)

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.

Posted by Tom Konrad at 04:06 PM | Permalink | Comments (0)

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.

Posted by Tom Konrad at 12:35 PM | Permalink | Comments (0)

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?



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.

Posted by Tom Konrad at 01:34 PM | Permalink | Comments (0)

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.

Posted by Tom Konrad at 10:44 AM | Permalink | Comments (0)

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.

Posted by Bill Paul at 08:57 PM | Permalink

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.

Posted by Tom Konrad at 08:50 PM | Permalink | Comments (0)

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.

Posted by Tom Konrad at 10:57 AM | Permalink | Comments (2)

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.

Posted by Bill Paul at 09:03 AM | Permalink | Comments (1)

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.

Posted by Tom Konrad at 05:48 AM | Permalink | Comments (2)

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.

Posted by Bill Paul at 10:51 AM | Permalink | Comments (0)

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.

Posted by Tom Konrad at 09:28 AM | Permalink | Comments (0) | TrackBacks (0)

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.

Posted by Joyce Crane at 07:40 AM | Permalink | Comments (0)

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.

Posted by Bill Paul at 05:21 PM | Permalink | Comments (0)

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.

Posted by David Gold at 12:10 AM | Permalink | Comments (3)

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.

Posted by Bill Paul at 08:13 PM | Permalink | Comments (0)

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.

Posted by Joyce Crane at 09:19 AM | Permalink | Comments (0) | TrackBacks (0)

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.

The 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 here.  Echelon (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.

Posted by Tom Konrad at 08:27 AM | Permalink | Comments (2) | TrackBacks (0)

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)

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).

 

Posted by Joyce Crane at 08:38 AM | Permalink | Comments (0) | TrackBacks (0)

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.

Posted by Joyce Crane at 08:20 AM | Permalink | Comments (0) | TrackBacks (0)

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:

• American Superconductor (AMSC).  Although AMSC is mostly a wind company in terms of revenues and profits, recently the prospects for its eponymous superconducing cable have been heating up.  Its superconductors will be crucial to the Tres Amigas Superstation linking the three major national grids, if that project is successful.
• General Cable (BGC) is a good bet for investors who expect the build-out to use tried-and-true technology.  What could be more tried-and-true than traditional wires?
• Composite Technology Corp (CPTC.OB) falls in between AMSC and BGC, with its Aluminum Conductor Composite Core cables, which replace the traditional Aluminum Conductor Steel Reinforced cables.  The composite core is smaller and stronger than steel reinforcement, allowing more electricity to flow in the same size wire, especially on hot days when power demand is typically highest.

CONSTRUCTION:

• Quanta Services (PWR) is the big daddy of the third party transmission construction business.
• Pike Electric Corporation (PIKE), MYR Group (MYRG), and MasTec, Inc. (MTZ) are smaller players, but could produce better returns for investors because their smaller size makes them likelier acquisition targets.

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.

 

Posted by Tom Konrad at 01:46 PM | Permalink | Comments (4)

Tom Konrad, CFA

Our 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.

Posted by Tom Konrad at 11:33 AM | Permalink | Comments (1) | TrackBacks (0)

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.

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

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.

Posted by Guest Contributor at 08:21 AM | Permalink | Comments (0) | TrackBacks (0)

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>

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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.

     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.

Posted by Joyce Crane at 07:02 AM | Permalink | Comments (3) | TrackBacks (0)

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.

Posted by Joyce Crane at 06:56 PM | Permalink | Comments (0)

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).



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).

Posted by John Petersen at 08:24 PM | Permalink | Comments (10)

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

Posted by Charles Morand at 10:23 AM | Permalink | Comments (3)

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:

• Five clean transport stocks,
• I looked at why it makes sense to wait for better prices,
• Five Energy Efficiency stocks (always my favorite sector), and
• Five Electric Transmission Stocks.
• Two Landfill Gas and Three Geothermal Stocks
• Five Solar Stocks

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.

Posted by Tom Konrad at 05:01 PM | Permalink | Comments (3) | TrackBacks (0)

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).

Posted by John Petersen at 11:04 AM | Permalink | Comments (8)

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:

• Reduce total electricity usage
• Reduce peak demand
• Lower the cost of renewable energy integration
• Lower electricity bills
• Allow electric vehicles to charge without overwhelming the grid.
• Stimulate job growth

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.

Posted by Tom Konrad at 12:03 PM | Permalink | Comments (2) | TrackBacks (0)

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.

Posted by Tom Konrad at 11:08 PM | Permalink | Comments (6) | TrackBacks (0)

Charles Morand

A little while ago, we received the following request from a reader:


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:

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)	37,984	2.80	~30%	Multiple	14.72
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)	275	0.20	7	1/3	2.22
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)	37,984	27.61	31	1/3	10.28
Siemens AG (SI)	65,944	47.93	54	1/3	17.85
Schneider Electric	19,195	13.95	16	1/3	5.20
TOTAL	137,573	100	N/A	N/A	100

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    

Posted by Charles Morand at 02:26 AM | Permalink | Comments (0)

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.

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.

Posted by Tom Konrad at 03:23 AM | Permalink | Comments (6) | TrackBacks (0)

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.

Posted by Tom Konrad at 08:44 AM | Permalink | Comments (7) | TrackBacks (1)

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