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.

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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.

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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

The Act introduced a number of energy efficiency measures with a focus on building efficiency:

1. No real property can be sold or leased for an extended period of time without undergoing an energy audit
2. Public agencies will be required to come up with an energy conservation and demand management plan
3. Public agencies will be required to consider energy efficiency when making capital investments or when acquiring goods and services (although the devil will be in the details here with more precise rules to come)
4. Energy distributors will be required to meet efficiency and demand management targets (see the brackets above about the devil)
5. The Building Code will be reviewed to include stronger efficiency measures

Analysis

Energy efficiency measures are clearly targeted at the building stock. There aren't really any good direct plays on this, and won't be until the government releases further information on what it intends to do with its own buildings. Building efficiency firms such as Johnson Controls (JCI) could benefit, although its unclear whether this would be needle-moving. 

3) The Smart Grid

Ontario has been somewhat of a leader in smart grid, with legislation passed back in 2005 requiring every home and business in the province to be equipped with a smart meter by 2010. Hydro One, the largest transmitter, has also begun smartening its network by embedding communication equipment from RuggedCom (RUGGF.PK). The Act contains provisions to expand smart grid capex. The Ontario Smart Grid Forum estimates that C$1.6 billion could be spent on a smart grid ramp up in Ontario over the initial five years of such a program. As I mentioned in a past article, while the absolute amount isn't huge, it is still a fair chunk of change for this emerging industry.

The smart grid measures are:

1. A timeline for rolling out the smart grid and apportioning spending responsibilities to different players (e.g. transmitters, distributors, retailers) will be released
2. Communication standards and other technical aspects will de defined through regulation
3. The regulator (called the Ontario Energy Board, the equivalent of a PUC in the US) will be directed to take actions related to the implementation of the smart grid, although these actions aren't yet defined

Analysis

Once all the rules are released, the legislation will have the effect of formalizing a patchwork of initiatives already underway. In my view, significant smart grid capex can be expected in Ontario over the next few years with a focus on the transmission and distribution infrastructure (rather then end consumers). There are several companies large and small entering the world of smart grid. My personal favorite play on this legislation is RuggedCom (RUGGF.PK): (1) it has already won contracts here; (2) it is part of the home team (based in Ontario); (3) it already generates EBITDA; and (4) even though its stock has withstood the latest storm in equity markets, it's still trading at a reasonable trailing PE compared to peers.   

Conclusion

Many people in the investment world loathe government intervention into anything. However, alt energy has been and continues to be primarily driven by regulation and government policies. In the absence of government support schemes, industry growth rates would be a fraction of what they currently are, and solar PV would not be on the steep cost decline curve it's currently on. It is therefore critical to keep an eye on the policy side to know where growth opportunities will emerge next.

With this new Ontario legislation, my favorite play is the Canadian clean power IPP sector (stocks listed above). The smart grid initiatives will also be worth watching, although more clarity on the rules is required before potential winners can be identified.

DISCLOSURE: Charles Morand does not have a position in any of the stocks discussed above.

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

Posted by Charles Morand at 10:05 AM | Permalink | Comments (0)

Perhaps ironically, it took one of the worst financial and economic crises of the past three decades to bring "the grid" into investor focus. To be sure, certain alt energy aficionados such as Tom have been on this topic for a long time (Tom is actually the one who introduced me to the grid as an investment theme). However, it is fair to say that most investors, including alt energy investors, have not historically paid the grid a huge deal of attention.

That is because most people outside of alt energy and VC circles held, until recently, the Old World view of the grid. In the Old World, the grid was a collection of transmission and distribution systems (i.e. transmission towers, utility posts and wires) connected together by the odd utility sub-station.  In the Old World, investments into the grid mostly took the form of maintenance capex by utilities, and there was little growth, at least in North America, beyond what was needed to keep up with economic and demographic expansion (2-3% per annum often offset by efficiency gains). Though antiquated and inefficient, the system mostly 'did the job' and the lack of coordination between various actors meant that no one would take the lead on massive investments required to upgrade the old infrastructure. In the Old World, the grid was nothing to write home about from an investment perspective.

Enter the New World, the world of the smart grid, where the electric grid doesn't stop at the connection with your house or office building, but can potentially extend all the way into nearly every electric device you use - if it can be plugged in, it can be made 'smart'. In the New World, IT capabilities are leveraged to optimize grid management. In effect, energy management, which used to rely on a closed system approach, is now integrated with the grid, opening a whole New World of possibilities. (I am admittedly not an expert in the technological ramifications of the smart grid and this post is not about the tech side. I find SmartGridNews.com to be a great source of info. I liked their reviews of various smart grid technologies)

The New World has actually been with us for some time. Smart grid pure plays such as Comverge (COMV), RuggedCom (RUGGF.PK) and EnerNOC (ENOC) all IPOed in Q2 2007, raising the profile of New World investment opportunities. However, in the broad world of alt energy investing, smart grid plays were often overshadowed by the mightier solar sector, in part because growth rates were far higher and in part because the smart grid business model is a bit arcane.

Fast forward to the 2008 US presidential run-off, where the leading candidate, Barak Obama, spoke repeatedly of the need to invest massively into the US power grid to make it smarter and more efficient. Most people probably can't remember the last time they heard a presidential candidate make the electric grid a central pillar of his/her energy policy. Nearly immediately following the election, the new President pumped, as part of his American Recovery and Reinvestment Act, $4.3 billion into mostly New World grid opportunities.

While this may seem small in comparison to the total size of the investment required to upgrade the grid (Old and New World) over the next couple of decades (The Brattle Group estimates that around $880 billion in transmission and distribution investment will be made by 2030), this amount is over 15x the combined 2008E sales of Comverge, RuggedCom and EnerNOC. Throw in Itron (ITRI), a $2 billion company that provides a number of utility products and services beyond smart meters, and the final package is still over 2.2x the combined 2008E revenue of all four companies. In other words, for this emerging sector, this is a fair chunk of change.

Besides the revenue that will flow in as a result of direct government expenditures, the impact of the American Recovery and Reinvestment Act will be felt for years to come as it jump-starts the industry. And the US isn't alone: the Canadian province of Ontario established a Smart Grid Forum that recently recommended spending C$1.6 billion over the next five years on smartening the grid there. Smart grid opportunities are also attracting large firms with no energy management background but expertise in complementary areas that can be leveraged.

Where does that leave investors? With the very real possibility that smart grid stocks will outperform the broader alt energy space over the next 12 months. Like other areas of alt energy, there are a growing number of ways to play the smart grid as larger cap firms with diversified revenue sources enter the space. The table below lists out some of the main publicly-traded plays on the smart grid. 

Smart Grid Stocks
Name	Ticker	Exposure to SG	Mkt Cap ($mm)	PE
RuggedCom	RUGGF.PK	Very High	252	18.88
Comverge	COMV	Very High	103	n/a
EnerNOC	ENOC	Very High	225	n/a
Itron	ITRI	Very High	1,810	66.39
Echelon Corp	ELON	Very High	287	n/a
Digi International	DGII	High	192	20.19
IBM	IBM	Medium	123,260	10.24
Cisco	CSCO	Medium	90,878	12.12
Google	GOOG	Low	110,110	26.24

To be sure, I am a little late on this one. Although I did discuss the potential for the smart grid to receive some focus in Obama's economic stimulus package in December, I initially believed that the Old World grid would receive as much if not more than the New World grid. In the end, Old World got next to nothing, which somewhat surprised me given its state of disrepair.

While I don't expect the smart grid to move the needle for the companies whose exposure is categorized as "medium" and "low" in the table above, my sense is that the "very highs" and the "high" will outperform alt energy stocks in general over the next 12 months. We will check again then!

DISCLOSURE: Charles Morand does not have a position in any of the stocks discussed above.

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

Posted by Charles Morand at 01:48 PM | Permalink | Comments (5)

On Friday, the House of Representatives and Senate passed H.R. 1, the American Recovery and Reinvestment Act of 2009 and sent the bill to President Obama for his signature. The impact on companies that manufacture advanced batteries and other energy storage devices will be staggering. The principal energy storage appropriations include:

• $2,000,000,000 for grants to manufacturers of advanced battery systems and vehicle batteries that are produced in the United States, including advanced lithium ion batteries, hybrid electrical systems, component manufacturers, and software designers;
   
• $4,500,000,000 for grants for “Electricity Delivery and Energy Reliability” including activities to modernize the electric grid, include demand response equipment, enhance security and reliability of the energy infrastructure, energy storage research, development, demonstration and deployment, and facilitate recovery from disruptions to the energy supply;
   
• $6,000,000,000 to pay the cost of guaranteed loans under a “Temporary Program for Rapid Deployment of Renewable Energy and Electric Power Transmission Projects;
   
• ”$500,000,000 for research, labor exchange and job training projects that prepare workers for careers in energy efficiency and renewable energy; and
   
• ”$300,000,000 to purchase high fuel economy motor vehicles including: hybrid vehicles; neighborhood electric vehicles; electric vehicles; and commercially available, plug-in hybrid vehicles

In addition, the final bill includes tax credits for purchasers of plug-in electric vehicles as follows:

• For new plug-in electric vehicles, a base credit of $2,500 plus $417 for the first 5 kWh of battery capacity plus $417 for each additional kWh of battery capacity, up to a maximum of $7,500 per vehicle:
   
• For new neighborhood electric vehicles, a credit of $2,500 per vehicle:
   
• For plug-in EV conversions, a credit equal to 10% of the first $40,000 in conversion costs

Analyzing Congressional intent is difficult and predicting how regulatory agencies like the DOE will interpret that intent is even harder. Nevertheless, recent DOE publications and the text of the legislation provide some important clues about how the subsidies are likely to be distributed. So I’ll go ahead and climb out on a limb and offer one lawyer’s opinion of how things are likely to evolve.

There are substantial differences between the original House bill and the final version sent to the President. The original House bill included $2 billion in funding for renewable energy research and development and specifically allocated those funds to biomass ($800 million), geothermal ($400 million) and other ($800 million). It also authorized $1 billion in battery manufacturing grants and $1 billion for the cost of guaranteed loans for battery manufacturing. Most of the bells and whistles were eliminated before the final bill was sent to the President. Now we have a single $2 billion appropriation for battery manufacturing grants. I would characterize the final bill as far more results oriented than the original House bill.

In a recent article titled “DOE Reports That Lithium-ion Batteries Are Not Ready for Prime Time,” I reviewed the 2008 Annual Progress Report for the DOE’s Energy Storage Research and Development Vehicle Technologies Program. While DOE concluded that Li-ion technology was promising, it also noted that there were numerous technical barriers that prevented immediate commercialization of Li-ion batteries for use in automotive applications including cost, performance, abuse tolerance and life. Based on the conclusions, tone and tenor of the DOE report, it’s clear that the DOE views Li-ion as a promising R&D stage technology, but believes it is not a prime technology that’s ready for immediate commercialization.

The final bill sent to the President requires the DOE to include Li-ion battery developers in the class of eligible grant applicants. Without that requirement, I think there would have been a reasonable argument that Li-ion developers should be excluded from grant eligibility. While Congress clearly wants some funding for Li-ion battery developers, it’s clear that the battery manufacturing grants are not directed solely or even principally toward Li-ion technology. The Congress wants energy storage solutions that work today, not potential solutions that may work in 5 or 10 years. On balance, I expect the bulk of the battery manufacturing grants to go to companies that are manufacturing and selling existing products into established markets.

In another recent article titled “Alternative Energy Storage: Enabling the Smart Grid,” I reviewed two recent reports from the Department of Energy’s Electric Advisory Committee that discussed the critical enabling role that energy storage technology would play in the evolution of the Smart Grid. At the time of the original House bill, I speculated that some of the $4.5 billion appropriation for electricity delivery and energy reliability might ultimately be used for energy storage devices. Since the final bill sent to the President specifically added, “demand response equipment” to the list of authorized uses, and the final bill includes a new $6 billion appropriation for guaranteed loans to electric power transmission projects that should alleviate some pressure on the $4.5 billion in grant money, I think my earlier speculation can now be classified as certainty. I’m not courageous enough to predict the amount of electricity delivery and energy reliability grants that will ultimately be allocated to energy storage, but I will be surprised if the grant funds allocated to energy storage don’t exceed $1 billion.

I believe a total of $3 billion in battery manufacturing and electricity delivery and energy reliability grants can do an immense amount of good across broad sections of the energy storage landscape as long as the DOE sticks to legislative intent and funds companies that can manufacture and sell commercial products today. It all goes back to my core belief that we need to wake up in the morning, go to work with the tools we currently have available, solve our problems to the best of our abilities and be prepared to embrace new tools and new technologies when the R&D work is done and the commercial value is established.

I have no doubt that the energy storage sector is in for some very interesting times, but this is a jobs, productivity and manufacturing bill, not a research and development bill.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

Posted by John Petersen at 01:59 PM | Permalink | Comments (4)

America’s electric power grid is subject to immense inefficiencies that arise from the interplay between centralized power generation, local power consumption and on demand utility service. To put things into a broad perspective, the nameplate capacity of U.S. generating facilities is about 1 million Megawatts (MW), so if all of our power plants ran 24/7 we would have a theoretical annual generating capacity of 8.7 billion Megawatt-hours (MWh). Since demand for electricity fluctuates on both a daily and seasonal basis, total electric power generation in 2007 was only 4.2 billion MWh, or less than 50% of nameplate capacity. The goal of the Smart Grid is to maximize the efficiency of existing generating facilities and accommodate the integration of renewable power resources. Since many better-qualified authors are writing volumes about transmission and distribution, demand management and renewable power technologies, I’ll limit this article to manufactured energy storage devices; enabling technologies that will be the beating heart of the Smart Grid for the next 10 to 20 years.

Last August I wrote Grid-based Energy Storage: Birth of a Giant, an introductory article that offered an overview of the potential uses for energy storage systems in the electric grid. At the time I confessed that the subject matter was a bit out of my depth, a problem that was compounded by a dearth of third-party analysis on specific applications. Mercifully, all that changed in December 2008 when the Department of Energy’s Electric Advisory Committee (EAC) published two reports that are must reads for investors that want to understand how the Smart Grid will develop, and position their investment portfolios to profit from cleantech, the sixth industrial revolution.

The first EAC report,“Smart Grid: Enabler of the New Energy Economy,” explains how the Smart Grid will use advanced technology to transform the energy production and distribution system into a more intelligent, resilient, reliable, self-balancing, and interactive network that enables enhanced economic growth, environmental stewardship, operational efficiencies, energy security, and consumer choice. The companion report, “Bottling Electricity: Storage as a Strategic Tool for Managing Variability and Capacity in the Modern Grid,” explains why the evolution of the Smart Grid will depend on cost effective energy storage, particularly in the early stages while other distribution and demand management solutions are being developed, adopted and implemented. This report divides Smart Grid energy storage applications into three functional classes: generation; transmission and distribution; and end-user, and then provides thumbnail descriptions of each potential energy storage application. Since my goal is to encourage readers to download and study the EAC reports and other source documents, this article will use summary tables to identify the major application classes and the existing and emerging manufactured energy storage devices that are expected to be useful in those applications.

I’ll apologize up front for giving short shrift to pumped hydro and compressed air energy storage. Both are highly efficient for storing massive amounts of energy and both are subject to physical and environmental constraints that limit where facilities can be built. More importantly, there are no pure-play public companies that focus on either storage technology, so spending a lot of time discussing cool technologies that you can’t invest in seems futile.

One of the most important concepts in any discussion of grid-based energy storage is discharge duration; or the optimal time required for a particular device to release its stored energy. Some grid-based applications require discharge durations measured in hours, others require discharge durations measured in minutes and still others require discharge durations measured in seconds. In general, manufactured energy storage devices that can store large amounts of energy are not good at discharging the stored energy quickly. Likewise, manufactured energy storage devices that can discharge energy quickly do not generally store large amounts of energy. Since the big challenge for utilities is to only provide slightly more power than customers need at any particular moment in time, they have to focus on peaks and valleys, rather than the averages. That's why a comprehensive solution will require a multi-pronged approach that uses a variety of manufactured energy storage devices to meet particular needs.

The core data in the following table comes from a July 2008 Sandia National Laboratories report on its Solar Energy Grid Integration Systems – Energy Storage (SEGIS-ES) program. While the original Sandia table focused on the current and projected capital costs for manufactured energy storage devices that can be used in solar power projects, the basic cost structure applies to all Smart Grid applications. Since the EAC’s Bottling Electricity report states that the principal purchase decision metrics in Smart Grid applications will be installed cost, reliability, discharge duration and cycle life, I’ve reordered the Sandia data to create a cost hierarchy and provide summary information for each type of storage device. More detailed information on the advantages, disadvantages, commercial status, current research and development and potential applications for each type of manufactured energy storage device can be found in the SEGIS report.

The following table is my attempt to integrate the cost and performance data from the SEGIS report with the Smart Grid application information in the EAC’s energy storage report. My goal is to identify the principal technologies that might be useful in each application and highlight the technologies that seem most likely to prove cost-effective. Since the EAC’s report highlights the need for substantial additional research, development and testing to better identify the optimal technology choices, the table is only one man’s informed view through a cloudy crystal ball.

At first blush, the percentages of generating capacity that could be satisfied by energy storage systems seem pretty modest, a mere couple of percentage points here and there with higher margins for alternative power installations. But those tiny percentages become massive potential revenue numbers when you consider that the capital cost of energy storage installations ranges from $150,000 to $1.3 million per MWh. Since the principal competitors in the energy storage sector are small compared with similarly positioned companies in other sectors, I believe energy storage is likely to be a veritable investment tsunami that will offer extraordinary returns.

Most of the buzz in the alternative energy sector focuses on renewable power, demand management technology, advanced power transmission systems and batteries for electric vehicles. In the process, the media has largely overlooked the reality that energy storage devices are essential enabling technologies for both transportation and the Smart Grid. A number of analysts are predicting that annual global demand for energy storage devices could grow from $25 billion to $100 billion over the next decade. Most estimates of future growth in the automotive market talk about battery sales the $15 to $20 billion range. The much larger growth will come from using energy storage technologies to support the development and evolution of the Smart Grid. While size and weight may matter when it comes to automotive applications, they will be meaningless in grid-based applications where installed cost, reliability, discharge duration and cycle life are the critical metrics.

There are two pure-play public companies in the flywheel sector. Active Power (ACPW) manufactures systems that use low-speed flywheel technology to provide backup power for server farms and a wide variety of commercial and industrial installations. Since Active Power’s technology is modular, scaling systems to provide Smart Grid support should be relatively simple and I expect Active Power to be an early beneficiary of the trend toward grid-based energy storage. Beacon Power (BCON) has recently begun field-testing of utility scale governor response and frequency regulation systems. While Beacon will likely require a couple years of testing before utilities are willing to commence wide-scale implementation of Beacon’s technology, its stock offers significant long-term potential.

There are five pure-play public companies in the advanced lead acid battery group including Exide Technologies (XIDE), Enersys (ENS), C&D Technologies (CHP), Ultralife Batteries (ULBI) and Axion Power International (AXPW.OB). Each of these companies has proven products that can be rapidly integrated into storage systems for the Smart Grid. Moreover, Axion’s pioneering work on lead-carbon devices promises a level of performance, power and cycle-life durability that has not previously existed in the lead-acid world. In addition to its activities in the transportation sector that have resulted in a couple of significant grants, Axion is involved in two utility scale demonstration projects. Since lead-acid is frequently perceived as old-tech, the group trades at a significant discount to comparable companies that focus on other advanced battery technologies. I believe the market valuation metrics will normalize as the Smart Grid opportunities become more widely understood.

There are three pure-play public companies in the lithium ion group that have expressed an interest in the Smart Grid market. Altair Nanotechnologies (ALTI) has shipped a utility scale frequency regulation system for testing and both Ener1 (HEV) and Valence Technologies (VLNC) have taken preliminary steps to evaluate the potential for using their technologies in utility scale applications. Since size and weight are not mission critical issues in utility scale installations, I expect the cost of Li-ion technology to be a significant impediment. However, there are limited Smart Grid applications like frequency regulation that could benefit from extreme high performance batteries.

The only pure-play public company actively involved in the commercialization of Zinc-Bromine flow batteries is ZBB Energy (ZBB) which has recently partnered with Eaton for the global distribution of its flow battery systems.

Foreign companies that have active plans to manufacture products for the utility sector include France’s SAFT Groupe (SGPEF.PK), which has partnered with ABB (ABB) for large-format Li-ion devices, and Japan’s NGK Insulators Ltd. (NGKIF.PK).

DISCLOSURE: John Petersen is a former director of and holds a large long position in Axion Power International (AXPW.OB), a leading U.S. developer of lead-carbon batteries, and also holds small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

Posted by John Petersen at 11:00 AM | Permalink | Comments (9)

A few weeks ago, I wrote about how a new Obama administration would renew with Keynesianism (i.e. large-scale counter-cyclical infrastructure spending) but with a green twist to: (a) get the US economy out of its funk and (b) propel America into the 21st Century by providing a massive push for its green industries. I discussed certain rail stocks and electric grid stocks that could benefit as a result. By-and-large, I've been right on both counts about the President-elect's strategy (i.e. Keynesian and green), but I did forget to mention an important part of the plan's focus: energy efficiency and the smart grid. Tom did discuss energy efficiency.

The smart grid, however, is increasingly being thrown around as a priority of the Obama plan insofar as the transmission system is concerned. It's thus not just about expanding transmission capacity but also about making the transmission infrastructure smarter and more efficient.

Stocks for the Smart Grid Build-out       

I'm therefore adding to my two previous lists some potential plays on large-scale smart grid expenditures.

EnerNOC (ENOC). EnerNOC designs, among other things, demand response solutions for grid operators and utilities. The company is earning-less at the moment. 

Itron (ITRI). This company is a leading maker of smart meters, the key tool on the consumer end of a smart grid. ITRI is a stock that I've found richly-priced for as long as I've followed the alt energy sector, and at a trailing PE of about 70x, I continue to find it very expensive.

Comverge (COMV). Comverge also makes smart meters and works with utilities to design smart grid solutions revolving around demand response. It's EnerNOC's direct competitor. The company is also earning-less.

RuggedCom (RUGGF.PK). RuggedCom, as its name indicates, designs communication applications for rugged environments such as electric utility substations. That communication equipment embedded at various points of the grid  is also critical in building a smart transmission and distribution system. This is a company that already makes money and trades at a reasonable PE of around 17x (reasonable given this sector's growth potential).     

DISCLOSURE: Charles Morand does not have a position in any of the securities discussed above.

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

Posted by Charles Morand at 09:56 PM | Permalink | Comments (3)

by Tom Konrad

Last February, I wrote "[Since] I expect the Fed-induced reprieve to be fairly short lived, [here are] ten solid companies I'd be happy to buy more of if and when the bottom really falls out of the market."  When I wrote those words, the Dow Jones Industrial Average was over 12,700.  Now, it's around 8,500, and I doubt anyone remembers the "Fed-induced reprieve" I was referring to.  The "bottom fell out" in September and October.   

On October 12, with the DJIA at 8451, I wrote "I don’t know where the market will go from here, but I now feel that we've seen the worst of what is likely to happen, even if the market has farther to fall."  With the market gyrating wildly but basically treading water since then, I still feel that many companies (if not the market as a whole) have seen their lows.   However, like my partner Charles, I'm interested in investing in companies which are likely to benefit from the stimulus.   I think energy efficiency stocks and electric grid infrastructure stocks are likely to be good bets, but I'm leery of any companies which depend on the consumer.

This is a reexamination of those companies in the new context.  The company names link to the articles where they were included in the series.

Building Retrofits

One of the major points which the President-Elect outlined for his stimulus plan was an energy efficiency overhaul for government buildings and schools.  Hence companies which sell services and equipment for building retrofits should be well placed to take advantage of these programs. Such companies include Johnson Controls (JCI), General Electric (GE), Owens Corning (OC),  Philips (PHG), United Technologies (UTX), Waste Management (WMI), and Honeywell, Inc. (HON).

Grid Infrastructure

During his campaign, Obama put much emphasis on the Smart Grid, but less on long distance power transmission, which I believe to be at least as important.  Fortunately, Steven Chu, Obama's pick to head the Department of Energy, is a strong advocate of transmission, and it also has support from Senate Majority Leader Harry Reid.  I am now fairly confident that, even if the initial stimulus package does not contain large spending on transmission, a more robust national electric grid is in our future.  From my list of Solid, Clean picks, those companies best positioned to benefit from this sort of spending are Quanta Services (PWR), General Cable (BGC), Siemens (SI), The ABB Group (ABB), and National Grid (NGG).  Quanta and General Cable perhaps the best positioned of these.

All of these were included in my partner Charles' list of companies well placed to benefit from electric infrastructure spending.  Given Obama's enthusiasm for the smart grid, it might also be worthwhile to consider these metering and energy management stocks.

Roads and Rail

Any spending package is likely to include considerable spending on roads, and, many of us hope, rail as well.  Not being a fan of the car, I generally don't pick road-building stocks, but one of my favorite rail picks, Trinity Industries (TRN), owns a leading producers of concrete, aggregates, and asphalt in Texas and neighboring states and the only full-line US manufacturer of highway guardrail and crash cushions, meaning that they are very well placed to benefit from the stimulus. My other rail pick, Greenbrier (GBX), seems less well placed because they are primarily in railcar leasing, which I don't expect to get immediate benefit.

Consumer Goods

Although General Electric (GE) and Philips (PHG) may benefit from building retrofits, they are likely to be weighed down by their exposure to the suddenly frugal consumer.  My solar pick Sharp (SHCAY.PK), also has this problem, without many obvious ways to cash in on other spending.

Others

My remaining February picks, John Deere (DE), and Applied Materials (AMAT) don't have any obvious way to cash in from a stimulus package, but don't seem overly exposed to consumers, either.

DISCLOSURE: Tom Konrad or his clients have long positions in JCI, GE, OC, PHG, WMI, HON, PWR, BGC, SI, ABB, NGG, TRN, GBX, DE, and AMAT.

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

 

Posted by Tom Konrad at 12:45 PM | Permalink | Comments (0) | TrackBacks (0)

A few weeks ago, I wrote a series of two articles on the yet-to-be-unveiled Obama stimulus package for the economy, arguing that things pointed in the direction of massive infrastructure spending with a green twist. I argued that this would benefit a certain categories of rail-related stocks and electric grid stocks. How am I doing relative to the market as a whole, which has had several positive trading days for the past while on the back of the eventual stimulus plan?   

Railway Stocks

I discussed four railway stocks in an article published on October 18. On October 17, the Dow closed at 8,852.22 and the S&P 500 at 940.55. Last Friday, December 12, they respectively closed at 8,629.68 and 879.73 for losses of 2.51% and 6.47% over that period. My stocks performed as follows:

Railway Stocks: Oct. 17 to Dec. 12 (Closing pr.)
Company	Oct. 17	Dec. 12	Δ %
Koppers Holdings	20.28	21.99	8.43
LB Foster	22.89	31.68	38.40
Stella Jones	20.18	13.25	(34.34)
Global Railway Indust.	1.00	0.75	(25.00)

Not bad. Stella Jones and Global Railways are Canadian companies and their primary listings are on the TSX, so they are not directly comparable to Koppers Holdings and LB Fosters which trade primarily on US exchanges. Nevertheless, I chose to include both Canadian companies and they both underperformed pretty badly, so my railway recommendations were good as far as the US went but mediocre overall.

Electric Grid Stocks

I discussed ten electric grid stocks on November 2. The last trading day before that was October 31. On that day, the Dow closed at 9,336.93 and the S&P 500 at 968.75. Last Friday, they respectively closed at at 8,629.68 and 879.73 for losses of 7.57% and 9.19% over that period. My grid stocks performed as follows:

Grid Stocks: Oct. 31 to Dec. 12 (Closing pr.)
Company	Oct. 31	Dec. 12	Δ %
ABB Group	13.15	13.80	4.94
Allegheny Technologies	26.54	24.05	(9.38)
Composite Tech	0.29	0.39	34.48
General Cable	17.08	16.97	(0.64)
MasTec Inc.	8.72	8.78	0.69
Quanta Services	19.76	18.13	(8.25)
Resin Systems	0.15	0.26	73.33
Schneider Electric	50.75	71.00	39.90
Siemens	60.15	63.92	6.27
Valmont Industries	54.78	57.46	4.89

A little better. Only one of my picks, Allegheny Tech, underperformed both benchmark indexes. If you ignore the two penny stocks (Composite Tech and Resin Systems), which most folks aren't touching at the moment, my picks performed overall decently, with five in positive territory, one that underperformed both indexes, one that underperformed only the Dow and one that's in negative territory but still outperformed the Dow and the S&P 500.   

What's Next?   

Of course none of the stimulus money has been spent or even approved yet, so at this stage in the game all of this remains speculation. Although I did not recommend any these stocks specifically, my thematic choices appear to be performing decently and may thus provide decent sub-sets for picking individual plays on the stimulus plan. I will reassess both sets of stocks once the Obama administration is in power and the stimulus strategy is being implemented. 

DISCLOSURE: Charles Morand is long ABB.

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

Posted by Charles Morand at 08:26 PM | Permalink | Comments (3)

Electricity Storage and Transmission are naturally complementary, and more of both will be needed.  But given limited time and resources, where should those of us who want to see as much renewable electricity on the grid as soon as possible concentrate our efforts?  The choice is not immediately clear.

Dennis Ray, ED of Power Systems Engineering Research Center (PSERC) was quoted [pdf, p.11] as saying “Regardless of contractual arrangements that are subject to environmental regulation, the ultimate dispatch pattern that will determine the actual emissions is largely dependent on transmission constraints and reliability considerations.”

Horses for Courses

At a basic level, the preference of transmission over storage will depend on your goals.  For those interested in energy self-sufficiency and distributed generation, improved transmission runs contrary to their goals.  

The related goal of energy security can cut both ways: while a more integrated national grid might be more vulnerable to large scale blackouts, its greater size would make it less vulnerable to disturbances caused by the loss of any one source of generation.  Since transmission can either cause or prevent blackouts, a smarter, more fault tolerant grid seems a better way to combat blackouts than a less connected, more Balkanized grid.

When it comes to goals of increasing the penetration of renewable energy into the grid, electricity storage will likely be essential at high levels of penetration, and new transmission is essential to bring electricity from areas where renewable resources are plentiful to where they are plentiful to population and load centers.  

Relative Value

Leaving aside necessary new transmission to bring renewable electricity to market, and electricity storage which will likely be necessary to reach high degrees of grid penetration for renewable electricity, there is considerable scope for both electricity storage and a more robust national grid to make it cheaper and easier to allow quick renewable electricity integration.

 Unfortunately, comparing transmission and storage is very much apples and oranges.  Storage, in essence, takes electricity produced now and stores if for use later (transfer in time), while transmission takes electricity produced here to where it's needed there (transfer in space).  The relative value of transferring electricity in time and in space depends on the relative price of electricity here and now, to the price of electricity used there and then, as well as the cost in losses from the transfer.

In the balkanized North American grid, we have both daily fluctuation in price and wide geographical price differences, as well as differences in price fluctuations in timing.  These variations will make storage relatively more valuable in a location which is far from other parts of the grid, and which sees high daily variation in electricity prices due to variable supply and/or load.  A common example of this is that it is often cheaper to build a completely off-grid home if the home is more than a half mile from existing electricity lines.

In contrast, the low cost of connecting to grid service means that no one is envisioning building off-grid homes where electricity service already exists.  Note that policymakers are talking about Net Zero Energy Homes (i.e. homes which both import and export electricity from the grid,) not true Zero Energy Homes, which would supply all their own energy all the time.

In a 2005 study "Improving the Value of Wind Generation through Back-up Generation and Storage" from the California Energy Commission (CEC Study) evaluating the use of storage to allow wind to operate as a firm resource found that "even under fairly optimistic assumptions, the energy storage approach is unlikely to perform as well as operating under an Intermittent Resources."  If the economics of wind cannot be improved through the direct use of storage, a more robust transmission system will have to achieve benefits at significantly lower costs in order to improve wind economics.

A Simple Example

In order to directly compare the benefits of transmission and storage amid all these variables, I start with a simplified example where the two are more or less comparable.  Traveling from West to East is in many ways analogous to traveling forward in time as you cross into new time zones.  It's always an hour later in New York than it is in Chicago.  

Let's assume then that we have a single transmission line connecting two similar areas of the grid, where the marginal costs of electricity have identical patterns throughout the day, but located in time zones an hour apart. Sending electricity from West to East would then have the same economic value as storing the electricity for an hour in the Western grid, and releasing it an hour later.  Sending electricity from East to West would have the same economic value as discharging the same amount of electricity from storage, and then re-charging an hour later.

If, for simplicity, we assume that the electricity storage and transmission line have the same capacity, then the transmission line can operate similarly to electricity storage with capacity large enough to charge or discharge discharging continuously for two hours.  The two-hour capacity is necessary to compensate for the ability of the transmission line to move power into the past (East to West) as well as the future (West to East)

Still Apples and Oranges?

Some readers may protest that electricity storage has the advantage of charging when electricity costs are low (usually at night), and not discharging until prices peak (usually in the afternoon or evening.)  This actually makes less difference than might be expected, because the transmission line can be operating continuously, and the sum of one-hour differences in price will equal the difference between the peak price and the price in the overnight trough.  In other words, transmission makes up for the smaller price differentials with increased volume of electricity transferred.  

On the other hand, the value of transmission deriving from different prices between locales are assumed to be negligible in this example.  A look at a map of average electricity prices in the United States

shows that most East-West transmission lines across time zones will also benefit from highly significant differences in average electricity prices.  Since my example completely ignores these differences, my simple example is likely to greatly underestimate the value of transmission relative to storage.  

What Does it Cost?

According to the Electricity Storage Association,  the best storage technologies other than pumped hydropower (which I exclude from this analysis because new pumped hydropower developments are severely limited due to environmental and water rights issues) can store electricity for an incremental cost of about 2-5 cents per kilowatt-hour.  

In contrast, Wikipedia puts the cost of "[l]ong-distance transmission of electricity (thousands of miles) [at] US$ 0.005 to 0.02 per kilowatt-hour."  A one time-zone transmission line needs to be long enough to cover 15 degrees of longitude.  This is slightly over 1000 miles at the equator, but gets smaller as you move to higher latitudes.  In the United States, this varies between approximately 800 and 900 miles.  The shorter distance should put the cost of transmission at the low end of the range above, or 0.5 cents per kWh, or about a quarter to a fifth the cost of storage.

In my simple example, the cost of transmission per kWh will have to be increased to compensate for the greater number of kWh transferred, since a storage system would likely only be cycled once per day (for two hours of charge or discharge), while the transmission system will be operating whenever the hour-to-hour price differentials are high enough to make up for line losses.

A look at hourly prices for electricity in Ontario for December 3rd (the day I am writing this) show that prices are rising or falling significantly about 16 hours a day, meaning we expect the transmission line to handle about 8 times as many kWh as the electricity storage.  Hence the incremental costs for transmission may need to be increased from the above estimates to reflect the greater incremental costs due to line losses.  However, all the "cents per kWh" numbers above contain assumptions about frequency of usage to allocate capital, maintenance, and electricity losses between kWh used.  Storage technology for grid stabilization is most likely assumed to cycle approximately once per day, while this paper uses the assumption that a transmission line will be operated at 65% capacity, similar to the line in my example.  Therefore, if the cost for transmission needs to be scaled up to reflect the higher usage, it should likely be increased by a factor significantly below 8, and perhaps not at all.

Taking this together, the value of the ability of the transmission line to act like electricity storage should be between 1 and 4 cents per kWh, still slightly below the 2 to 5 cents per kWh for most storage technologies.  If we assume that there are any significant other benefits to transmission (such as increased diversification of power supplies and the ability to buy low and sell high between different regions, as discussed above), electricity transmission becomes the clear winner where it can be built.

Too Simple?

Clearly, my comparison for a trans-time-zone transmission line and electricity storage is still far too simple to capture the full benefits of either technology.  However, in an age when storage technologies are still mostly experimental while transmission technologies are well-established, it seems clear to me that our first efforts should be to capture those large-scale gains we can with a robust national grid.  With President-Elect Obama promising "green" infrastructure spending to jumpstart the economy, neglecting electricity transmission would be a tragic mistake.

What's Stopping Us?

To a believer in free markets, it's probably quite surprising that such large economic opportunities exist.  Similar to the untapped opportunities in energy efficiency, market barriers have crippled the national electric grid.  The most obvious barriers are those of people who object to how they look.  Because of the need for long, contiguous corridors, negotiation with individual landowners has delayed many projects for years.  For many large projects, the power of eminent domain is essential.  This is why T. Boone Pickens combined his wind plan with plans for a water pipeline from the Ogallala Aquifer.  In Texas, water projects have eminent domain, while electricity projects do not.  

There are also significant regulatory barriers.  Electricity deregulation in many states meant that utilities often had no incentive to invest in new transmission infrastructure[pdf].  Furthermore, electricity planning is done state-by-state and region by region, with the North America carved up into nine independent regions.  

Currently these problems are only being addressed on a state and regional basis.  A robust national grid will require all these problems to be addressed at a national level.  One approach might be for Congress to create a national transmission planning authority with the right of eminent domain, or the right to use the right of ways along the interstate highways system.

Is that too much to hope?

Tom Konrad

Posted by Tom Konrad at 02:00 PM | Permalink | Comments (4) | TrackBacks (0)

Electric utilities have a process by which they project future expected demand for electricity, and then find resources, either new electric generation or energy efficiency (Demand Side Management, or DSM) resources to meet that expected demand, or reduce that demand.  Progressive utilities and utility regulators now include DSM among the mix of resources as a matter of course.  According to Martin Kushler, of the American Council for an Energy Efficient Economy (ACEEE) who spoke at the Southwest Regional Energy Efficiency Workshop about an upcoming report from ACEEE, DSM resources cost an average of 3 cents per kWh of energy saved, much lower than the typical 10 cents per kWh for new supply side resources.  Since saving energy is not only considerably cheaper but also cleaner than new generation, including renewables, DSM resources deserve pride of place in resource planning.

Bringing DSM into resource planning has required that utility regulators change utility incentives to assure that utilities will not be undermining their own profits.  In many states, this has been a slow revolution moving from traditional "least cost" planning, which focused on achieving the lowest possible cost per unit of electricity delivered, to a focus on reducing overall energy bills (either by reducing kWh used, or minimizing the price per kWh.)  This goes against traditional utility instincts, which like most businesses would like to expand by increasing sales, but can be achieved by paying for reliable service, or giving incentives for efficiency.

However, there has always been one aspect of DSM which utilities have little problem with, which are various measures to reduce peak loads, either through Demand Response (payments to customers in return for turning off equipment during peak times) and peak shaving (efficiency measures which reduce peak load by shifting loads to other times of the day.)  Reducing peak load is in the utility's interest because it improves system reliability without significantly reducing total sales or expensive expenditures on peaking plants which are only used for a tiny fraction of the year.

Utility-Think

The traditional thinking breaks down demand into a base load piece, which is basically the least amount used at any time during the year, and any demand above that level.  Traditionally, utilities sought to meet this demand with a mixture of base load (which runs nearly all the time) and dispatchable generation (which can be controlled, and is brought on as necessary).  This thinking has run into problems as intermittent generation, such as wind and solar.  

Typically, utilities express these problems as problems with intermittent technologies, calling them "unreliable," which they are if you define "reliable" as only those resources which are on 90% of the time, or which can be called on at will.  That is not the definition of reliability most of us use: most people would call something reliable if it's there when you expect it to be.  With the colloquial definition, the rising and setting of the sun is about as reliable as anything gets, and the reliability of solar and wind power also follow predictable daily and seasonal cycles, limited only by our ability to predict cloudiness and windiness.  

Admittedly, weather prediction is not the most reliable of sciences, especially when attempting to predict weather in small areas or gusts of wind or shadows from clouds in small areas.  However, geographic diversification can smooth the fluctuations in generation from gusts of wind or shadows of clouds in an electric system with multiple solar or wind facilities spread over a broader area.  The remaining unpredictability of generation for such a diversified system should be manageable by a system which has no trouble coping with customers' unpredictable and wildly fluctuating demands for electricity.

A typical "reliable" combined-cycle gas turbine [pdf], takes 3 hours to start from cold, and can ramp up or down only 7% in power output per minute.  On this time scale weathermen tend to be fairly accurate over broad regions and a few hours ahead; weathermen earn their reputation for unreliability due to the surprises which arise in forecasts for a day or two ahead, and even here improvements are on the way.  For minutes ahead, the wind speed around the field should give operators a good idea of the strength of wind approaching it.

Implications for DSM

The same narrow focus on dispatchable and base load generation also leads to a focus on only two types of demand management in electric utility DSM programs.  These programs are almost universally evaluated on (and hence focus on achieving) three things:

1. Overall energy reduction (kWh savings)
2. Peak load reduction (usage at peak times)
3. Demand response (load reduction which can be called upon in times of need.)  

As I argued in my article on Wind Power and Heat Pumps, there are other valuable aspects of managing demand than just these three factors.  While electricity is most expensive to generate at times of peak use, the costs vary greatly throughout the rest of the year as well.  In addition to the load on the system, the cost of natural gas is considerably higher in the winter than the summer, meaning that saving the same kWh of energy at the same level of load is worth more in the winter than in the summer, so long as the kWh would have been generated using the same amount of natural gas at the two times.

To be fair, the cost/benefit tests used to evaluate the effectiveness of DSM measures often do take into account such cost factors as the fuel cost I point to above, but in my experience, it is a very imprecise process, with very little attention given to timing of the savings ("load shape") beyond an attempt to quantify the coincidence with peak.  At a discussion with Xcel Energy (NYSE:XEL) where they were soliciting feedback from stakeholders for the goals of a DSM Potential Study, they did not intend to ask the contractor for load shape information of various measures evaluated until I raised the issue.

Demand Planning

Over the longer term, as more electricity is generated by intermittent sources, load shape information will become increasingly important.  Rather than a focus on reducing peak load, the focus will need to shift to reducing load when it exceeds available intermittent resources, and increasing useful use of electricity when renewable energy is most abundant.  At even relatively small penetrations, solar generation can exceed demand on sunny mornings when the temperature is moderate, while wind can exceed demand on windy nights, especially in the winter.  Even before we add enough renewables to the system that they begin to exceed demand at these times, we need to be thinking about shifting future demand to those times of relative plenty, and from those times of relative scarcity.  

Such shift can easily be accomplished with electricity storage, but such storage can be quite expensive.  A more economic option would be encouraging customer choices today which influence the patterns of future load.  Even if we can't predict how windy it will be a week from now, we know, climate change notwithstanding, the daily and annual patterns of sun and wind five, ten, and twenty years from now.  We also can reasonably expect that both wind and solar electric generation will be much higher than it is today.  That extra generation will be added as part of the utilities normal process of Resource Planning, in which DSM is now finding its place.  The next logical step is Demand Planning, using utility DSM programs and other tools to better meet the available future electric resource with future electric demand, supplying useful electric services to make our lives better.

Tom Konrad

Posted by Tom Konrad at 11:30 AM | Permalink | Comments (2) | TrackBacks (0)

Two weeks ago, I brought you the first of a series of two articles on how you can play the clean infrastructure build-out that could come as a result of an Obama victory today. In that article, I made the point that the political and economic ideology that had prevailed in America over the past 30 years, economic laisser-faire, had been severely undermined by the recent credit meltdown and what now looks like it will be the worse economic shock in a generation or more. I further argued that the increasing sidelining of the "small government" discourse in American politics in the wake of this crisis would provide the impetus for an overt return to a Keynesian approach to dealing with recessions, whereby the government would directly undertake expenditures in the economy to jump-start aggregate demand. Finally, I linked this to Barack Obama's environmental and clean energy credentials, and argued that under his watch, a massive, federally-mandated infrastructure spending program would certainly contain environmental and clean energy components.

Much has happened since I wrote that first article. Firstly, Allan Greenspan, arguably the most influential free-market thinker of the past four decades, shocked the world by admitting that the ideology on which he had relied for the better part of his professional life had been proven "flawed" by the crisis. This admission represents the loss of a major pillar for the intellectual edifice of the Free Market. Second, state and municipal officials' calls for an economic bailout package grew louder last week, with demands ranging from infrastructure spending to direct help in meeting budgetary shortfalls. Thirdly, a plethora of metrics are now pointing toward a significant softening of the economy in the coming quarters, not the least of which is a record drop in consumer sentiment. Lastly, barring a major onslaught of the Bradley Effect, Obama looks nearly certain to win the presidential contest, and there is a very real possibility that the Democrats could emerge with a filibuster-proof majority in the Senate, giving the new president a significant amount of leeway in moving swiftly on an counter-cyclical spending agenda.

In light of what I just highlighted above, I continue to believe that clean infrastructure on the back of government intervention is a potentially interesting theme. There are, of course, some pretty significant risks to this thesis. Firstly, the US is in no fiscal position to launch into a multi-billion dollar economic bailout effort. Second, although credit markets are slowly thawing, my commercial and investment banker friends will readily share that accessing capital for companies remains a daunting task, government contract or not. Lastly, local content provisions aimed at boosting the domestic multiplier effect could eliminate many foreign companies from being eligible for money.

Stocks For The Clean Infrastructure Build-out, Part 2 - Electricity Transmission & Distribution

In the first article of this series, I discussed rail power stocks. In this article, I discuss stocks in the second major area of infrastructure that alt energy investors have an interest in: electricity transmission and distribution. As with the first instalment, I did not do an extensive amount of research on most of these companies, so I welcome any insight readers may have. As with rail stocks, I looked for firms that would benefit from spending programs - i.e. suppliers and contractors - rather than companies that operate transmission systems. A decline in industrial production and a weak economy in the US could spell lower volumes for power generators and distributors in certain states with a high concentration of heavy industries.

The ABB Group (ABB) - Financial statements here. ABB has exposure to a number of areas related to transmission and distribution systems. The company makes cables, transformers and various other products related to power electronics and management. ABB is also a leader in providing power equipment for wind farms, including in the emerging area of offshore wind. This is a stock that has gotten blasted in the past few months on worries over significantly weaker infrastructure spending around the globe, and is down about 60% from its high in April of this year. ABB now trades at a last-twelve-month (LTM) PE of around 6.8x, which is cheap by historical standards.

Allegheny Technologies, Inc. (ATI) - Financial statements here. Allegheny is not as pure a play on transmission as ABB is, but it nevertheless produces some products with grid applications. Among them are a number of specialty alloys and metals for transformers and efficient grids. Allegheny also produces iron castings for wind turbines. At a TTM PE of about 4.5x, this is also a down-and-out stock that has taken a beating. 

Composite Technology Corporation (CPTC.OB) - Financial statements here. Composite is commercializing an innovative transmission cable solution, and has a wind power division that produces utility-scale turbines. However, this is an earning-less stock and those aren't for the faint of heart in the current market environment.

General Cable (BGC) - Financial statements here. This company that makes a range of cables, including transmission and distribution cables of different voltages and underground cables. This is a very direct play on cables, as the name indicates. At an LTM of about 3.8x, this stock is trading squarely in cheap territory.

MasTec Inc. (MTZ) - Financial statements here. MasTec is a subcontractor to the utilities and communication industries, building, installing and maintaining electricity transmission infrastructure. The company is earning-less.

Quanta Services (PWR) - Financial statements here. Quanta is also a contractor to the power transmission and distribution industry, with services including infrastructure design, installation and maintenance. At an LTM PE 23.81x, this is a stock that would be too expensive for me in the current market environment, especially that it doesn't pay a dividend.  

Resin Systems (RSSYF.OB or RS.TO) - Financial statements here. Resin Systems makes composite utility poles for electricity transmission and distribution. Composite materials aren't ubiquitous for utility poles just yet, with wood, concrete and steel still dominating. However, as in other applications, composites probably hold a decent amount of potential. Here, we have an earning-less company trying to set new standards - probably a tall order in this environment.

Schneider Electric (SBGSF.PK) - Financial Statements here. Schneider provides a range of products related to electricity management, distribution and transmission. It is a direct competitor of ABB's. One interesting factoid about Schneider is that it recently acquired Xantrex, a leading maker of power inverters and converters for the wind and solar industries. At an LTM PE of 6.6x, Schneider is valued similarly to ABB...no big surprise here.   

Siemens (SI) - Financial statements here. Siemens makes a range of products for the power transmission and distribution sector, including switchgear, transformer and substations. The company is also a leading manufacturer of utility-scale wind turbine. It is currently trading at a TTM PE of 5.4x.

Valmont Industries (VMI) - Financial statements here. Valmont makes transmission and distribution poles from concrete, steel or a mix of the two. 

DISCLOSURE: Charles Morand has a position in ABB.

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

     

       

    

          

 

             

Posted by Charles Morand at 09:52 PM | Permalink | Comments (1) | TrackBacks (0)

This is the final article on the companies in the Wise Energy Use index.  I believe that the current turmoil has given stock pickers an opportunity to buy well capitalized firms which make money by helping people save money on energy.    The industry is poised to do well in hard financial times, but companies with weak balance sheets may not survive.  In this series, I try to separate the wheat from the chaff.   I generally liked the efficient lighting, smart metering and energy management, and global services companies in the index, but wasn't thrilled by any of the electric vehicle picks.  

Although the Smart Grid is something which is definitely necessary to use our electricity more wisely, it's also something of a research project: we don't really know what it's going to look like when it gets here.  What it does look like and which companies profit will be highly dependant on future regulation, so while many of the smart grid projects pursued by the following companies are quite admirable, I have to wonder if they will do much for any of the company's bottom lines.

Duke Energy (NYSE:DUK).  Duke has a current ratio of just over 1, which is lower than I would like with its cash from operations only about a quarter of its total debt, and a slightly negative levered free cash flow.  However, since Duke is in part a regulated utility with very stable operations, a less solid balance sheet could potentially be tolerated, although I'd want to look deeper into the company's structure to see just how this affects the riskiness of the company as a whole before investing.  The pilot project in smart grid technology is interesting, but not much of a reason to invest.

Xcel Energy (NYSE:XEL).  I'm very familiar with Xcel, which is my electric and gas utility in Colorado, as well as a company I deal with at the Colorado Public Utilities Commission (PUC).  Because of my personal involvement as an expert witness in Demand Side Management cases for the Energy Efficiency Business Coalition, I believe that the current program the PUC adopted as a result affords Xcel the opportunity to slightly increase their profit margins by aggressively adopting energy efficiency, benefiting both Xcel and its customers.  Therefore, I'm also a small shareholder (I consider the Smart Grid pilot in Boulder to be unlikely to affect the bottom line any time soon.)  The company also leads the country for the amount of wind power delivered to customers.  Although the current ratio is only 0.8, and operating cash flow is a fraction of total debt, as a regulated utility profits are relatively stable.  I have also heard from company employees (water-cooler talk, essentially, but this could be confirmed by a review of company financial statements) that the company has been taking every opportunity they had over the last year to raise new debt financing, in anticipation of tightening credit markets. 

Whirlpool Corp (NYSE:WHR). As a manufacturer of consumer durable goods, albeit appliances ready for the Smart Grid, Whirlpool's revenues are likely to be hurt by an extended downturn.  Therefore, although the current ratio is 1.2 and operating cash flow would cover the company's entire debt in three years if it were not to decrease, I would still be uncomfortable holding this company.

Samsung Electronics.  Samsung does not have a US listing, but Energy Tech Stocks chose to add it to the index because it's looking into the same unpromising business of selling Smart Grid-enabled appliances to consumers as is Whirlpool. As I'm reluctant to invest in any company hoping to sell durable goods to consumers, I decided not to hunt down the financial statements in order to examine the company's liquidity.

Freescale Semiconductor (NYSE:FSL).  With a current ratio of about 3.5, and enough operating cash flow to cover all debt in a year, this company seems like a better bet to gain from putting chips in appliances than the appliance makers themselves, since each smart grid chip will be a new sale for Freescale, but simply replace another appliance sale for Whirlpool and Samsung.

DISCLOSURE: Tom Konrad owns XEL.

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

Posted by Tom Konrad at 05:16 AM | Permalink | Comments (1) | TrackBacks (0)

I'm not sure whether John Maynard Keynes, the father of Keynesian economics and an ardent proponent of government interventionism during hard economic times, and Rachel Carson, the mother of modern environmentalism and the author whose work is credited for the eventual creation of the EPA, ever met during their lifetimes. But if current voter sentiment holds until November 4, their ideas could soon converge and form the basis of government policy for at least the next four years. Let me explain.

First, John Maynard Keynes. There is no doubt that the deliberate and coordinated nationalization of financial services institutions across the West marks a new low for neoconservative economic thinking. This line of thinking holds that government should play as small a role as possible in the economy, and leave spending decisions to individuals and firms. Proponents of this philosophy argue that the best fiscal move a government can ever make is to return money to its citizens and corporations through tax cuts, who will then spend that money most efficiently. The Keynesian approach, on the other hand, is premised on the idea that it is not only OK but even desirable for governments to step in and directly incur large expenditures in difficult times to jump-start the economy.

Until the credit crisis hit, the Keynesian view had all but disappeared from Washington, and small and unobtrusive government was all the rage. However, in the wake of the economic and financial havoc wrecked by what many view as too much withdrawal of government from the economy, it appears as though its has become politically-acceptable for American lawmakers to overtly push for a more activist state. What form will this take, according to proponents? In old Keynesian fashion, large-scale infrastructure investments to create jobs and kick-start aggregate demand. While it is not especially surprising to hear academics argue for this form of government intervention, it's quite something to see Democratic politicians so emboldened by recent polls that they feel they can safely write about it in op-eds. The current crisis, it appears, has cast serious doubts in the minds of a growing number of voters on the ability of the free market to deliver wealth and well being for everyone, thus setting the political stage for a return to a more interventionist state in America.

Second, Rachel Carson. Obama's environmental credentials are strong to be sure. He has remained steadfast in his support of clean energy as a cornerstone of his broader energy policy, even in the face of overwhelming public support for domestic drilling and falling fossil fuel prices. It is therefore no wonder that in cleantech-addicted Silicon Valley, generally a place where big government is seen as a break on innovation and entrepreneurship, a number of high-profile VCs and their employees are supporting Obama. AltEnergyStocks.com officially endorsed Obama last week specifically for his credentials on alternative energy and energy efficiency. While some of Obama's motivations for being in favor of clean energy have to do with energy independence and economic development, it is fair to say that he is also strongly motivated by his own environmental values and his belief that climate change must be addressed.

What does this all mean for investors? As the macro-economic consequences of the credit crisis continue to spread, I expect an Obama victory to result in some form of an activist government strategy to boost employment and the economy. This activist program will revolve around massive expenditures in large-scale infrastructure projects, and if Obama can help it there will likely be an environmental angle to the program. If what politicians are currently saying is a true indication of what they intend to do, rail transportation is likely to be a major beneficiary. In the first of this two-part series on how investors can play the build-out in clean infrastructure, I present four stocks I came across while doing research on this.

Besides rail transport, the other major area of infrastructure alt energy investors care about is electricity transmission. Given Obama's promises on clean energy and the environment, the amount of press the Pickens Plan is receiving, and the state of America's transmission system, it is not unreasonable to expect that Washington could seize this opportunity to direct massive investments into this area as well. In the second part of this series, I will discuss potential plays on transmission.

Stocks For The Clean Infrastructure Build-out, Part 1 - Rail Transport

When doing research on this topic, I looked for companies that would benefit from investments in the rail infrastructure network, rather than companies linked to running or manufacturing/maintaining trains and cars. A severe economic downturn coupled with lower gasoline prices would reduce demand for rail transport, so this is not an area I'm particularly bullish on for the next year or so. In the long run, however, I believe that the renaissance of North American rail driven by high energy prices, tighter environmental regulation and an increasingly clogged highway network that's running out of space to expand, will be a strong theme to watch for alt energy investors.

I did not run any numbers or do an extensive amount of due diligence on the firms below, so if you have any information to share please go ahead.

Koppers Holdings (KOP). Financial statements here. At upwards of 45%, Koppers holds the largest market share in the North American railway tie business. Railway ties are the wooden beams that support the rails. Koppers also makes utility poles, and could thus benefit from investments in electricity transmission. One interesting thing about Koppers is that it runs a biomass power plant that burns recycled railway ties and utility poles (I found that out while checking the website. They have a video about it). At a PE of around 6.3x last year's earnings, this stock is trading in cheap territory.

LB Foster (FSTR). Financial statements here. LB Foster's rail division sells rail and other related products to a range of industries including passenger and freight railroads, rail transit, ports and others. One interesting feature of this company is that it also recycles and re-sells used rail. This stock is currently trading at a trailing 12-month PE of around 2.2x, which is very cheap by most measures. I haven't looked closely into this firm so I'm not sure why it would be trading at such a discount to its peers, even in difficult market conditions.

Stella Jones (STLJF.PK or SJ.TO). Financial statements here. At about 20%, this company has the second largest market share in the North American railway tie market after Koppers, and it has been an aggressive consolidator of the fragmented treated wood market. The company also has a 70% market share of the Canadian railway tie market, another jurisdiction where the government is weighing the merits of infrastructure spending as a counter-cyclical measure. Stella Jones is also active in wooden utility poles and could benefit from spending programs in electricity transmission. One of the major negatives with this stock is illiquidity: the largest shareholder owns about 62% of shares outstanding, and volumes tend to be extremely light. At a trailing 12-month PE of around 9.8x, Stella Jones is reasonably priced, although increased debt levels recently on the back of five acquisitions in five years could be a concern.

Global Railway Industries Limited (GRWIF.PK or GBI.TO). Financial statements here. Most of the company's business is in the sale of locomotive and other train components. However, it also sells a range of railway track and signal products. This stock is currently trading at around 10x last year's earnings, so it is the most expensive of the four.

DISCLOSURE: Charles Morand does not have a position in any of the stocks listed above.

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

Posted by Charles Morand at 12:48 PM | Permalink | Comments (0)

This is a continuation of my look into which companies in the Wise Energy Use index seem to have the financial strength to survive a prolonged slowdown.  I generally liked the efficient lighting companies in the index, but wasn't thrilled by any of the electric vehicle picks. This article looks at the energy management and metering companies described here, many of which were also featured in my article on smart metering.

Many of these companies sell their products to utilities, not consumers, so their revenues should be less vulnerable to a drying up of consumer credit than most. 

Itron, Inc. (NASD: ITRI).  Metering company Itron has a lowish current ratio (.93), but positive operating and free cash flow. It also sells its products into the utility market, not to consumers, giving it a relatively stable revenue base in a downturn.

Echelon (NASD:ELON).  Energy management company Echelon also sells into the utility market, has a strong current ratio over 5, and while operating cash flow is negative, it is less than 4% of cash on hand.  

Woodward Governor (NASD: WGOV).  Energy control company Woodward Governor sells into a wide variety of industry, aerospace, and energy companies.  Some of these will be exposed to a slowing economy, but certainly not as much as consumers, and some are relatively stable (utilities and military.)  The company has a comfortable current ratio of 3.3, and positive cash from operations and levered free cash flow.

EnerNOC (NASD:ENOC).  Demand Response company EnerNOC also sells into the relatively stable utility market.  Although still losing money, their current ratio is a relatively comfortable 2.8 and they have four years of operating cash loss and two years of levered free cash loss in cash on hand.

Energy Recovery (NASD: ERII). Energy Recovery was a new company to me.  According to Energy Tech Stocks, they provide "power to water desalination plants. Experts say Energy Recovery’s equipment provides significant cost savings over its competitors."  Desalinization plants should be a relatively stable market, even in a downturn.  The company has a solid current ratio of 3, but very little cash on hand; most of their current assets are in the form of accounts receivable and they have a small negative operating cash flow.  Doing a little more digging, I see that these numbers are from before the company's well-timed July 8 IPO, so the balance sheet now looks much better than would be expected from the last quarterly report.  I still need to do more digging, but Energy Recovery is going on my list of stocks for further research.

DISCLOSURE: Tom Konrad owns ITRI, ELON, WGOV, and ENOC.

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

Posted by Tom Konrad at 05:44 PM | Permalink | Comments (0) | TrackBacks (0)

The Casualty

Last Monday, I discussed how I had recently reviewed Railpower Tech with a view to potentially adding to my position on grounds that: (a) the company had a fair amount of cash in the bank, which reduced the need to go to capital markets for financing for a while; and (b) that it was getting badly battered by general market conditions, potentially offering an attractive entry point. Although my portfolio has taken a beating in recent weeks, I remain ready to take small positions in stocks if I feel they are being unfairly bashed, including in penny stocks. The current situation is bad to be sure, but I don't think we are at the point yet where every small and medium business faces certain bankruptcy.

I noted in the article that the reason why I decided not to commit any more money to Railpower for the moment was the lack of contracts being signed given the operating leverage the firm was taking on by building a new factory. Unfortunately, this exact problem forced Railpower to materially alter its plans, and on Monday evening it announced it was canceling construction of the plant on grounds that new orders were not coming in (PDF). I fully exited my position on Tuesday morning at a pretty handsome loss on a percentage basis, although luckily my position was very small and the cash loss wasn't needle-moving.

With my portfolio, I keep a log and always record the reasons why I enter and exit positions and what I've learned from different investments. What are main lessons I took away from this one? First, as money rarity spreads into non-financial industries, capital expenditures, especially for big-ticket items, will be some of the first things to be delayed or canceled. Prudence is therefore in order with firms that derive a large portion of their revenue from the capital expenditures of other firms. However, as pointed out by Tom yesterday, it is not impossible that the government may try to invest in infrastructure as a counter-cyclical measure.

The second thing I noted down was that in uncertain times, it is cautious to start out a position small and see how things develop. If the market turns in your favor, you can build up your position and the only real cost is an opportunity cost. If you missed something in your analysis or if the market ceases to pay attention to fundamental value as it is currently doing, you can exit the position at a smaller cash loss or you can try to weather the storm without loosing sleep over it.

Lastly, the balance sheet weighs a lot more heavily in my analysis in tough times in three main ways: (1) the cash position - it's gotta very strong; (2) debt levels - there has to be little or no debt and ideally refinancing isn't needed in the near-term; and (3) the value of tangible assets per share must compare favorably to share price (notably with the Price-to-Book-Value ratio). For penny stocks, I would look for firms with no debt, a completely depressed Price-to-Book ratio and assets that can be readily sold off to unlock some shareholder value should the going get too rough.

The Addition

Last Thursday, I purchased ABB Ltd. (NYSE:ABB) for the first time. I am down quite substantially since but it doesn't bother me very much. This is a long-term buy (3 to 5 years) that I had had my eyes on for quite some time but that I had always found too rich on a PE and Price-to-Book basis. ABB, a stock Tom has discussed on several occasions, is a prime play on the transmission infrastructure build-out and energy efficiency. I also applied my rule and took a very small position, which I stand ready to increase.

The Positive News

A stock that I've held for quite some time now, AAER Inc. (AAE.V or AAERF.PK), an emerging Canadian maker of utility-scale wind turbines, finally signed its first major contract on Monday. It is to deliver 100MW of turbines to a large Canadian wind project.

The next step in closing this transaction is for both parties to show they have secured financing within three months. This could prove tough in the current environment, so this is not a done deal just yet. However, if AAER can pull this through successfully, it could be the beginning of what patient investors such as myself have been waiting for for a long time - a buildup of the order book. The supply/demand situation for large turbines continues to be heavily skewed in favor of turbine companies and AAER should in principle be able to find customers.

Ironically, after the stock experienced a 40% pop last Friday probably because the news was leaked, I put in a sell order to exist most of my position Monday morning in case this was just an aberration. The company asked for a trading halt and I was never able to sell before the news came out. I wrote down in my log that I had been quite lucky on this one.

DISCLOSURE: The author is long ABB and AAE.V and does not have a position in RPWRF.PK

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

Posted by Charles Morand at 06:42 PM | Permalink | Comments (0)

The Solar Investment Tax Credit has been extended, and the market for mortgage debt "rescued," but neither renewable energy nor the rest of the economy are out of the woods.  We'll probably be feeling the effects of the financial imbalances which have built up in our economy for years to come.

While the extension of the tax credit will help renewable energy technologies raise funding, the headwinds from the continued fallout of the structured finance and real estate bubble will be blowing in the other direction.  This will be a problem both for developers of new technologies, and project developers.  On the other hand, changes in the ITC (allowing it to offset the AMT, and removal of the public utility exemption) allow new investors, such as property and casualty insurers, into tax equity investing.  These investors are likely to be more cautious, but they are likely to be there.

The good news is that we already have the technology we need to decarbonize the economy.  The key now is adapting our regulatory structure and infrastructure to accept the technologies we already have.  Unarguably, project finance has become more difficult with the drying up of many pools of capital, but that is not the end of the story.  

Too Much Money

When money was relatively cheap, investors grew careless choosing their investments, most dramatically in structured mortgage products, but also in other sectors.  Now investors are more likely to careful about where they put their money.  For marginal or speculative companies, this is bad news, but it could be an advantage for dull but profitable businesses which might have been overlooked previously. 

The first steps towards decarbonizing out economy do not need to be high tech; they need to be hard work.  Energy efficiency is cheap (in fact, it usually pays for itself in just a few years, if not months,) but often requires new ways of thinking.  Investors and politicians have been quick to talk up photovoltaic companies.  Using the energy we already have more efficiently seldom received more than lip service.

I think that's likely to change, now that money is scarce.  In politics, it's no secret to anyone that the economy is hurting.  Even John McCain figured it out a couple of weeks ago.  This means that politicians are going to be looking for ways to help workers and create new jobs.  But with money scarce, there will be a push to do as much as they can with as few taxpayer dollars as they can.  

Energy Efficiency programs are an obvious option.  Most energy efficiency measures save far more money in fuel costs than they cost to implement.  This means that programs to promote energy efficiency put more money in peoples' pockets than they cost to implement.  This stimulates economic growth and jobs, all while reducing carbon emissions.  Typically, many opportunities to save energy at low cost are missed because people are too busy or in too much of a hurry chasing the big score to spend time thinking about saving a few dollars a week by sealing their house or driving sensibly.

Policy can do a lot to promote energy efficiency, through utility energy efficiency programs, independent programs with mandates to help consumers save energy, as well as labeling and information schemes such as Energy Star, and incorporating energy efficiency into building codes and other standards, such as the CAFE standard for automobiles.

Because few consumers consider energy usage in their purchasing decisions, such legislative measures as those outlined above save consumers more money than they cost to implement, and boost the economy because less money is spent over time on imported energy, therefore more can be spent on goods produced locally, keeping the money in the local economy.  Even in energy producing states, less money spent on locally produced energy means that more energy can be exported, also helping the local economy.

Transmission for Economic Transformation

Another traditional way for government to fight a slow economy is infrastructure spending.  As I've long argued, in order to reduce our carbon emissions, we need better energy infrastructure far more than we need new energy technologies.  Right now, our electrical grid is outdated and Balkanized.  Just as the national highway system contributed as much as one-third of US economic growth in the 1950s by facilitating the transport of goods across the country, a national electric transmission system would contribute to national growth by lowering electricity prices in areas without abundant cheap generation, and adding export income in areas with inexpensive generation.  A national transmission network, by providing export opportunities, would allow wind penetration in under populated, windy areas to grow beyond the needs of the local utility.  A strong transmission backbone, combined with electricity demand responsive to price signals, and electricity and heat storage are how Denmark hopes to go from 20% to 50% wind penetration.

Price responsive electricity demand (which I discuss in my articles on the one-house grid and wind and heat pumps) and and a better transmission network both make the electricity market closer to the free market ideal. Any economist will tell you that improving price signals in a market or broadening the pool of possible buyers will improve market efficiency.  Efficient markets bring economic gains, which is why transmission investments (not to mention investments in smart metering to improve the price response of demand) are not only wins for renewable energy, but wins for the economy.

Might a slowing economy make political authorities see the potential of improving our electricity transmission?  Transmission advocate Charles Benjamin of Western Resource Advocates thinks it might.  At the Second Annual Concentrating Solar Power Summit, he told the story of how he persuaded the Republican Public Utilities Chairmen to support a transmission authority.  Key to his argument was the fact that electricity rates in East Kansas were six times the rates in West Kansas, so it was clear how West Kansas residents were losing out due to lack of transmission from one side of the state to the other.

Mr. Benjamin is currently making progress getting a similar transmission authority in Nevada, despite the fact that the local utility hates the idea.   The key to this battle is bringing politicians to the realization that what is good for the utility is not necessarily good for the public, and that he was having success pitching transmission as an economic development tool.  

Rather than a hindrance, Mr. Benjamin thinks the current economic crisis is making the case for improved transmission in Nevada easier, not harder.  Google CEO Eric Schmidt seems to agree.

Those of us who want to see the whole nation have access to plentiful renewable energy can hope that the same will hold true in our nation's capitol.

Posted by Tom Konrad at 01:51 PM | Permalink | Comments (2) | TrackBacks (0)

This article has been cross-posted on The Oil Drum.

Last month, I brought you some nice maps showing when and where good wind resources are found in the US.  Now I've found something better: a visual comparison of electrical load with wind farm production[pdf file], published by the Western Area Power Administration in 2006.  The study compared electricity production from five wind farms in Northern Colorado, Southwestern Nebraska, and Central Wyoming in 2004, 2005, and the start of 2006, compared with electricity consumption in the same area over the same time period.

Comparison of Wind Production to Electricity Demand

I've copied four of the most representative graphs below.

The first and third heat graphs below show electricity production at the five wind farms studied in 2004 and 2005, respectively.  The Second and fourth show electricity demand in the surrounding territory.  Red(blue) denotes areas of high(low) production or demand. 

For wind advocates, these are probably rather scary graphs.  The first thing you probably noticed was the big blue patches of wind production during summer peak demand, roughly 10am to 10pm in June, July, and August.   This is why wind is referred to as an "energy resource" not a "capacity resource."  Right when demand is highest (namely hot summer afternoons), the wind is least likely to be blowing.

On Second Thought - How Much Backup Do You Need?

That is just the first impression, and while it is a true impression, it's also an oversimplification.  If you look at the scale, you will notice that the blues on the wind production graphs actually represent wind generating at 10% to 15% of nameplate capacity.  If you factor in the fact that a normal capacity factor for wind is about 25-40%, that means that even on these hot summer afternoons, the farms are generating at one-third to one-half of their "normal" output.  This means that, contrary to popular misconception, wind does not require a "100% back-up with natural gas."   It is true that wind is less reliable than baseload power plants such as coal and nuclear, which typically run about 90% of the time, but in an apples-to-apples comparison, a 100 MW coal or nuclear plant will produce as much energy over the course of a year as a 270 MW wind farm.  During the peak summer months, the coal plant will need some backup power in case of an unscheduled shut down due to lack available coal (this happened in Colorado in 2005 due to problems with dust in rail tracks) or lack of available cooling water during a heatwave, and when a coal or nuclear plant goes down, it goes all the way down, so the 100 MW baseload plant has a small chance of needing 90 MW of backup to produce at its "normal" rate of power production.  On the other hand, the wind farm will be operating at (a conservative) third of its "normal" capacity, producing about 30MW.  To bring that up to it's normal capacity for the year, it will need 60MW of back-up power.  

In other words, because some part of a large distributed group of wind farms is always producing some power, it will never go completely down.  A large baseload power plant, on the other hand, is completely down about 10% of the time (although less during peak summer months, because utilities schedule maintenance in off seasons.)

Pick Farms to Match Your Load

Another point worth noting, is that the wind has different annual patterns in different locations.  The smallest (8.4 MW out of 139MW) of the five farms in the study was "Wind Farm B" in central Wyoming.  If you look at the following two heat maps below for 2004 and 2005, which show the production of just this wind farm, you will note that during the peak summer demand, this farm was producing at over 50% of "normal" capacity for much of the summer peak.

Since we know what electricity demand looks like, if we plan new wind farms (and adequate transmission), we can choose to build wind farms that produce more power when we most need it.  If all the farms in the example in the last section had more favorable production patterns like Farm B, even less back-up generation would be needed to bring them up to "normal" capacity.

For instance, in the Texas Competitive Renewable Energy Zones study [.pdf 7.64MB] wind in the coastal area (along Texas's southern gulf coast) was found to be a much better match for the ERCOT load shape than wind in other areas, although the average capacity factor was considerably lower than panhandle wind.  See chart below.

 

Hence, careful selection of wind farms can lead to wind production with higher capacity during peak loads, and correspondingly less need for dispactchable power.  Although Texas is currently focusing on developing wind farms in West Texas and the Panhandle because of their high capacity factors and correspondingly high annual energy output, the power from coastal wind farms is likely to become increasingly valuable as wind reaches higher penetration.

It's Not All About Summer Peak

Statements about wind's need for large dispacthable backup generation because of low capacity factors during peak times contain am implicit assumption that electricity demand is fixed.  This assumption is both false and pernicious, because shifting demand can be done cheaply, and often produces multiple benefits.  While it is true that most large scale electricity storage technologies, such as pumped hydropower, compressed air energy storage, and utility scale batteries are expensive or limited to a few available sites (pumped hydro,) technologies which shift the demand curve are not.

If you look back at the first set of four heat maps, you will note that wind actually does a quite good job serving the winter peak.  In 2004 (a year with a moderate summer) winter peak demand actually exceeded summer peak.  

Capacity during winter peak has some advantages over summer peak.  First of all, natural gas prices are higher during the winter, because natural gas is used extensively for home heating as well as power generation.  In February 2006, Xcel Energy had a series of major power outages in Northern Colorado which they blamed on insufficient natural gas in storage due to an unusually cold temperatures.  Yet as this heat map  

shows, wind farms in the region were operating at 40-60% capacity factors (i.e. well above "normal" production) for January and February.  Note that the blue at the end of the year was due to lack of data, not lack of production.  Had there been more wind farms installed, this would have had a large impact on the amount of natural gas needed for electrical generation, and the outages would not have happened.   I don't have data to back it up, but my personal experience leads me to believe that cold winters in the great plains are also particularly windy winters, meaning that winter wind capacity is ideally suited to displace natural gas needed for heating.

How Heat Pumps Fit In

Which brings me to the title of this article: why heat pumps are an excellent fit with wind generation.  In my article on how to invest in the Pickens Plan, I mentioned that ground-source heat pumps (GHP) can displace gas used for heating with a smaller amount of electricity from wind.   Since a GHP is both an efficient air conditioner as well as an efficient heat source, it not only reduces natural gas used for heating, but also reduces electricity used for cooling in hot summer months, which in turn reduces summer peak loads.  

Deployment of GHPs does three things to make energy supplies fit energy demand:

1. Winter electricity usage is increased just when wind capacities are highest.
2. Summer electricity consumption is decreased when wind capacities are lowest.
3. Use of natural gas for heating is reduced during times of peak gas demand.

GHPs, because of their extreme efficiency, also have the benefit of saving users a lot of money.

The Dual Fuel Option

Unfortunately, GHPs have not been widely adopted, due to the difficulties of installing the buried heat exchange loops, especially in urban areas (although some utility programs have been very successful.)  When I bought a house, it was in a New Urbanist development with very small lots which was close to my work.  While this saves me countless gallons of gasoline, it meant that I was unable to use a heat pump.  I opted instead for the most efficient natural gas furnace available from my homebuilder, in combination with the most efficient air-source heat pump.  Unlike GHPs, air-source heat pumps lack a ground loop, meaning that they only work efficiently when temperatures are above about 40F.  In my dual-fuel system, the heat pump heats my house during milder weather (which is frequent in Denver winters), and the natural gas furnace takes over when it is cold.   Since the heat pump is only slightly more expensive than the air conditioner I would have bought anyway, the dual fuel system will pay for itself rapidly, especially when natural gas prices are high.

From the perspective of the electric grid, my electric usage is higher and my natural gas usage is lower during the heating season, when gas demand is high and wind farms are at their most productive.  So while a dual fuel house is much less of a strain on the energy infrastructure than one with a furnace and an air conditioner, it also saves the homeowner money for a much smaller investment.  In addition, while the need for a ground loop makes a GHP nearly impossible to retrofit to an existing home, an air source heat pump is an option for anyone considering replacing or installing an air conditioner, and has the added advantage of having a back-up heat source during a natural gas outage.

Another retrofit option I hope to see available soon is a hybrid ground/air source heat pump [pdf].  These systems combine a short ground loop with an air heat exchanger.  By using the air exchanger during milder weather, only a smaller ground source loop is needed for use during more extreme conditions, reducing the up-front costs compared to a GHP, but without the performance loss of an air source heat pump.  A startup called Co-Energies has developed a way to retrofit existing air conditioners into hybrid heat pumps; see slides 33 and later of this PowerPoint.

Electricity Demand Can Shift

Heat pumps are just one option for changing the shape of the electricity demand curve.  Many such efficiency measures can do so.  Other examples are improved home sealing and insulation, which typically pay for themselves in a couple years or less, and, because air conditioners work less hard in the summer, reduce summer peak loads.  Wind is undoubtedly a tricky sort of electricity to use in the existing grid, but the fallacy that demand is fixed makes the problem seem much harder than it needs to be.

Posted by Tom Konrad at 10:51 PM | Permalink | Comments (2)

A friend recently asked me how to invest in the Pickens Plan.  I named a stock (see below).

He then surprised me by saying "You are the fifth person I've asked, and no one else knew how.  Several said it could not be done."

You can invest in T. Boone Pickens's plan.  Here's how:

The Plan

T. Boone's plan is both simple and audacious.  

1. We will build wind farms all over the Great Plains.
2. Build the necessary transmission to get that electricity to cities, displacing natural gas used in electricity generation for the use in automobiles.  
3. This will give us an alternative, clean transportation fuel, to replace oil, which has peaked.  
4. It will also cause an economic revival for rural America.

There are investments available for you to profit from all of these steps (so long as they are more successful than is currently expected by the market.)  Most of the links below are to articles about how the company fits into the clean energy picture.

1. Wind Farm Investments

To profit from the massive build out of wind farms, look no further than wind turbine manufacturers, and other wind related stocks. 

• Among individual wind stocks, Zoltek (ZOLT) is currently looking relatively cheap because of a negative analyst report.  If you believe T. Boone will pull it off, now is a probably a good buying opportunity.
• T. Boone is buying his turbines from a longtime favorite of this blog, General Electric (NYSE:GE).
• If you want to play wind without picking particular manufacturers or suppliers, try one of the new wind ETFs, FAN or PWND.
• Makers of power conversion devices to turn the the "wild AC" produced by wind turbines into more domesticated power should also benefit.

2. Transmission Investments

We've been pushing transmission investments at this blog for a long time.  It's nice to have an oilman hop on our bandwagon.  Here are some of our top picks.

• Long distance transmission from the Great Plains to coastal cities could be most efficiently accomplished with new high voltage DC (HVDC) lines.  Leaders in HVDC are the ABB Group (NYSE:ABB) and Siemens (NYSE:SI). 
• A more speculative play, Composite Technology Corporation (CPTC.OB), has technology not only for a superior transmission cable, but also for an innovative wind turbine.
• Other interesting ways to play transmission are ITC Group (NYSE:ITC) a Midwestern transmission-only utility, and two I highlighted in February, National Grid (NYSE:NGG) and Quanta Services (NYSE:PWR).

3. Natural Gas

• The most direct investment in the Plan is natural gas fueling stations.  Clean Energy Fuels (NASD:CLNE), operates fueling stations for natural gas fleets, as well as providing fueling stations to the public.  T. Boone owns about 37% of the company personally, serves on the board, and founded the predecessor company in 1997.   His wife owns another 7%.  Although he just recently hit the media with it, T Boone has been thinking about peak oil for a long time. (This is the stock I told my friend about.)

4. Rural Resurgence

• Massive wind investment should be good for real estate values in rural towns in windy areas, mainly the great plains.  You don't have to buy the land that the wind farm is on to benefit; the economic revival should help land values in towns nearby, too.  The workers have to live, eat, shop, and sleep somewhere, and county tax rolls will benefit, leading to improved public services.
• Another way to play the same trend would be to invest in a Midwestern REIT, such as Investors Real Estate Trust (NASD:IRET).  While this should profit by an improving Midwestern economy, I'd prefer a REIT with a rural focus, but have been unable to find one.

Quibbles

• Insulation.  Pickens dismisses insulating homes as "too slow."  I'd guess his real problem is that he has no way to profit from insulation on a large scale, so he's not going to waste his money and time promoting it.  But you can profit from insulating homes, which not only will save natural gas used in heating, but is usually an excellent investment for the homeowner.  About 21% of US natural gas is goes to residential uses, nearly as much as is used in electricity generation.  To invest in insulating homes, Owens Corning (NYSE:OC) is a good bet.  Another home efficiency improvement is a ground source heat pump.  Waterfurnace Renewable Energy (WFFIF.PK) sells extremely efficient ground source heat pumps, which can displace gas used for heating with a smaller amount of electricity from wind.
• Intermittancy.  Pickens oversimplifies when he says we can simply slot in 22% of electricity from wind power and displace electricity from gas.  At the current low penetrations, wind will mostly displace natural gas, but without other sources of dispatchable power, such as Concentrating Solar Power (CSP), and/or much improved smart grid infrastructure, wind will begin to displace baseload generation such as coal (or the wind generation will be curtailed.)  Displacing coal is a good thing, not a bad thing, but Pickens is most likely not talking about it because it would muddy his message.  The improved transmission called for in the plan will help, but in no case can wind simply displace natural gas one for one on our electric grid.  It's like trying to fit a square peg in a round hole.  You either have to trim down the peg (wind curtailment) or make the hole square using demand response and other smart grid technologies.
• Water.  Some environmentalists have been protesting the whole plan as a shell game to win permission for a water pipeline, to bring water pumped from an ancient aquifer to thirsty Texas cities.  While pumping water from an ancient aquifer is not a good idea, opponents are too simplistic.  First, no account is given to the water which would otherwise be used in electricity generation without the wind farm.  Second, the water will likely be pumped with wind power when electricity prices on the grid are low.  This will even out the net output of the wind farm, and displace less clean electricity which would otherwise be used to pump or purify water elsewhere.  Finally, if the giant wind and transmission project is really just a quid pro quo to get us to accept the pipeline, he's essentially offering us a $10 billion plus wind power quid so that we'll ignore the $1.5 billion water pipeline (and the powers of immanent domain which are necessary to put the necessary transmission in place) quo.  It sounds like a good deal to me.

DISCLOSURE: Tom Konrad and/or his clients own ZOLT, GE, ABB, SI, CPTC, ITC, NGG, PWR, CLNE, OC, WFIFF, .

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

Posted by Tom Konrad at 12:57 AM | Permalink | Comments (4) | TrackBacks (0)

Equus Total Return (NYSE: EQS) is a closed-end fund that trades at a 42% discount to its net asset value (NAV). The fund invests primarily in both debt and equity instruments of small-caps and private companies. Each quarter, management must report the fair value of its net assets, but the stock market value of Equus is much lower than that of its net assets. Here's a chart showing Equus' discount to its net assets for the last five years:

As we can see, Equus is used to trading at a discount to its NAV, but recent negativity across the US market has taken it to even newer lows relative to what it owns.

One of Equus' key holdings (in fact, it makes up almost one third of its portfolio) is an equity position in Infinia Corporation. Infinia is a company aspiring to mass produce a low-cost solar power converter. The fair value of one of Equus' investments in Infinia (based on follow-up venture capital investments) recently jumped from $3 million to over $20 million, as the company demonstrated a prototype late last year that converts solar energy into electricity at twice the efficiency and at a lower cost than existing products.

One way to look at a purchase of Equus' stock at this discount level is that for the price of one share at $6.90, you're getting all of its other assets (which are worth about $8.30/sh) for a slight discount, and on top of that you're getting the investment in Infinia (valued at $3.50/sh) for free! Of course, before jumping in blindly you'll want to make sure you read Equus' latest reports along with its financial statements and their notes, as we've discussed here.

In reading these reports, I found that Equus does carry some debt on its balance sheet, which is somewhat rare for a fund. This has the effect of amplifying any changes in the values of their investments, both to the upside and the downside (the effect of leverage).

Furthermore, most of the investments are in companies that aren't public, and therefore Equus is not as liquid as those funds that invest only in the stock market (undoubtedly, this liquidity premium contributes to the larger than average historical discount we see in the chart above). The lack of market quotations also makes it more difficult for management to value each of it's holdings. Infinia is one such example, as it doesn't trade on the stock market and so it's not available for an individual investor to buy. Although the drawback is that Equus' investments are illiquid, it provides an investor the opportunity to get into a company like Infinia when it would otherwise be limited to venture capital firms.

The discount is a bonus that makes this an intriguing play from a value investing point of view.

Saj Karsan is a guest contributor on AltEnergyStocks.com. Saj is a value investor at Barel-Karsan, and can be regularly found writing for Barel-Karsan's blog.

DISCLOSURE: The author does not have a position in EQS

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

Posted by Charles Morand at 09:47 PM | Permalink | Comments (4)

We have discussed on several occasions the investment opportunities related to power regulation and renewable energy. I have also recently written about the value approach to investing.

I came across a stock today that I believed fell into both categories: power regulation (transformers) and value. The stock is Hammond Power Solutions (HPS-A.TO or HMDPF.PK), a firm that makes transformers for a number of applications, including wind turbines.

While revenue and earnings have been ramping up quite nicely over the past four years, the stock price has been trending mostly laterally (albeit in a volatile manner) over the past 12 months, with the result that Hammond currently trades at about 9.7x 2007 earnings. A PE of below 10 almost always draws my attention, especially for a company with exposure to one of my favorite areas of alt energy.

Interestingly enough, one of my former classmates who runs his own value investing blog had come across the same stock earlier. Here is his take on Hammond Power Solutions. I thought it was an interesting analysis and provides insight into how the balance sheet can be used to spot a value stock. Enjoy!

In Hammond's case, the question therefore is: does the company have a unique competitive advantage that will lead investors to multiply its earnings beyond 10x in the future? If so, this could be a value play.

DISCLOSURE: The author does have not a position in Hammond

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

Posted by Charles Morand at 09:42 PM | Permalink | Comments (0)

In June, I wrote how intermittent power sources such as photovoltaics and wind would have to compete with baseload technologies such as IGCC "Clean Coal" and nuclear for capacity on the grid.  The key problem is that neither baseload technologies nor intermittent technologies are able to match themselves to the fluctuations of demand.  This creates a need for technologies which can fill the varying gaps between supply from these sources, and normal energy use.  From the comments, it seems like I was not completely clear how intermittent and baseload power cause problems for each other, so I will start with a simplified example, which I will use to illustrate the various strategies for dealing with the problem.  I see investment potential in all of these strategies.

The One-House Grid: An Illustration

Suppose that the entire grid were just one house, and it was the utility's job to make sure that there was always enough power to run all the gadgets that anyone in the house was using.  Even in the middle of the night when everyone is asleep, there will still be some power usage: running clocks, the VCR, charging cell phones for use the next day, and maybe the porch light.  That is the minimum load of the house, and traditionally utilities have met this demand with baseload power.  In contrast, there will probably also be a moment on hot summer afternoon when the air conditioner is running full blast, the refrigerator kicks on, dad is watching football on his 60" plasma TV, dinner is cooking in the electric oven, and 15 other appliances are on somewhere or other.  This is peak load, and the difference between the minimum load and peak would traditionally be met with dispatchable generation, which, until recently, mostly means gas turbines.  

In addition, some dispatchable generation will always be kept running below full capacity in order to maintain power quality and availability as appliances are turned on and off throughout the day.  These ancillary services [pdf] are called load-following reserves (maintaining availability) and voltage and frequency regulation (power quality,) and both require fuel, even if the actual energy provided is negligible.  Ancillary services are like your car's engine idling at a stop light so that you can start quickly when the light changes.  They're necessary to keep the system running, and they use fuel, but they don't actually get you anywhere.  Also like idling engines, options like hybrids exist which can save much of the energy cost (see below.)

Add a Solar Panel

Suppose we now add a photovoltaic system and a wind turbine on the roof.  Most people with solar systems know, that if you want to spin your meter backwards (i.e. produce more energy than you are using) the best time to do it will be in the late morning, while it is still cool, but it's bright enough that the panels (which actually produce more power from the same amount of light when they are cool) are producing near their peak output.  

With grid-connected solar, spinning your meter backwards may be fun, or at least get you bragging rights.  However, in my fictional one-house grid, we now have a new minimum demand: demand will be negative (we're going to have to find something to do with the excess electricity) because there is no other grid to sell it back to.  Peak demand will also be reduced, because on the hot summer day, the PV will also be producing power.  The result is that the one-house gird with a PV system will no longer need any baseload generation (since minimum demand is now negative), and it will probably also need less dispatchable generation, because peak demand will also have been reduced, most likely by more than minimum load. Not only will peak demand have been reduced, but it will also have shifted to the early evening when the PV is producing little electricity, but cooling, cooking, and football watching needs are still high.

Adding a wind turbine to the roof has a similar effect.  Now, the meter will also be spinning backwards on windy nights, and demand is reduced whenever it's windy, which will in turn save fuel and reduce the need to run the remaining dispatchable generation..  However, if the climate is similar to that here in Denver, on the hottest days of the year, the wind will typically be minimal, so there will be little further reduction in peak load, so nearly the same total amount of dispatchable generation will be needed, although it will not be in use as often.

Consequences

As the above illustration shows, the oft-repeated shibboleth that we "need" baseload generation is not only misleading, but also counter-productive.  Adding baseload generation will simply increase the number of hours per year that intermittent sources of power exceed net demand.  I too, formerly believed we needed baseload.  I no longer do, although some level of baseload power in the grid is no doubt inevitable, at the very least produced by renewable sources such as geothermal and electricity generation from industrial waste heat.

Solutions

Returning to our one-house grid thought experiment, a number of options present themselves.

1. Storage.   In the real world, if you build a house off the grid, you will add batteries so that you can still run your lights when the sun isn't shining and the wind isn't blowing.  
2. Transmission.  Suppose our one-house grid has a neighbor, running his own one-house grid.  While generation from their PV and wind systems will be similar (but not identical), demand at the two houses is likely to be different.  By diversifying the electric demand, average demand will double, but peak load will increase by somewhat less, and minimum load will more than double.   This reduced volatility of electrical load brought by connecting two homes is analogous to the reduced volatility of a portfolio of two securities, rather than just one.  Unless the electrical load of the two homes is perfectly correlated, there will be benefits in terms of a reduction in the overall amount of dispatchable generation needed to service the same total load.  Our knowledge of the principles of diversification will correctly lead us to the intuition that connecting dissimilar users of electricity will lead to greater diversification benefits than similar users.  If residential, commercial, and industrial users are all on the same grid, the same average electric demand will be easier to serve than if only residential or only industrial customers were connected, because a residential user will have lower correlation of demand with most industrial users than with other residential users.
3. Demand-Response.  My sister lives in an old house, and the kitchen is on an old, low amperage circuit breaker.  If she ran both the microwave and the toaster at the same time, it would trip the breaker and she would have to trudge outside to turn it back on.  Needless to say, she quickly stopped using the toaster and the microwave at the same time, and thereby reduced the peak load in her kitchen.  Demand response involves getting electric customers to agree ahead of time to refrain from using high-wattage appliances during times of high electric demand.  In the one-house grid example above, dad might choose to record the football game and watch it later in that evening.
4. Energy Efficiency.  Another way to reduce volatility of demand is simply to reduce overall demand.  If dad had decided to buy an LCD TV rather than a Plasma TV, the demand from his 60" TV might have been reduced by as much as 200-300 watts, depending on the models, and this in turn would have reduced peak load.

Investments

Each of the above solutions leads to an investment, and as intermittent power sources grow as a percentage of total generation, the needs for these solutions will increase.  Below is a selection of companies working to provide each of the above solutions to the overall problem of matching electrical supply and demand.

Electricity Storage

Electricity storage can serve several related needs of the grid.  First, it can absorb excess supply of power at times of otherwise low demand, which means that intermittent and baseload sources of power do not need to be curtailed, even though they are producing power at near zero marginal cost.  Second, when charged, energy storage can provide ancillary services to the grid, by supplying power to meet short term spikes in demand or drops in supply, and absorbing power if intermittent generation ramps up unexpectedly, or demand suddenly drops.  According to Paul Denholm of the National Renewable Energy Lab, the revenues from these ancillary services are significant, and should not be discounted in any economic assessment of an energy storage technology.  Finally, storage can help to shave peak load by supplying power from off-peak charging.

I have previously written about investments in large scale batteries for the electric grid, but when I did so I neglected to consider the value of ancillary services.  Since I wrote that article, both VRB Power (VRBPF.PK) and NGK Insulators have continued to sell their respective solutions to utilities, telecoms, and other consortia.  However, these technologies are still searching for general market acceptance.  Beacon Power (BCON) recently commissioned a 20 MW flywheel based plant to supply frequency regulation services to the New York grid, which will primarily be used for frequency regulation.  Given the enormous potential of demand response and electricity transmission to improve long-term electricity price volatility, I am currently much more bullish about companies using energy storage primarily to provide ancillary services over large scale storage.  Because of that, I have recently increased my investments in Beacon, Maxwell Technologies (MXWL) and Active Power (ACPW).  

Maxwell's ultracapacitors can be used in various power quality applications, as well as a high power, low energy supplement to batteries in hybrid electric vehicles. (As a side note, high power is more of a concern in hybrids than pure electric vehicles, because the smaller battery pack has difficulty producing enough power for rapid acceleration.)

Active Power, like Beacon, uses flywheel technology, selling mostly into the customer side, rather than utility side of the market.  However, as the market for ancillary services grows and becomes more sophisticated, I could see Active Power's UPS systems selling ancillary services to the grid, in addition to their primary function of protecting data centers and other sensitive equipment from temporary power outages.

Transmission

I've written extensively about investments in electricity transmission and distribution.  My top picks are ABB Group (ABB) and Siemens (SI), Composite Technology Corporation (CPTC.OB), ITC Holdings Corp (ITC), Quanta Services (PWR), General Cable (BGC), and National Grid (NGG).  Geographic diversification of electric supply and demand is as essential as financial diversification in your portfolio.

Demand-Response

I haven't written about demand-response aggregator EnerNOC (ENOC) since before its IPO in March 2007, but that doesn't mean I'm no longer interested.  EnerNOC, along with Demand-Response/Smartgrid companies Comverge (COMV) and Echelon (ELON) all became quite expensive on a wave of investor euphoria in 2007, which is why I was not buying or writing about them much at the time.  That has now changed, with all three losing about 70% from their peaks, and making them look relatively valuable.  I have been taking positions in all three over the last few months.

Energy Efficiency

Unfortunately, few pure-play energy efficiency companies exist.  The recently named Waterfurnace Renewable Energy (WFIFF.PK) is one I've recently been adding to my portfolios.  I've previously written about Flir, Inc (FLIR), a thermal imaging company which I do not currently own due to valuation concerns, a pair of LED companies, Cree (CREE) and Lighting Science Group (LSCG.OB) , and a number of energy efficiency related conglomerates.

DISCLOSURE: Tom Konrad and/or his clients have long positions in VRBPF, BCON, ACPW, ABB, SI, CPTC, ITC, PWR, BGC, NGG, ENCO, COMV, ELON, WFIFF, CREE, LSCG.

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

Posted by Tom Konrad at 01:30 PM | Permalink | Comments (7) | TrackBacks (0)

Value Investing

A few months ago, I discussed my encounter with Warren Buffett, and promised that I would eventually analyze a stock using the