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 (0) | 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.

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 (7)

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) | TrackBacks (0)

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 value investing (VI) approach.

While I can`t say that I qualify as a hardcore value investor, there are many things about the VI approach that have influenced my thinking. For instance, I tend to stay away from very high PE stocks and momentum plays. While I take positions in firms with no earnings, they are generally relatively "unknown" or are past star stocks that investors have moved on from. I like the idea of investing in companies that have fallen below the radar, but that I believe have the potential to get back on it, either because they are fundamentally undervalued or because I believe they can execute on their business strategies and have a unique value proposition. However, I can't say that I have the discipline of a hardcore value investor, and will sometimes be swayed by a good story even though quantitative analysis dictates I perhaps shouldn't.

The value analysis I will conduct today is based on the methodology outlined in the book Value Investing: From Graham to Buffett and Beyond. If you are interested in finding out more about value investing, this is the perfect guide. It explains the philosophical approach to value investing, and provides enough information for you to build your own value analysis model in a spreadsheet. I will not go into a huge deal of methodological detail here, as this article is long enough as it is. I instead encourage you to buy the book (or any similar book) and read it.

Value Investing: The Three Sources Of Value

There are three key components to value to the VI approach: Net Asset Value (NAV), Earnings Power Value (EPV), and Growth.

Net Asset Value

NAV is the replacement value of the firm's assets minus its liabilities - this is therefore a balance sheet analysis. The way the value investor looks at the balance sheet and a firm's assets is in terms of what it would cost a competitor to come in and reproduce the firm's business. The firm is looked at as a going concern, and the balance sheet is therefore not a measure what one could fetch if they liquidated the assets, but rather the cost of matching the firm's position in a market. Certain adjustments must therefore be made to the balance sheet:

1) The gross value of capital assets (e.g. PP&E) is employed instead of their net value, and in certain cases such as land, those values are actually grossed up to reflect the fact that acquiring land today would be more expensive than at some time in the past. What assets are grossed up and by how much requires knowledge of the industry. For instance, machinery may be less expensive to acquire today for similar levels of economic output than it was 10 years ago because of technological improvements. In this case, the gross value would actually be brought down by an appropriate factor (eg. gross value x 0.8 or 0.7).

2) New assets are created for the product portfolio and customer relations. This is a way to account for the competitive edge represented by technological leadership and well-established relationships with key customers. The quick and dirty way to create those items is to take a realistic percentage of SG&A, and multiply it by the number of years it would take to reproduce the asset. For instance, assuming a company with a large market share spends half of its SG&A on sales and marketing, one could take 50% of SG&A and multiply that figure by 3, reflecting the fact that it would take about 3 years at this level of marketing and sales expenditure to match the level of customer loyalty.

3) Creating a liability for stock options outstanding in cases where this is material for companies

Now remember, this is just a rough guide to approaching replacement value analysis, and requires a good deal of judgment and knowledge. There are more things one could do, but those are the major items. Again, this approach comes from the book, and an analyst with plenty of experience in one industry could tinker more or differently.

Earnings Power Value

EPV essentially measures the cash generation potential of a firm's assets via an income statement analysis. Earnings are adjusted to come up with something akin to a free cash flow, which is then discounted and compared to the adjusted value of assets, or NAV.

In a situation of market equilibrium with ample competition, EPV should equal NAV for all market participants - the adjusted earnings of companies are just sufficient to replace assets, and revenue growth doesn't create any incremental value as the asset base grows by a proportional amount. In such a situation, the return on invested capital (ROIC) equals the weighted average cost of capital (WACC). I will expand on this later.

Just like for NAV, adjustments are made to the income statement. Changes are:

1) Take at a 5-year avg EBIT margin

2) Apply that margin to current year revenue to smooth out any unusual events

4) Take out taxes

5) There a couple more adjustments needed that are discussed in the Growth section below, but that I will leave out for now

You then take this number as a numerator and, using the firm's WACC, do a straight perpetuity assuming no growth. From the resulting figure you subtract debt and excess cash (i.e. greater than 1% of sales), and this gives you the firm's earnings power.

If this figure is equal to NAV, the cashflows from the firm`s assets after investors are paid at the rate they require are just sufficient to replace those assets, and no incremental value is created. If EPV is smaller than NAV, then managers are actually destroying value, and the asset base needs to shrink to meet EPV.

If EPV is greater then NAV, then the firm is able to replace its assets and create an additional return for investors over and above what is already captured in the discount rate - ROIC is greater than WACC and return on equity (ROE) is greater than the cost of equity. In end, equity holders are really the prime beneficiaries from this situation, as debt holders`returns are capped.

Growth

Value investors typically don't like to include growth assumptions in their models, because they believe that in most cases firms whose EPVs are larger than NAVs won`t be able to sustain that position because of competition, and therefore that the long-term equilibrium lays with EPV = NAV. Remember, in this case, ROIC = WACC, and sales growth does not create any incremental value as it just goes to pay for more assets.

The only time value investors actually compute growth is when a firm's EPV is greater than its NAV and they believe that the firm has a so-called moat, or a competitive advantage that can't be undone (think of Microsoft and its position in the operating systems market). Only in such a case would value investors actually pay for growth, and include it in their valuation (more on this later). Barring the existence of a moat, competitors will eventually notice the value creation potential of a given industry, will enter, and will force equilibrium through competition - all EPVs will equal NAVs.

In #5 above, the other two adjustments needed when computing EPV are to account for maintenance SG&A and maintenance capex. In other words, some of the SG&A expenditures and some of the capital expenditures are made to maintain and replace the existing assets, while some are made to grow sales. Since we are only interested in what it costs a going concern to maintain its existing asset base, we add back a percentage of depreciation and SG&A (between 25% and 50% - again, this is a matter of judgment and industry knowledge) to make up for the fact that some of this expenditure went to fund growth and shouldn't be accounted for.

Closing Remarks On The Value Approach

There are thus two main types of value plays (excluding growth, to be discussed later):

1) Asset-based --> If NAV/shr is larger than share price, is there a high probability that investors will eventually wake up to that fact and that the two will converge, creating a capital gain? If so, you have a value play on your hands and are paying for undervalued assets.

2) Earnings Power-based --> If EPV > NAV, does the company have the means to prevent competition from eating away at its margins – in other words, is there a moat around its market position? If so, is EPV/shr lower than share price? If you can answer yes to both questions, you also have a value play on your hands but you are paying for sustainable earnings power.

There are more adjustments to the financial statements and more nuances to those adjustments than I’ve presented here. However, in the interest of length, there is only so much I can get into. I just wanted to provide a high-level picture of how value investors approaches valuation and security analysis. As I mentioned earlier, I would strongly encourage those interested to read more about it on their own. In the end, what your VI valuation yields is a result of your particular assumptions, which by the way holds true for any type of valuation.

The Search Process

In theory, VI is a bottom-up approach, meaning that one typically starts the search for stocks by looking at fundamental ratios, and only worries about the industry and qualitative factors if the investment makes sense quantitatively. The two preferred ratios are the price-to-earnings (PE) ratio and the price-to-book-value-per-share (P/BVPS) ratio, and the preferred valuation levels are typically around 15x for PE and 1 to 1.3x for P/BVPS.

However, I’m not entirely sure how it is actually done in practice. For my part, I start at the industry level and then work my way down to valuation, and I don’t let a PE above 15x or a P/BVPS of over 1.3x discourage me from pushing on.

Stella Jones

The company I chose to analyze for this article is Stella Jones (STLJF.PK or SJ.TO), which is a treated wood product manufacturer. The company’s main business segments are railway ties (35% of 2007 sales) and utility poles (48%). The remainder is made up of other treated wood products, but those are the two key segments. SJ thus has significant exposure to two sectors I believe are very well-positioned to benefit from the transition to a green economy: rail transport and the electricity grid.

Both the railway ties and the utility poles industries are fragmented in North America…or at least in the US. In Canada, SJ has been an aggressive buyer, consolidating the market. It now has a roughly 70% market share in both industries in Canada, and following a recent acquisition in the US now holds upwards of a 20% market share in railway ties, which places it second there in terms of market share. As you will see below, SJ has done a great job of integrating acquisitions so far, and is considered by analysts to be in a strong position to consolidate the US market, starting in the east and southeast. As can be noted from the share price performance over the past five years, this expansion hasn’t gone unnoticed, and this has been a great ride for shareholders who were there early.

The company currently trades in the FY2007 17x PE ($2.04/shr) and 3.4x P/BVPS ($10.35) ranges, so on the latter metric it certainly seems rich for a value investor. The reason why this company drew my attention is that the stock has seemingly halted a largely uninterrupted 4-year run over the past 12 months. The reason is simple: the company is based in Canada but has operations in the US, and it has been hit hard by a rapid increase in the value of the Canadian dollar. While SJ has some natural hedges in the form of facilities in the US, and uses derivatives to control its forex exposure, this hasn’t proven enough and SJ missed it targets in Q4 ’07.

Value Investors will typically like a stock whose underlying business is intact but in which, for one reason or another, the market has lost interest. This qualifies as one of those. Already liking the sector and the company’s positioning in it, the pullback in share price led me to want take my analysis further.

Despite completing five acquisitions in five years, SJ has managed to steadily improve margins as well as a key profitability ratios.

The capacity of Stella-Jones to acquire and successfully integrate businesses at this rate while continuing to improve returns for capital providers is a signal that the management team is likely very strong. While margins and other ratios will certainly not continue to improve at this rate indefinitely, SJ’s track record speaks volume as to its ability to be a successful consolidator in the US treated wood market.

Value Investing Valuation

NAV

Through my NAV adjustments, I ended up adding about $29 million in net assets, mostly as a result of adjustments to capital assets and the addition of a $15 million customer relations asset. As explained above, I took two years of 50% of 2007 SG&A (or full 2007 SG&A) as what it would cost a competitor in terms of marketing and sales expenditures to come and establish the market position SJ has achieved, especially in the Canadian market.

I did not push too much on this analysis because I knew that, at a non-adjusted BVPS of $10.35, no realistic adjustments would bring NAV anywhere close to the $35 figure the stock is trading at. Looking at the company’s margin and profitability ratio improvements over the past five years, I knew this was an earnings-power story and not an undervalued asset story.

EPV

My income statement analysis yielded more interesting results. Following the earnings adjustment approach above, I got an EPV of about $24 per share.

I discounted the company’s adjusted earnings at 11.15%, using a before-tax cost of debt of 8% and a cost of equity of 16%. The target capital structure for this firm likely lays at around 45% debt-to-total cap. About 60% of the stock is held by one shareholder, so I added a percentage point of liquidity premium to the 15% cost of equity I had originally come up with. The choice of a discount rate, however, varies widely from person to person, so this is by no means the only "right" discount rate.

Still, at $24/shr, we are still far from the ~$35 the stock is currently trading at, indicating that much of Stella Jones' potential is already priced in.

Growth

I believe Stella Jones has a moat, in the form of a high market share in Canada and the ability to consolidate at least a part of the US market on a back of a successful integration strategy to date. Moreover, my understanding is that wood is not about to be displaced as the primary material for railway ties and utility poles, because the cost of alternatives is plain too high.

As you can see if you compare SJ's profitability ratios to the cost of capital I came up with, the company is creating additional value for its stockholders, and there is a good bit of room to absorb any error on my part in computing that cost of capital. It would therefore seem reasonable to want to price in some growth, as discussed above.

In order to value growth, value investors (at least the ones who wrote the book :) use a matrix called the Growth Value Multiplier matrix. The GVM matrix outputs a number by which EPV is multiplied to get the value of growth for the firm.

The two axes on the matrix are the expected long-term sustainable growth rate over the cost of capital (g/K), and the ROIC over your cost of capital (ROIC/K). How does this all make sense? Believe me, the algebra works, and if you are familiar with the Gordon Growth Model the vertical axis should make sense. I'm not going to lay out the algebra here however, both because that would take too long and because this isn't my model, and I doubt the authors would be happy with me giving away too much.

So how does one use this matrix? First, a reasonable long-term growth rate must be determined, which can't be too much greater than the economy as a whole given that the underlying algebra assumes a perpetuity formula. In this case, I picked 4%, which places SJ between 0.25 and 0.5 on the vertical axis. I used a 16% ROIC as the long-term figure to reflect further marginal improvements on 2007 but not much more, which divided by the WACC at 11.17% lends SJ on 1.43, close enough to 1.5. Given the position on both axes, it would be reasonable to assume a multiplier of 1.2.

Multiplying the EPV/shr by 1.2 yields an intrinsic value of about $28.60/shr, still short of $35. And I haven't even worked in a margin of safety, which is a way to hedge risk in case the valuation is off or if one misses a major qualitative factor. Typically, the intrinsic value arrived at is multiplied by something like 66%, and if the share price is still below the resulting figure, it's a buy. Needless to say, we're not even close here.

Where Do We Go From Here

Any way you slice it using the VI approach, SJ's past achievements and future potential are fully priced in...and then some. The story remains pretty attractive, and although I didn't delve too much into the qualitative side, it's hard not to see a gem of a company here. The sell-side analyst notes I read on SJ are all positive with 12-month targets implying pretty respectable returns, all based on forward multiples (I didn't see a DCF, and I suspect it's partly because with reasonable assumptions you couldn't justify very elevated share price levels).

For the time being, however, I'm going to be disciplined and hold off on this one. SJ has essentially flat-lined over the past year, and it could be that some of the hype is gone - as I pointed out earlier, it wouldn't be realistic to assume a doubling of margins every five years in perpetuity.

Value Investing as a philosophy provides a good way of thinking about a business and its potential. However, I'm told by practitioners that you sometimes have to sit on the sidelines for long periods of time in hot markets, as you just can't find securities that meet the stringent value criteria. For my part, as stated initially, I can't claim to have the discipline of a true value investor, and maybe I'll end up owning SJ sooner than I think...

DISCLOSURE: The author does not a position in any of stocks discussed in this article

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

Posted by Charles Morand at 09:12 AM | Permalink | Comments (0)

Paul Denholm, a Senior Analyst at the National Renewable Energy Lab (NREL), sees an upcoming struggle between renewable sources of electricity such as photovoltaics (PV) and wind with low-carbon baseload alternatives for space on the low carbon grid of the future.  These baseload alternatives are nuclear and Internal Gasification Combined Cycle coal plants with Carbon Capture and Sequestration (IGCC w/ CCS, refereed to by advocates as "Clean Coal).

This may come as a shock to advocates of the idea that Global Warming is such a big problem that we will need all forms of low carbon electricity, because the heart of that argument is that the choice between nuclear and IGCC w/CCS (if and when it's available) is that the decision is not one of "either-or" but "and."

PV Curtailment

In his seminar at NREL's Strategic Energy Analysis and Applications Center, Dr. Denholm showed what could happen with only an 11% penetration of photovoltaics on a cool, sunny Spring day.

PV Coincidence With Load - Spring

Source: The Role of Energy Storage in the Modern Low-Carbon Grid - .PPT 7MB

Electricity demand in the Spring is typically low, and likely to be lower on weekends, because there is no need for air conditioning, nor much lighting on a sunny day.  The graph above shows a day where PV (even at only 11% penetration) would actually be producing more energy than the total demand on the grid.  While worries about the cost of integration  and even curtailment are well known and studied [pdf] in the context of wind power, integration has typically not been considered a problem with photovoltaics.  In fact, PV is generally considered to bring integration benefits, given the good correlation of PV output with summer peak loads.

The above chart is just a simulation, and PV is a long way from 11% penetration anywhere, but PV curtailment lurks in our future.  A combination of wind and photovoltaics will simply reach that limit sooner (as wind already has.)

The Problem With Baseload

If PV curtailment is not yet a problem because of low penetration, the more baseload power we have, the more difficult it will be to integrate intermittent power sources into the grid.  Unlike Natural Gas Combined Cycle plants, IGCC and Nuclear, like current coal plants, have very little flexibility in how much power they generate.  This means that the more baseload generation there is on the grid, the less "room" there will be between baseload power and current demand for electricity from intermittent sources.  So while higher penetrations of dispatchable power such as natural gas aid the profitability of wind and solar, higher penetrations of coal and nuclear power reduce their profitability.  And vice-versa: a grid with high penetration of intermittent sources will make proposals for new baseload power less attractive, since intermittent power lowers the minimum electricity demand on the grid, effectively reducing the market for baseload power.

Why IGCC is Baseload

I was a bit surprised that Dr. Denholm spoke of IGCC woth CCS as a baseload technology.  Although I consider "Clean Coal" an expensive distraction, I had thought that one advantage of the technology would be to make coal dispatchable.  My thought was that, since IGCC first involves producing syngas (a mix of carbon monoxide and hydrogen) by gasifying coal, and then burning the syngas in a turbine very similar to the natural gas turbines used today (which are dispatchable), it would not be too difficult to separate the steps, and store the syngas for later combustion.  When I asked, he replied that adding storage is an "extremely tricky" problem, because the current technology relies on hot gas cleanup to achieve high efficiencies.  

Squaring the Circle

It's not surprising that we hear about the baseload-intermittent power conflict from Dr. Denholm: his expertise is energy storage.  Energy storage has the potential to mediate between the fluctuations of load and intermittent power, and difficulty of shutting down baseload power plants for short periods.  I've discussed investments in large scale energy storage, but there are also opportunities for smaller scale and shorter time span operations which I will explore in later articles.

UPDATE: As promised: Investments to mediate between intermittent loads, and intermittent power.

Tom Konrad

Posted by Tom Konrad at 05:49 PM | Permalink | Comments (5) | TrackBacks (0)

by Tom Konrad

When I asked, Alternative Energy Stocks readers overwhelmingly wanted me to take another look at Composite Technology Corp. (OTC BB:CPTC.OB)  I've discussed CPTC several times over the last year, and consider it my most speculative pick in electricity transmission and distribution.  True to the nature of a speculative stock with no current earnings which is still trying to establish markets for its products, the stock price has been all over the map.

The reader interest is doubtless due to the recent sharp decline since mid January.  I personally sold a portion of my and client positions when the stock was in the $1.75-$2.00 range, and repurchased it for some accounts around $1.30 (including my own.)  These accounts are currently showing a loss of around 30-35%, not counting the gains taken last year.

I actually have not been watching the recent decline, but seeing the stock at $0.82 today makes me wonder: should I buy more?  Should I take a tax loss for those accounts that could use one?  Has something happened to make the stock look worse, or is the current decline just the effect of falling markets on what has always been a very speculative stock?

Those Pesky Banks

Two weeks ago, I was talking to a friend who acts as a CFO for small wind developers.  Unprompted, he mentioned that banks would not finance CPTC's DeWind turbines because of their lack of track record, which is a gigantic barrier to incorporating them in a US windfarm.  My friend made the same comment about  AAER Inc [TSE:AAE], a company which AltEnergyStocks Editor Charles Morand bought last year (He still owns it, and says he bought if for other reasons, but is not overly concerned about turbine financing.)  In general, I have not been paying nearly as much attention to CPTC's wind division, because I'm more interested in the transmission play, and I had assumed that, given the long backlog for turbine orders from major manufacturers, DeWind would find places to sell as many turbines as Westinghouse can manufacture for them.  This financing difficulty is not news to investors who have been following DeWind, but it raised the question of how many turbines they will be able to sell until they build more of a track record in such places as the Czech Republic.

However, since this is not news, it can't account for the stock's decline.  CPTC does seem to be making accepted progress towards getting these turbines tested and certified, which should do something to ameliorate banks' reluctance to finance DeWind turbines.  They are currently waiting on two reports from the National Renewable Energy Laboratory and the Department of Energy, as well as negotiating with insurance companies which would insure the turbines to allow bank financing.   

Uncertainty among investors as to the results of the DOE and NREL certifications are likely to be the cause of some of the decline.  This sort of uncertainty can feed on itself in down markets like the one we are currently experiencing, but that leads to buying opportunities for brave investors.

Latest Earnings Release

The Feb 11 December quarter earnings release certainly provides no explanation for the recent decline (although the decline began a full month before the release, so it would require the leak of insider information if it had.)  With revenues having doubled from the 2006 December quarter, and up 40% from the previous quarter, the expectation would be that the stock would also be up.  Both the DeWind and ACCC Cable divisions seem to be making headway towards broader market acceptance.

In contrast, operating cash flow for that quarter was almost $14 million in spending, mostly due to a large increase in inventory.  With cash on the books of only $11.5 million, their balance sheet looks weak, so failure to convert those inventories to cash could lead to a liquidity crunch in the coming quarters.  This might lead to a dilutive stock offering, which would probably be bad for current shareholders, unless it were in order to finance an increase in orders.

The company currently does not anticipate needing new cash until June, but seems determined to avoid further dilution if at all possible, mostly by relying on customer payments to fund inventory growth.  This adds both uncertainty, but also means that any gains are likely to be much more profound.

Conclusion

I like what I see.  The company has made considerable progress over the last year, and the stock is staying at the same price.  As the ACCC conductor begins to make a significant contribution to the bottom line, and its turbine certification continues as expected, the company seems likely to maintain current revenue growth rates.  At some point, barring too many unforeseen hiccups, investor greed sparked by rapid revenue growth should overcome uncertainty.

UPDATE: Shortly after publication, two readers pointed out that I'd missed the most likely cause of the sell off: selling by Millenium Partners, to pay an SEC fine.  All the more reason to buy, if the reason for selling has nothing to do with the company.  One of these readers gave the following detailed reasoning:

One issue that I noticed you did not cover is the selling by Merriman (Englander) of Twelve million shares to cover a 148 million fine by the SEC.  This can explain the dropoff in share price.  The market maker that handled the sale of the shares is ARCA, I believe.  If you notice, when ARCA appears to be off the ask, the stock has a tendency to go up.

Good enough for me.  I just bought some more.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CPTC.  Charles Morand owns AAE.

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

Posted by Tom Konrad at 11:11 PM | Permalink | Comments (9) | TrackBacks (0)

Like Quanta Services, (#8 in this series), National Grid PLC (NYSE:NGG) allows investors to participate in the massive build out of electricity transmission and distribution infrastructure necessitated by years of neglect and the growing need to decarbonize our electric infrastructure.  See the article linked above for more detail on these two forces driving the sector.

Having its origins in British electricity deregulation in the 1990s, Nation Grid is a regulated utility in Britain and the United States, and operates high pressure gas pipelines and high voltage transmission in Britain, and electricity transmission and natural gas distribution in the Northeastern US.  The US operations were acquired with the purchase of Keyspan and the gas distribution network of Southern Company in 2007, as well as some smaller previous aquisitions.  They also own some electricity generation assets (mainly acquired as part of Keyspan)

Comparables

The only pure play publicly owned electricity transmission and distribution utility I'm aware of is ITC Holdings (NYSE:ITC), a company I recommended in my article on transmission stocks last April.   Since then, the stock has risen almost 30%, and I now think that it looks expensive, compared to NGG and Quanta Services, which is why it did not make it into this series.  In contrast, NGG trades at a forward P/E of around 13.3, below the utility industry average, with a dividend of 3.2%.

Environment

As a European company based in Britain, management understands dealing with regulators and customers who are far more concerned with Climate Change and renewable energy than those of it's recently acquired US operations.  I expect that the British experience will be a valuable asset to the US based operation as we see carbon regulations in the US (something I expect early in the next Presidential administration, considering that Congress and all the leading Presidential candidates support it), and as the United States begins to catch up with the Europeans in our level of environmental awareness and demand for lean energy sources.

National Grid's leadership can be seen in their initiatives, such as their inclusion the Dow Jones Sustainability indexes, and their award winning energy efficiency programs.

Valuation

As a regulated utility (with 95% of revenues from regulated businesses,) large price appreciation is unlikely, but given National Grid's position and expertise in transmission and distribution, a P/E below industry averages makes the stock seem a solid, safe bet, especially in uncertain economic times.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in NGG, ITC, PWR.

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

Posted by Tom Konrad at 11:44 PM | Permalink | Comments (0) | TrackBacks (0)

It may be a stretch to call a company with a P/E ratio in the high 30s "cheap," but in the case of Quanta Services (NYSE:PWR), it's a bargain.  

I won't repeat myself about why electric transmission and distribution (T&D) investments are a good bet.  Put simply, the grid has been long neglected, and improved long distance transmission is essential to bringing large scale renewables such as solar and wind onto the grid.

How does Quanta fit in?  They build transmission line for utilities.  When I ask industry insiders what company is best placed to actually string the wires or lay the cable, the answer is Quanta Services (the answer used to be InfraSource, until that company was acquired by Quanta.)

According to a recent article in the January/February issue of EnergyBiz (this particular article, on p.56 of the print version, does not seem to be online), Northeast Utilities (NU) signed a 6 year contract with Quanta in order to assure themselves access to T&D contracting services which they expect to be in short supply.  According to Jim Muntz, a Senior Vice President at NU, "There are only a few contractors who have the capability to do contracts on this scale, so we determined that before it's taken away from us, we would have to lock up their services for a number of years."

Another reason to expect growth in the industry comes from the same article.  According to Tim Hope, a vice president of operations at ABB (another excellent transmission investment), "While other parts of the utility's operations... looked to outsourcing solutions, T&D seems to be one of the last departments to embrace the concept."  This means that the market for outsourced T&D can not only grow as utilities invest more, but also as they increasingly turn to outsourcing, either due to regulatory pressure or because of insufficient internal resources.

While I might have preferred the pure-play electric T&D opportunity of Infrasource before the merger, Quanta's strategy of becoming a one-stop shop for infrastructure in natural gas, telecommunication, and broadband cable as well as power should serve it well if these industries continue to converge.  The strategy may also allow the power division to draw on additional workers with similar skills from telecoms and cable, if or when the skills shortage outlined above takes hold.

Doesn't that make a high-thirties P/E start to sound cheap?  It does to Cramer and an analyst at Morgan Stanley. I'm hoping the current market decline will make even cheaper.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in PWR, ABB.

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

Posted by Tom Konrad at 05:03 PM | Permalink | Comments (0) | TrackBacks (0)

I'm a fan of investing in electricity transmission, both because the grid in the US is in a sad state of repair, and because considerable expansions to the grid will be needed to take large scale renewable energy (especially concentrating solar and wind) from the lightly inhabited areas with renewable energy resources to population and demand centers.

Unfortunately, the need  for new transmission can put renewable energy advocates at odds with more traditional environmentalists, who are concerned about the local damage to views and habitat caused by new transmission lines.  Cases in point are opposition which looks like it will prevent a proposed new line in West Virginia, and opposition to the "Green Path" transmission line which was proposed to allow geothermal, solar, and wind development in the Salton Sea area of Southern California.

If new transmission is not built, we won't be able to wean ourselves from fossil fuels quickly, and the global effects of climate change will cause more disruption to ecosystems than any number of transmission towers would.

Investors Take Note

No matter where you stand in the debate, the issue is a serious one for Renewable Energy and Transmission investors.  If the lines don't get built, neither will the clean energy generation.  For transmission investors, opposition to new lines means that the US grid will have to make current rights of way work harder and transmit more electricity, since fewer new lines will be built than if there were no opposition to new transmission.

Transmission investors concerned about NIMBY opposition should tilt their portfolios more towards technologies that allow for line upgrades than towards builders of new lines.  This can be by either upgrading the existing lines with higher capacity technology, or by managing the grid better.  

I can think of three companies which might be insulated from a lack of new rights-of-way, because they have technology for upgrading the existing grid.  First, there is Composite Technology Corp., which was my #4 Speculative pick for 2008. In that article I describe Composite Technology's (OTC BB:CPTC) ACCC cable which can be used to replace conventional conductors to upgrade power lines without the need to make any alterations to the towers.  This can lead to as much as a doubling of the capacity of an existing transmission corridor at very low cost to the transmission owner.

For larger scale upgrades needed for very long distance transmission, as well as for new long distance transmission lines, the technology of choice is likely to be High Voltage DC Transmission (HVDC). The top suppliers of  HVDC technology are The ABB Group (NYSE:ABB), and Siemens (NYSE:SI). See this article about ABB's HVDC technology for more information.

I'm looking for more ideas in this area.  I love the desert, and don't want to see any more new transmission towers than absolutely necessary.  On the other hand, I don't want to see more and more of our land turned into desert because of Climate Change.

DISCLOSURE: Tom Konrad  and/or his clients have long positions in ABB, SI, and CPTC.

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

 

Posted by Tom Konrad at 04:10 PM | Permalink | Comments (2) | TrackBacks (0)

This article is a continuation of my Ten Alternative Energy Speculations for 2008, with picks #8, 9, and10 published last Thursday.  If you haven't already, please read the introduction of that article before buying any of the stock picks that follow.  These companies are likely to be highly volatile, and large positions are not appropriate for many investors.   My least risky picks (#8,9, and #10) are part of that same article; my most speculative plays (#1-3) will are here.

#7 Electro Energy, Inc. (NasdaqCM:EEEI) $0.68

Electro Energy has risen 36% in the month and a half since I last wrote about it.  But the reasons to own it are still strong, and the rising share price should actually help the company raise the money they need to ramp up production.  See this article and the one linked to above for my reasons to like this stock.  

More recently, EEEI briefly rose to over $1 because of some excitement generated by their participation in an electric vehicle symposium.  My guess is that year end tax loss selling has brought the stock back down since then.  If I'm right, we can expect it to rebound again the next time they get attention from the press.  In any case, we can expect a lot of volatility.

#6 Capstone Microturbine (NasdaqGM:CPST) $1.62, and

#5 FuelCell Energy Inc. (NasdaqGM:FCEL) $10.30

I'm bullish on both these companies because I'm bullish on distributed generation and Combined Heat and Power (CHP) technologies.  My intuition is that 2008 or 2009 will be the year that distributed generation and CHP grab the attention of Wall Street, the way thin-film PV stole the show in 2007.  Both FuelCell and Capstone stand to benefit.  They may even get a boost from making ethanol production more efficient. 

Regular readers may be surprised that I am recommending a fuel cell stock, since I call Hydrogen Fuel Cell Vehicles "a politically inspired boondoggle."  But there are more types of fuel cells than hydrogen: molten carbonate or solid oxide fuel cells.  FCEL makes a variant of  molten carbonate fuel cell, called the Direct Fuel Cell (DFC), a different beast than the hydrogen  fuel cells, because it can work without an external mechanism to reform the hydrogen.  

FuelCell's DFCs burn methane rather than hydrogen, and are very tolerant not only of low heat content methane (which is often produced in anaerobic digestion or wastewater treatment.)  Note that on page 10 of this EPA study [.pdf] of combined heat and power installations at wastewater treatment plants, a 300kW fuel cell requires a less expensive fuel treatment pressurization facility than a much smaller microturbine system. This is almost certainly due to the lower need for fuel pressurization.

Biogas can be a particularly tricky fuel given the presence of impurities such as H₂S and siloxanes which build up as deposits in combustion chambers.  Microturbines, fuel cells, and internal combustion engines need fuel treatment if siloxanes (which are usually present in waste water treatment plants as a byproduct of deodorants) are present.  Fuel cells and reciprocating engines also require the removal of H₂S.  Nevertheless, wastewater treatment facilities combine an abundant source of free fuel (biogas) with a need for heating, and so present excellent opportunities for CHP.

Fuel cells are more efficient (47% fuel to electricity conversion) than comparably sized microturbines (30-35%) or internal combustion generators (about 40%), which not only translates into fuel savings (or higher electricity output), but also leads to only 85% or less CO₂ emissions than the less expensive (per kW) or internal combustion generators.  Both microturbines and fuel cells get a large system efficiency boost when the heat is also used; both FuelCell and Capstone claim that their products can reach 80% overall efficiency in a CHP context, while the relatively small size of microturbines and fuel cells are particularly well suited to small scale industrial facilities and commercial buildings.

Rising fuel prices make efficient generation important and new fuel sources such as biogas and other waste gasses (such as the Ford plant using a DFC to make electricity from paint fumes) will present opportunities for both DFCs and microturbines in CHP and distributed generation applications.  While DFCs have the advantage of working well on low energy content gas, microturbines are better suited to many projects due to their smaller size, and more fuel flexibility.  Microturbines are much more tolerant of a wide variety of fuels, and can even handle the H₂S in digester gas, as noted above.  Capstone sells versions which can run on liquid fuels such as diesel, propane, and kerosene.  While fuel cells also have this capability, they are less tolerant of impurities, and FuelCell does not currently sell products for these markets.  

One final advantage for microturbines is their ability to ramp up and down quickly, meaning they can used in remote locations with irregular fuel supplies, or when demand for electricity is not constant.   DFCs are less able to ramp up and down because of the need to maintain a high temperature in the fuel cell stacks, so they will only be used when they can be always on, but their ability to supplement biogas with natural gas from the pipeline system still means that they can be used with fuel of variable availability.

FuelCell's DFC and Capstone's microturbines should be able to compete effectively with internal combustion engines in distributed generation applications, since reciprocating engines are too large for many potential projects.  Rising energy prices and tightening emissions limits should allow DFCs to slowly increase their market share in a rapidly growing market.  Incidentally, there has also been a successful test of a fuel cell/microturbine hybrid system [.pdf], with a Capstone turbine generating electricity from the waste heat of a fuel cell.

Capstone finished 2008 with a year-end surge because of new rules which streamline the installation of microturbines in New York City, but could easily continue higher, if I am right about distributed generation taking off.  The new NYC guidelines could easily be one sign of the beginning of this trend.  On the other hand, I wouldn't be surprised to see a small price retreat in January.  It may be wise to wait a couple weeks and see what happens with CPST.

#4 Composite Technology Corp. (OTC BB:CPTC) $1.37

I first recommended CPTC last April in an article about how electricity transmission is essential for renewable energy on a large scale.  At the time I focused on how transmission helps even out the variability of wind power, but transmission is going to be if anything more essential to the development of Concentrating Solar Power (CSP).  While a 100x100 mile square of Southwest Desert theoretically receives enough sun to generate electricity for the entire US, and that electricity could meet both peaking and baseload needs with thermal storage, if the population centers in the East and California are to be served, it will require a massive transmission build out.  

I don't expect Southwest CSP to ever supply all our electricity needs, but I do expect that this abundant, storable electricity will start to be used for more than just the local needs of the desert Southwest within the next decade.  Even this much smaller vision will require a large upgrade to our transmission infrastructure, as will the growing penetration of wind as a percentage of utility resource bases.  CPTC's Aluminum Conductor Composite Core (ACCC) is gaining acceptance in China (which is building out its electric infrastructure much faster than we are building ours.)  I expect the US to follow (although just the China play could be enough to keep the stock rising.)  In the US, I see an opportunity for ACCC with utilities that want to move more power down existing rights of way.  Many utilities need to upgrade their transmission after decades of relative neglect, and the added demands of higher wind penetration and the possibility of long range transmission of CSP power only enhance this need.

Using ACCC instead of traditional (Aluminum Conductor Steel Reinforced) power cables allows the same line to carry higher currents (up to 2x as much) with less sagging in hot weather, and line losses are reduced by as much as a third under all conditions.  For high usage lines, a straight retrofit with ACCC can have good financial returns for a utility based solely on the lower line losses. 

CPTC also has a wind division, which like all turbine manufacturers should, in my opinion, be able to sell all the turbines they can build for the foreseeable future, which should greatly help CPTC with their ongoing operating cash flow as they ramp up production of their D8.2 turbines.  However, they are not profitable, and much of their turbine technology is assembled through patents licensed from other companies, and these revenues are vulnerable to a declining dollar and other foreign currency exchange risks.  CPTC will not become profitable in the near future, and will almost certainly have to return to the capital markets for additional capital.  If their products catch on, it should be easy for them to raise capital on favorable terms; if they don't, we can expect massive dilution.

In all, the "Risk Factors" section of their most recent annual report is long and many of the risks (including multiple lawsuits) are not trivial.  Perhaps the most serious risk is the United States' utility industry's resistance to change, which may lead to a complete unwillingness to use ACCC, despite its superior properties.  This is a big if, and I expect to long term inventors returns to be excellent if they persuade utilities to adopt their technology, and miserable if utilities stick to the way they have always done things.

Three more speculative picks available here.

DISCLOSURE: Tom Konrad and/or his clients have long positions in EEEI, FCEL, CPST, and CPTC.

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

Posted by Tom Konrad at 08:56 PM | Permalink | Comments (6) | TrackBacks (0)

Net metering describes the requirement that an electric utility buy electricity from any of its customers that generate their own electricity (usually with some sort of renewable energy, such as solar or wind) at the same price that they sell it to the customer.  That seems fair, doesn't it?

The Utility Perspective

It doesn't seem fair to the utility.  Utilities do more than just generate and sell electricity to customers.  They also are responsible for transmission (delivering the electricity) and reliability (making sure that the lights work when you flip the switch.)

Taking just the reliability requirement, suppose that a homeowner, call him Sol, wants to install a solar photovoltaic (PV) system on his roof and sell the electricity back to the grid when he was not using it himself.  But suppose Sol had a reliability requirement.  For instance, suppose that whenever Ted, one of his neighbors,  turned on the TV, Sol had to make sure the PV system was working, or the TV would not turn on.  Also suppose Ted knows where Sol lives, and that Ted likes to watch TV at night. 

Ted would probably grow quite unhappy with Sol quite rapidly, and would definitely complain, and might even start pay Sol an unfriendly visit at uncomfortable hours.  Sol would probably think twice about signing up for net metering under those rules.  

Utilities aren't enthusiastic about net metering, either.

The Benefits of Grid-Tied Solar

The example above is something of a straw man.  Unlike Sol in my example, with net metering, utilities are not being asked to do something which they are incapable of doing.  In fact, utilities balance load and demand all the time, and so long as net metered systems only account for a small fraction of a utility's total demand, they are un likely to be a strain on the grid.

In fact, because PV panels usually produce power on hot, sunny afternoons when peak load is driven by air conditioning, solar homes often provide a net benefit to the grid [.pdf] for which the customers are not paid, because most utility customers are charged a flat rate per kWh, which does not take into account the higher value of electricity at times of peak demand.

Peak reduction from near Zero Energy Homes with West-facing PV (blue) for Sacramento Municipal Utility District. Slide 19

The ideal orientation for PV depends on the utility's load profile.  West-facing PV will be better for some, while south facing will be better for others.  

What about Small Wind?

Not all distributed generation is south- or west-facing PV, however, and other forms of generation such as small wind often produce power at times unrelated to peak.  If the distributed generation customer is charged a flat rate for electricity, the costs of servicing the customer may come to exceed what he pays for service.  This is especially likely for a customer with a small wind turbine which may produce very little of its power at high priced peak load times, and a lot at times of low load.  This requires the utility to transmit the power a long distance to where it may be needed, as well as run its least expensive generation at less than full capacity in order to accommodate the extra power generated by distributed wind.  

Many environmentalists will read "least expensive generation" in the line above and think "that's exactly what we want... least expensive generation means coal plants, and it would be wonderful if a utility had to shut those down."  

While coal is the least expensive form of generation for most utilities today, but it may not be for long, and not only because of the cost of pricing un carbon emissions.  In terms of marginal cost of generation (the cost of producing an extra kWh of power) wind is already cheaper than coal because there is no fuel cost.  I no longer recall where I heard this anecdote, but I believe that last winter (2005-6), on an extremely windy weekend in Europe, electricity was trading for free on the wholesale market, and many utilities were shutting their coal plants down.  North America still lags Europe in terms of wind penetration, yet utilities in windy areas are likely to get to high wind penetrations first, and these are precisely the areas to which small wind is also most suited.  In the not so distant future, I can easily see a scenario where a rural utility with a high degree of wind generation of its own might have to shut down some of its wind turbines in the middle of a windy night because of net-metered small wind, forcing the utility to pay retail rates for electricity it would otherwise have gotten for free, and then having to pay to transmit that power somewhere it might actually be used.

The Bigger Picture

This is not to say that small wind is bad and west-facing PV is good, just that each impose different costs or benefits on the system as a whole.  Wind can also be good for a system.  In February of 2006, an unseasonable cold snap caused power outages in Denver in part due to unexpectedly large demand for natural gas for heating.  Cold winter nights also happen to be when the wind blows hardest and most consistently on the northeastern Colorado plains, so a small wind turbine on net metering would have actually helped to reduce the severity of the controlled rolling blackouts Xcel ordered.  If the 400 MW Peetz wind farm (now in phase II of construction) had been operational in February 2006, I think it is unlikely that the blackout would have happened at all.

Graph from Trans-Elect, LLC using data from NREL Wind Performance Projections.  Note that the capacity factor for Peetz in NE Colorado is over 60% in the month of February, when the blackouts occurred, and capacity factor is also highest at night.  The other lines are wind regimes from SE Wyoming and Lamar in SE Colorado.

Having Customers Pay for Costs and Benefits

Net metering is an implicit subsidy for distributed generation, because the net metered customer gains the benefits of the utility's grid (reliability and transmission of electricity) without having to pay for it.  In addition, some forms of net metered generation are given greater benefits than others when electricity is metered at a flat rate.  If the price of electricity varied depending upon the load on the system (Time of Use pricing), then properly oriented PV would often be paid more than it under a flat rate system, and people would be encouraged to orient their solar panels for maximum system benefit, rather than maximum electrical output.   

As for the implicit subsidy of unpaid-for transmission, I believe it should be abolished, and replaced by an explicit subsidy large enough to reflect the social benefits of distributed generation other than increased grid stability, which is accounted for with time of use pricing.  

California Solar Initiative: A Note of Caution

When California mandated that solar customers had to sign up for time of use metering in order to earn solar rebates, solar installers felt that they were not given enough support to understand the new rules (which included a lot more than the switch to TOU.)  Non-specialist customer confusion was understandably greater, and TOU pricing became the focus of a minority of solar customers who were actually charged more than they would have been under flat rates (because their solar system too small to offset enough of their air-conditioning driven usage during the peak period).  The California Public Utilities Commission (CPUC) removed the TOU pricing requirement because of the outcry.

The fact that the CPUC backed down is a tragedy.  In a very real sense, the solar customers who were hurt by the switch to the TOU tariff were the ones who had been receiving an unfair subsidy in the flat-rate system: they used a disproportionate amount of power during peak times, so much so that the benefits of solar systems were too small to replace the lost implicit subsidy.  Customers who suddenly had to pay something closer to the true cost of their electricity usage found that they were paying more than they had been, despite their new solar panels.  They unsurprisingly clamored to get back onto the flat rate where they were able to take advantage of the market inefficiencies which subsidize their air-conditioning chilled lifestyles.

Such homeowners would do a lot more for the environment if, instead of splashing out money on a PV system, they had made their homes tighter and switched to more efficient air conditioning.  For instance, the hyper-efficient Coolerado Cooler (The commercial version of which is sold as the Delphi HMX) works best in the hot, dry climates which were worst hurt by the time of use rates.  As I have said many times, PV holds an unhealthy fascination for people, to the point that money which would do far more good spend on energy efficiency improvements is effectively wasted on solar.  If we are truly more interested in solving the world's climate problems, we will spend limited government rebate money subsidizing energy efficiency improvements with large net benefit for the grid that also reduce carbon emissions, rather than subsidizing expensive solar systems for a fraction of the benefit.

Conclusions

Net metering is definitely advancing.  On August 21, I attended a Colorado Public Utilities Commission (PUC) hearing on distributed generation, and it seemed clear to me that some form of statewide net metering would likely become law in the Colorado in the next legislative session.  See my notes from that meeting for more detail.  I did bring up the possibility of combining net metering with TOU pricing in the meeting.  However, that and other good ideas from participants (including inverted tiered block pricing) or using solar rebates to subsidized increased energy efficiency will probably require considerably more advocacy if they are to make it into law.  

On the bright side, the Colorado Governor's Energy Office did suggest that the PUC investigate west-facing PV as part of a net metering program.  They are likely to be listened to, although inclusion in the final package from the state legislature is chancier. 

The California experience shows that the complexity of such schemes means that care will have to be taken with design, and educational outreach is important.  If the California consumers were helped with efficiency improvements before they installed solar, there would likely have been much less of a backlash, and the efficiency improvements would have done a lot more good than the solar PV systems which would have served as the carrot to induce the efficiency improvements.

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

Posted by Tom Konrad at 04:50 PM | Permalink | Comments (2) | TrackBacks (0)

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

Relevant articles on Biofuels

Competition in Ethanol

An Insider's View of the Ethanol Industry

Let Them Eat Grass

Blue Sun Biodiesel

Biodiesel's Competition

My Biodiesel Jeep

The Answer is Trading in the Wind

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

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

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

Diamond in the Rough

Alternative energy stocks are usually exciting, development stage companies with break-through technology which just might to totally transform the way we live.  Unfortunately, that's a better description of a speculative lottery ticket style company than a solid investment which will provide solid, long-term capital gains.  So it's always a pleasure to find a company whose products are so commonplace that we don't even notice them, even when we see them every day, and yet is involved in essential work to reduce our dependence on fossil fuels. 

I took this picture in a new subdivision near me.  They are scattered unobtrusively in back alleys, and painted a dark green to fade into the background.  This is a transformer, which takes high voltage electricity and converts it into the lower voltage that runs your refrigerator and lights your compact fluorescent bulbs.  It's also made by The ABB Group, a glaring omission from my article on transmission stocks as a way to invest in wind energy.  That omission was due to the fact that, while I knew they are heavily involved in electricity Transmission and Distribution (T&D), I had no idea that they were anything other than what you might expect when looking at all those boring green boxes with the scary warning labels.

T&D Technologies

That changed when I read last weeks Renewable Energy Insider column about improving T&D efficiency by Bob Fesmire, an ABB spokesman, and listened to an interview with him on the Inside Renewable Energy podcast.  He mentioned ABB's FACTS (Flexible A/C Transmission Systems - also supplied by Blue Chip Alternative Energy Portfolio pick Siemens (NYSE:SI)) which improve the carrying capacity of existing transmission lines (which is very important because of the difficulty and expense of expanding existing lines in urban areas, and of building new transmission lines anywhere), as well as Gas-Insulated Substations (GIS) which allow utilities to upgrade substations in dense urban areas with a smaller footprint and less noise than the original (also supplied by Toshiba (TOSBF.PK) and Mitsubishi Electric, among others.)  Finally, they also have a strong presence in High Voltage DC transmission, which many energy advocates are arguing will be essential for a modern grid which will allow us to bring concentrating solar power from the US Southwest to the rest of the country as well as bringing North African Concentrating Solar power to Europe.

Efficiency High-flyer

ABB clearly does not have the T&D efficiency space to itself, but it is hard to imagine a future in which it wouldn't be a player in upgrading our T&D infrastructure.

 

As you see from the chart, ABB has been on a tear.  With a P/E ratio of 32 and a dividend yield of just 0.8%, this is not a value pick.  Nevertheless, it has the same P/E as its larger and more diversified competitor Siemens (but without the cloud of the bribery scandal, which Siemens is trying to put behind itself).  

Transmission Investment vs. Retail Electricity Sales
Source: IEEE

T&D investment has been lagging in the United States for decades, and politicians and public utilities commissions are starting to take this long-term underinvestment seriously.  Hence, it is not unreasonable to assume that annual transmission spending in the US will increase to at least 1975 levels, and possibly much higher in the next couple of years, with ABB's US revenues doubling as well.  European T&D spending is also increasing in order to ease the adoption of renewable electricity generation, but is unlikely to increase as much, as they have not neglected their grid to the same extent as has the United States.  To me, this implies annual revenue and earnings growth even in in excess of the 25% currently predicted by analysts, making the 32 P/E look reasonable.

Given that most alternative energy picks don't have earnings at all, and those that do have even higher valuations, ABB deserves a look.  I expect to buy more for my clients and myself on any decent pullback.

Speculative investors interested in T&D might also consider American Superconductor (NasdaqGM:AMSC.)  As the name implies, they hope to use high temperature superconductors to increase the capacity and efficiency of the grid, as well as providing enabling power electronics for wind farms.  Earnings are negative, but revenue is growing at 30-50% a year, and the stock has been on a tear since they secured Department of Homeland Security money for a superconducting cable to help shore up New York City's grid.  In other words, they're an exciting, early stage company with break-through technology which just might totally transform the way we get electricity. 

DISCLOSURE: Tom Konrad  and/or his clients have positions in these companies mentioned here: ABB, SI.

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

Posted by Tom Konrad at 07:02 PM | Permalink | Comments (0) | TrackBacks (0)

Last week, Charles told us to expect wind power industry suppliers to benefit from shortages in wind turbine components. Owens Corning (NYSE:OC) which I mentioned in my Blue Chip Alternative Energy Portfolio fits nicely into this category with their composites for turbine blades, as do the power converter stocks I mentioned two weeks ago.

As essential to wind power as any of these is improved power transmission. The National Wind Coordinating Collaborative states,

Electrical transmission facilities connecting windy areas and load centers are sometimes non-existent or minimal. Even in cases where a good wind resource has nearby transmission, that transmission often has limited capacity to transport additional energy. In fact, transmission facilities throughout much of the country are strained, and this problem is acute at specific points of congestion. The expansion of wind power is hampered by this situation, but the associated problem is not confined to wind. Instead, it is a general problem of concern to many in the electric power sector.

While the need for long distance transmission often holds up the construction of wind farms for logistical reasons (there is no incentive to erect wind turbines if you cannot get the power to market), it is unlikely to prevent investment in renewables for financial reasons. The ERCOT Competitive Renewable Energy Zones Study found that the necessary investment in transmission for the high resource zones they identified in Texas ranged from a low of 1.5% to about 12% of the cost of the generation, which will only change the overall economics of any project in marginal cases. Some of these transmission improvements will also be likely to improve system reliability, and so the full cost is unlikely to be considered totally attributable to the wind projects.

As a less expensive but unavoidable investment for new renewable energy projects, transmission improvements are well positioned to be profitable investments in our energy infrastructure as the US shifts to more sustainable electrical supplies.

The FERC opens up Transmission

Politicians and regulators are beginning recognize the necessity of new transmission. This started with the Energy Policy Act of 1992 (EPAct), which opened access to the transmission grid to allow power to be delivered from one generator to another utility.  The Federal Energy Regulatory Commission (FERC) Order 888 laid out laid out the terms under which this was implemented. Order 888 fell short of providing the necessary incentives for investment in transmission and access for renewables, and in December of 2000, the FERC issued order 2000 and 2000-A which require transmission-owning companies under FERC's jurisdiction to file either proposals to form Regional Transmission Organizations (RTOs) or progress reports on the development of RTO proposals. RTOs will have sole responsibility for operation and expansion of the transmission system, maintaining short-term reliability, establishing and managing tariffs, and responding to requests for service.

The credible threat of RTOs in competitive bidding for projects acts as an incentive for utilities to stop delaying necessary investment in transmission, and make such investments quickly at the lowest possible costs.  This should benefit investors in the companies best able to build transmission efficiently and quickly.

Action at the State Level

My own Governor, Bill Ritter recently signed Colorado Senate Bill 100, which requires electric utilities subject to rate regulation to identify high-potential wind-energy locations by undertaking biennial reviews to designate “Energy Resource Zones��? where transmission constraints hinder the delivery of electricity. Texas passed a similar law in 2005, and, as a result, there are several competing proposals for transmission to bring wind power from Texas' remote, windy areas to where it is needed, such as the proposed "Panhandle Loop".

Transmission is not only necessary for large scale wind installation, it also goes a long way (pun intended) towards dealing with wind power's most oft-cited drawback: the wind seldom blows when you need it. Typically, the wind blows at night, and the overall capacity factor for most wind turbines is around 30%. But long distance transmission allows wind from different areas to be combined, allowing benefits similar to the diversification that we investment advisors are always pushing for our client's portfolios. The more wind farms that are built over a wider geographical location, the more reliable wind energy is, and it is transmission that ties it all together.

In the Great Plains, wind typically blows at night in the winter... but winter peak load in California is typically in the evening: due to the time difference, midwest winter wind is on-peak; a more robust transmission system will bring the power from where and when it is cheap to where and when it is needed. Minnesota has also passed enabling legislation to study and develop plans for transmission network enhancement to support Renewable Energy Standards.

In the United States, the grid is characterized by decades of under-investment, with the established operators having insufficient incentives to invest, and as a consequence, having until recently rested on their laurels, treating their existing transmission assets as a sinecure. Therefore, I expect the best investments to be those transmission owners who have shown the ability to upgrade their networks quickly and effectively, with the rest likely to lose out to upstart RTOs which will increasingly be able to win projects from incumbent utilities. There will also be a political aspect to these potential returns: states still have fairly broad authority to implement FERC rules, and the actions of state legislators in utilities commissions will undoubtedly have significant impacts on the decisions and profitability of building new transmission.

States which seem particularly supportive of new transmission include the perennial leader, California, along with New Mexico, and the states mentioned above. Ohio, Virginia and Washington are have long been leaders.

The Best Companies

I see three distinct ways to invest in the coming transmission building boom. We can invest in owners who have shown a willingness and ability to invest effectively in transmission; we can invest in the contractors who do the actual building of new transmission, or we can invest in suppliers of pieces of the transmission puzzle.

Among owners, the undisputed US leader is ITC Holdings Corp. (NYSE: ITC). ITC was created three years ago when DTE Energy decided to spin off their transmission assets (2600 miles of lines.) ITC CEO Joseph Welch has run the company since, and has since acquired the transmission properties of Michigan Electric (6800 miles), and is expected to close a deal for 6800 miles of lines from Intrastate Power and Light late this year. Welch recognizes that ITC's assets have suffered from over two decades of neglect, and expects to spend in excess of $1 billion in upgrades over the next 5 to six years. Given that transmission qualifies for a regulated rate of return, a high rate of investment is a good thing in a transmission organization.  ITC seems committed to acquiring more assets and upgrading what it has, which I believe will be good for investors.  It's current territory (in Michigan, Iowa, and Minnesota) also has lots of potential for wind development, which creates the need for even more transmission development. I'd love to see the acquire or develop assets in northern Illinois and Indiana to tie the system together and connect windy Iowa with power-hungry Chicago. The downside: ITC is up 50% since the Michigan Electric deal last summer. In situations like this, I usually sell put options to generate income if the stock does not pull back, or to pick the company up on the cheap if it does.

The company known for their ability to build new transmission rapidly and inexpensively is InfraSource Services (NYSE: IFS). It has recently agreed to be acquired by Quanta Services Inc. (NYSE: PWR) in an all-stock transaction. Given that both companies are up over 80% since last summer, and acquiring companies often have earnings hiccups as they struggle to integrate the acquisition, most investors would probably do well to wait for a pullback, and buy stock in the merged company after a disappointing earnings report or two.

Among suppliers, I like bulletin board traded Composite Technology Corp (OTC BB: CPTC), which is also up about 90% since last summer, but that is less worrying to me in a microcap company... that sort of volatility comes with the territory. CTC makes an Aluminum Conductor Composite Core cable which they claim can double the current carrying capacity of existing lines, or significantly lower costs for new lines. As a bonus for renewable energy investors, their DeWind subsidiary also manufactures support structures for wind turbines. They recently announced their first contract to supply turbines to XRG in Minnesota. A larger cable supplier is General Cable Corp (NYSE:BGC) which sells not only high voltage cable for electricity transmission as well as telecommunication applications. It has had a similar run-up in the stock price and trades at a rather high multiple for an industrial business.
[UPDATE: I said that DeWind "manufactures support structures for wind turbines." This is not strictly true, and it's a lot more complex than that... see comments.]

Conclusion

All in all, an investor looking to get into transmission today is confronted by rather high multiples for industrial businesses.  Given the good potential growth in the industry, these companies may not turn out to be overvalued, even at current prices, but I prefer to wait for a pull-back on most of them. For those concerned about missing a continued rise, I would advise putting in only a fraction of the amount you hope to invest now, and slowly buying more whenever one of the stock pulls back to a level you are more comfortable with (or using my naked puts strategy, if you understand the risks involved with options and can get sufficient options trading approval from your broker.)

DISCLOSURE: Tom Konrad and/or his clients have positions in the following stocks mentioned here: CPTC.OB.

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

Thanks to Lynn Greene for her help with the research for this article.

Posted by Tom Konrad at 07:35 PM | Permalink | Comments (4) | TrackBacks (0)