John Petersen

During the fourteen years that I've lived in Switzerland, the Germans have been the world's staunchest supporters of green power and alternative energy. Their aggressive development of wind power was breathtaking, as was their warm embrace of photovoltaic power. Over the last few weeks, however, there has been an ominous change in the mainstream German media's tone as the political class finally comes to grips with the unpleasant reality that rooftop solar panels are worthless on short, grey winter days and "For weeks now, the 1.1 million solar power systems in Germany have generated almost no electricity." Three recent and highly negative articles from Der Spiegel Online include:

• Solar Subsidy Sinkhole; Re-evaluating Germany's Blind Faith in the Sun;
• Solar Subsidy 'Insanity' Will Cost Consumers; and
• Solar Energy Row is an 'Undignified Spectacle'

As recently as last year, articles like these would have been unthinkable. Today they're viewed as reasonable discussions of critical issues as the laws of thermodynamics and economic gravity assert their absolute primacy.

The Germans have been trailblazers in all things green since the emergence of the Green Party in the 1980s. In fact, it's hard to name an alternative energy technology that Germany hasn't welcomed with open arms. When it comes to green power and alternative energy, the Germans have been on the far left of the technology adoption curve for a very long time.



If the tone of the recent Der Spiegel articles is a reasonable indicator of public sentiment, the innovators are getting ready to throw in the towel on green panacea solutions and get down to the serious work of conserving energy instead. They're weighing the costs and benefits, and reaching an entirely predictable conclusion that it's impossible to depend on variable and inherently unreliable power sources as the backbone of an industrial economy. As Germany goes, so goes the world.

If the world's standard-bearer for green power and alternative energy abandons the quest and chooses a more sensible path of conservation and energy efficiency, the backlash against the solar power industry will be immense and risks to the wind power industry will skyrocket. After all, it's hard to argue the merits of "One for the Price of Two" power solutions; which is exactly what you get when wind and solar power have to be fully backed up by conventional power plants. If the solar and wind power dominoes fall, they'll almost certainly take out the emerging electric vehicle industry that demands huge amounts of money and natural resources to simply substitute one fuel source for another.

Currently all eyes are on Germany as the epicenter of European efforts to restore fiscal balance in an age of profligate and unsustainable government spending. The apparent German surrender on green power and alternative energy may just be an unfortunate victim of that broader effort. Until the dark clouds dissipate and we have a clearer view of the landscape, I'd minimize my exposure to solar, wind and electric drive and focus instead on less costly energy efficiency technologies that work with the laws of thermodynamics and economic gravity instead of fighting them.

Disclosure: None

Posted by John Petersen at 08:41 AM | Permalink | Comments (5)

Tom Konrad CFA

One irony of green investing is that doing good (for the planet) does not always do well for investors.  Recently the rewards for do-gooders have been abysmal.  For years, I've been warning that the rapid price reductions we need to make solar mainstream are unlikely to be good for the profits of solar companies. 

This year a combination of subsidy cuts in Europe and photovoltaic (PV) module oversupply brought those price reductions home to roost.  Recently, PV manufactures have been scaling back expansion plans, which should help reign in module supply and the price cuts which are undermining solar manufacturer profitability.

The LED Industry

 

LED Headlamp. Photo by author

Light Emitting Diodes (LEDs) are widely assumed to be the lighting technology of the future.  LEDs have found their way into televisions and computer monitors, where they are much more energy efficient than the incumbent LCD and Plasma technologies.  As I discussed in my March article "Ten LED Stocks, and a Wildcard," LEDs are also just beginning to enter the consumer market as replacements for incandescent bulbs and Compact Fluorescent Lights (CFLs).  While LED based bulbs are still much more expensive than CFLs, they have generally superior performance in several ways: They turn on instantly, are fully dimmable, work well in the cold, and last much longer.  LEDs also don't come with any worries about the small amount of mercury contained in fluorescent bulbs (CFLs included.)

Although LEDs are potentially more than twice as efficient as CFLs (and ten times as efficient as conventional incandescents), my experience with replacement bulbs (I own a half dozen of various types) has been that they are only slightly more efficient per unit light output than comparable CFLs. 

LED chips currently produce 100-120 lumens per watt, and typical CFLs produce 60-70 lumens per watt.  But it's clear from the comparison chart from Phillips (PHG) below that the company's LED based bulbs produce only 48 lumens per watt.  That is likely why LED manufacturer comparison charts like the one below only reference incandescents, not CFLs.


The disappointing performance of LED screw-in bulbs is most likely because LED bulb replacements require normal household alternating current (AC) to be converted to direct current (DC), as well as to be kept cool.  These added complexities have so far prevented LED replacement bulbs from achieving their full potential efficiency. 

Dr. Roland Haitz (of the eponymous Haitz's Law-- the Moore's Law of the LED industry), quoted in a Cannacord Genuity research note, "views replacement bulbs as a bridge solution and believes that in 20-30 years there will be no more screw-in light
bulbs. He sees fixtures transitioning into more of an integrated solution."

Given the difficulties of adapting LEDs to a form-factor designed for incandescent bulbs, I'm inclined to agree that replacement bulbs will continue to struggle.  Instead, LEDs will continue to make headway in a growing number of lighting niche applications.  They already dominate flashlights and other battery powered lighting where their preference for DC current is an advantage rather than a disadvantage.  They also dominate in traffic signals, where their directional light and pure colors are an advantage.  Continued price reductions will allow them to dominate an increasing number of niches.

Like PV, LEDs have a lot of promise.  Yet like PV a couple years ago, they need to see significant price reductions in order to fully achieve that promise.  Those price reductions may cause nearly as much turmoil in the LED industry as we're currently seeing in the PV industry.

Perspectives

A dimmable LED downlight. Photo by author

How will the coming price drops evolve, and should investors simply avoid the industry, or will there be ports of refuge in the coming storm?  I asked three green money managers for their perspectives.

Rafael Coven, manager of the Cleantech Index which underlies the PowerShares Cleantech ETF (PZD), thinks prices for LEDs are likely to fall as fast if not faster than  solar PV due to the rapid commoditization of the product.  He thinks  that as prices fall, "LEDs will start to grab share from halogen lamps first and then decorative incandescent lamps.  Eventually LEDs will take share from compact fluorescent lamps where the need for dimming is high, but it will take much longer for LEDs to supplant CFLs because of CFLs longer lamp life/replacement cycle, and the diminished value proposition vs. replacing incandescent lamps with CFLs.  ... [A]nywhere where labor for lamp replacement is high will be excellent applications for LEDs as well."

But there are already niches where LEDs have the advantage at current prices.  Coven says, "I have already seen long-operating hour applications (e.g., Baltimore’s Mount Sinai Hospital) where LED lamps have already been effectively adapted to replace T8 fluorescent lamps with solid economic returns."

He thinks most current LED companies will not be able to survive as high volume/low cost producers, so he suggests looking for companies with strong intellectual property that can earn significant profits from licensing, or companies with superior technology which will allow them to charge higher prices.

Garvin Jabusch of Green Alpha Advisors and manager of the Sierra Club Green Alpha Portfolio, thinks that the PV and LED industries are similar in that they have "perceived oversupply issues," but also rapidly increasing demand.  He says, "The macro case for LEDs rests mainly with incandescent bulb sales being banned in the EU, US and China beginning as early as next year, and phasing to complete ban by 2016. This is significant: China alone consumes 1.07 billion incandescent bulbs per year. LEDs aren't the only alternative but they are the best one in terms of efficiency."

For ports in the storm, Jabusch points to "upstream play Aixtron AG (AIXG) which makes and sells the machines other firms use to make LEDs, and so provides a way to bet on the industry without selecting individual diode manufacturers. We also like Applied Materials (AMAT) whose LED operations include [high efficiency] LED applications for displays, LED manufacturing software designed to shorten production time, and several other tactical plays hitting multiple verticals and diverse uses. AMAT is also well diversified in other next economy sectors such as advanced materials and energy storage, so it's an all around good green economy bet."  Green Alpha Advisors and its clients are long both stocks.

Jeff Cianci, Chief Investment Officer at long-short equity fund Green Science Partners sees parallels between the two industries in that both need to drive down prices, but he also sees contrasts.  He says "solar needs to consolidate the number of players and LEDs need to consolidate the steps in the value chain for faster adoption."  Cianci thinks the winners will be those that can vertically integrate along the value chain, but they will only be relative winners.  He says, "Short term, I don’t see many places to hide."  Longer term, he expects the winners will be acquired by larger industrial technology companies." 

His picks for possible longer term winners are Cree Inc (CREE), or GT Advanced Technologies (GTAT).  While GT is a broad based, mostly upstream company like Jabusch's Aixtron pick, Cianci sees most of the value add in the industry downstream.  He thinks that attractive LED fixtures are likely to drive adoption of LEDs, not just price.

Cannacord Genuity.  As I was finishing this article, Rafael Coven forwarded me a research note from investment bank Cannacord Genuity.  Their LED Analysts believe that investors should avoid upstream names such as Aixtron AG (AIXG) and Veeco Instruments Inc. (VECO), while they have buys on downstream names Cree Inc (CREE), and Acuity Brands (AYI).  Their reasoning is that the industry will not need to greatly increase capacity (and hence not need to buy new equipment) even to achieve high penetration of the lighting market.  This is in large part due to the extremely long lifetimes of LEDs: the replacement market will be minimal.

Conclusion

These green money managers all agree about the coming difficulty for most LED companies... but there is little agreement about which companies, if any, will do well in the short term.   On balance, there seems to be a slight preference for downstream plays, but these stocks may just be the ones which suffer least.

Overall, I think it's currently safer to be an LED consumer than an LED stock investor.

DISCLOSURE: No Positions. 

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 12:43 PM | Permalink | Comments (0)

Tom Konrad CFA

Picking the best energy services stocks.

Fossil fuels are getting more expensive, but so are the industrial metals and other commodities used in the wind and solar farms with which we hope to replace them.   Meanwhile, government and personal budgets everywhere are under strain.  These economic imperatives make energy efficiency the one clean energy sector that may benefit despite rising denial about the existence of climate change among the US political elite and continued economic weakness.

Energy efficiency represents the sort of true win-win-win in that it saves money, reduces the use of scarce commodities and energy, spurs economic activity.  Like any spending, implementing efficiency measures gives the economy a one-off boost, but efficiency is unusual in that it continues to bring economic benefits going forward because it allows money that had formerly been spent on energy to be put to more productive economic use, even after the financing costs of the intial outlay are taken into account.

The Benefits of a Whole System Approach

The problem is that to get the most out of energy efficiency, energy users must go far beyond changing light bulbs.  Only by taking a whole system approach to energy use can all of the benefits of energy efficiency be captured.  For example, a homeowner might be interested in replacing an aging air conditioner or furnace with a more efficient model.  If they do so, they will save on energy bills and probably recoup their initial investment over a handful of years. 

An energy rater using thermal imaging. Photo by Tom Konrad

On the other hand, if the homeowner takes the time to assess the whole home's performance with the help of an energy rater, and improves the home's shell by plugging air leakage and improving insulation, the whole thermal load of the home will be reduced.  The measures to improve the home's shell will typically pay for themselves in a few months to a year or two, and the home will be more comfortable with fewer drafts and cold or warm spots.  More importantly, the reduced heating and cooling load will allow the homeowner to replace the heating and/or cooling system with a smaller and significantly less expensive lower capacity model.

Upgrading the furnace alone might have had a five year payback, while improving the home's shell alone might have had a payback of a year or two, but doing both together allows the furnace to be upgraded at no net cost because of downsizing, making the overall payback of the combined measures quicker than undertaking either measure alone.

Energy Service Providers

Just as the homeowner requires outside expertise to identify the most advantageous combination of energy savings measures, the same is true for larger entities like companies, schools, hospitals and government complexes. 

With this in mind, the companies that help other entities achieve energy savings seem to be well placed for growth even if the economy does not rebound and energy and materials cost stay high.  There are many firms operating in this sector, including energy utilities such as Constellation Energy (NYSE:CEG), equipment providers like Johnson Controls (NYSE:JCI), and Honeywell (NYSE:HON), and IT firms such as IBM (NYSE:IBM).

There are also a number of pure-play energy service providers, both niche players and firms offering comprehensive energy services.  To get a better understanding of the whole sector, I embarked on a series of interviews with the CEOs s of publicly traded, pure-play energy services companies, and published an article after each one.

The companies covered were:

• World Energy Solutions (NASD:XWES), which helps its clients purchase energy at the best possible price.
•  EnerNOC (NASD:ENOC) and
• Comverge (NASD:COMV), two companies which help clients manage energy demand in order to earn incentives from utilities, a service known as Demand Response (DR.)
• Ameresco (NASD:AMRC) and
• Lime Energy Co. (NASD:LIME), two companies which help clients improve energy efficiency and make the best use of renewable energy systems.
  

You can follow the link on each company's name to read the original article.  I learned a lot in the process, and have significantly changed my investments in the sector as a result of my research.  Going in, I owned the two DR companies Comverge and EnerNOC because the stocks looked cheap compared to their prices the previous year, and they seemed to be fairly well capitalized, while DR is one of the most cost effective ways to stabilize the electric grid.

The Commoditization of Demand Response

Unfortunately, the DR industry has become much more competitive in recent years.  Larger players like those mentioned above have been entering the space aggressively.  Electric utilities require significant customer deposits to guarantee the load reductions that DR firms contract with them to deliver.  This can strain the resources of  small firms like EnerNOC and especially Comverge, and so they have to retain a significant portion of the fee the utilities pay for DR in order to cover their costs.  In contrast, larger firms like Johnson Controls can pass on more of the fee because of their lower cost of capital, and firms like World Energy Solutions and Ameresco, which include Demand Response as part of a package of energy services, can also accept lower margins because DR is not their main profit center.

This competitive landscape along with lower-than-anticipated electricity demand because of the economic downturn, has led to rapidly falling prices for DR, and has undermined the profitability of EnerNOC and Comverge, as can be seen in the chart below.

While it is possible that EnerNOC and Comverge might be attractive acquisitions for a better capitalized company looking to move into Demand Response, such companies seem to prefer to build up their own DR business.  While both Ameresco and World Energy have been making significant acquisitions in the energy services space, both are focused on companies which they consider strategic fits, and neither is interested in pure-play DR.

Addressing Energy Systems

Because DR is a standarized service, the industry has been fairly open to new entrants, and this has contributed to its commoditization.  In contrast, Ameresco and Lime Energy take a systems approach to managing energy for their clients, much like what I outlined in the homeowner example above, except that they serve customers with demand in the megawatts, not the single digit kilowatt demand of a typical homeowner. 

Although it produces the greatest benefits, the systems approach is very knowledge and skill intensive, making it very difficult to commoditize.  These companies' businesses are very much about the skills of their people and the customer service they deliver. 

That does not mean there is no competition, especially among Energy Service Companies (ESCOs) such as Ameresco, where equipment providers like Honeywell (NYSE:HON) and Trane, as well as utilities are active.  While these are heavy weight competitors, Ameresco has a long track record of winning and delivering on large projects, and its independence from equipment manufacturers gives clients confidence that it will use the best equipment available for the job at hand.

The competitive picture is even better for Lime Energy, whose CEO John O'Rourke told me in our interview that competition has actually decreased in the insulation business in the Northeast.

Energy Sourcing

Lastly, World Energy Solutions helps customers find the lowest possible price on energy services using a unique electronic auction platform.  They may also include some green energy, energy efficiency services, and demand response.  World Energy has recently acquired several small companies in the energy efficiency space, but their core business is getting customers the cheapest possible power, something I do not see as particularly green, so I have not been following the company since I profiled it for this series.



Financial Strength

Because of their poor earnings prospect, the two Demand Response firms EnerNOC and Comverge are trading only slightly above book value, and I expect the stocks to continue to decline unless they are acquired by larger firms that can finance their operations at a lower cost of capital. 

Of the three others, the least risky is Ameresco.  The company is already profitable, and its apparently large debt load is in large part project debt which will be removed from Ameresco's balance sheet when the projects are completed and turned over to it.

World Energy would look like a safe bet because of its lack of debt and strong balance sheet, but the low earnings yield implies investors are betting on continued extremely rapid growth.  They may be right, but that's not the sort of bet I'd like to take in the current financial climate.

Lime's business is similar to Ameresco's, but since Lime does not take project debt onto its balance sheet, it's easy to see from the above chart that Lime can easily cover all its liabilities with current assets.  With Lime likely to become profitable in 2012 without the need to raise any additional outside funding, this company has the most potential upside, but only if management is able to deliver.

Conclusion

Of the five, I like both Ameresco (currently trading around $11) and Lime ($3.)  I acquired a significant stake in Ameresco when the stock was in the $9.50-$10.50 range, and I don't have plans to buy more unless the stock falls to $9.  I've been buying Lime near current prices, but given the unsettled state of the current market, I'm not in a rush to build up a large position.

While I currently don't like the prospects of EnerNOC and Comverge, the reason I'm staying away from World Energy is different: the company is not a green enough investment for my taste.  The company might be a great buy at current prices or it might not: I simply have not looked into it.

This article was first published on Forbes.com.

DISCLOSURE: Long AMRC LIME.

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

Posted by Tom Konrad at 10:42 AM | Permalink | Comments (0)

Tom Konrad CFA

The high upfront cost of efficient buildings (and efficiency in general) is more than offset by the significant long term rewards, as you can see from the McKinsey chart below.

Despite the long term benefits, the upfront cost is often a barrier, especially to government entities in today's tight budgetary environment.

Performance contracting offers them a way to square the circle between the long term budget benefits of efficient buildings and the often significant capital cost. This works by funding the capital improvement with debt secured by future energy savings. An Energy Service Company (ESCO) guarantees a certain level of energy savings and performance (hence the term Performance Contracting.)

Yet performance contracting comes at a cost.  No ESCO puts its balance sheet behind a promise of energy savings solely out of a desire to green the economy.  That ESCO has a cost of funds just like everyone else, and in the case of a performance contract, this cost of funds is built into the contract price.  Entities which understand what needs to be done and can borrow at reasonable interest rates or have cash can wring greater savings out of energy efficiency services by avoiding performance contracts.

ESCO Business

That's where Lime Energy Co (NASD:LIME) comes in.  Lime (a name derived from "Less Is More Efficient") has been providing energy efficiency services for 20 years, both directly to clients and also as a subcontractor to ESCOs. Lime does not have the balance sheet to guarantee performance contracts itself, but it does have significant expertise in delivering the energy efficiency services that make performance contracts work.

In a recent interview, Lime CEO John O'Rourke told me that his current ESCO clients include Johnson Controls (NYSE:JCI), Honeywell (NYSE:HON), Constellation Energy(NYSE:CEG), Clark Energy, and PEPCO (NYSE:POM).  According to O'Rourke, Ameresco (NYSE: AMRC), the publicly traded pure-play ESCO firm that was profiled in the most recent part of this series, "would probably never use us," because of overlap in certain in-house capabilities and (I suspect) a bit of inter-company rivalry.

In its 20 years of business, Lime has worked with many ESCOs and directly with public sector or institutional customers which do not need performance contracts.  One such example is the United States Postal Service (USPS), which issued competitive solicitations for multiple regions where the USPS financed the work directly instead of a traditional performance contract. Lime was awarded several of these IDIQ contracts with achieved savings in excess of 30 million kWh per year.

While the ESCO business is becoming more competitive, the business of actually delivering energy efficiency has become somewhat less competitive. In Lime's core Northeastern market, several energy efficiency contractors have recently gone out of business or shrunk their operations significantly. These businesses were unable to weather the trough that the ESPC industry experienced over the last three years. Lime survived by re-directing their focus to other areas, and found growth opportunities in the private sector.

Utility Business

Lime has carved out a niche for itself managing Demand Side Management (DSM) programs for utilities.  This is the fastest growing part of Lime's business, which O'Rourke expects to reach about 40% of revenues in 2011.  Part of the reason for the rapid growth is likely Lime's track record, in which the company has "blown savings goals out of the water" over the last three years. 

Utility DSM targets tend to be conservative, since the utility itself usually plays a very large role in setting the regulatory process, and utilities have a vested interest in setting targets low to keep them easily achievable, so Lime's track record may not be as impressive as O'Rourke makes it sound. On the other hand, targets for delivered savings have increased dramatically over the last few years, and utilities face penalties for failure to meet these goals.

The urgency and market opportunity vary widely between utilities and state regulators, but according to O'Rourke, utility spending on DSM programs is increasing consistently by over 20% per year, and he's not exaggerating. I checked O'Rourke's numbers with Howard Geller, the Executive Director of the Southwest Energy Efficiency Project, and he told me that “Based on data collected by the Consortium for Energy Efficiency, utility spending on programs that help their customers save electricity and natural gas has been increasing by more than 25% per year in recent years.”

In addition to this rapid growth, the utility business brings two main benefits to Lime.  First, it is a source of earnings stability, since contracts tend to be multi-year and not seasonal like much of Lime's energy efficiency business. (The energy efficiency business is back-loaded towards the end of the year when many commercial and industrial (C&I) clients decide if they should go forward with energy efficiency projects depending on budget constraints.) The second benefit of the utility business is as a way to reach new C&I clients. Lime may initially contact a C&I client as part of a DSM program, but then go on to provide energy efficiency measures for the client beyond those in the utility program.

Current utility clients include the Long Island Power Authority and National Grid (NYSE:NGG), but O'Rourke hopes to win additional contracts this year.

LEAD

Finally, Lime has recently introduced a new division (called Lime Energy Asset Development, or LEAD) to develop its own energy projects in-house. These projects involve the development, design and construction of larger alternative energy projects where the clients purchase the energy produced, rather than the asset itself. These larger projects will be limited by Lime's ability to finance them, but doing project development in-house should allow Lime to maintain strong margins on the projects, and Lime need only undertake them when it will not put undue pressure on Lime's balance sheet.

Financial Metrics

Lime is not yet profitable, but O'Rourke says the company has enough capital to grow 30% for the next two years and achieve profitability in 2012 without raising additional capital “anytime soon.” Analyst consensus earnings are for a loss of 8 cents a share this year, and a profit of 21 cents next. The company has $6 million in net cash on the books, no net debt, and a free cash flow of negative $9 million over the last 12 months. Since the third and fourth quarters tend to be the most profitable, cash should increase over the next two quarters, and so O'Rourke is probably right that current assets and credit lines should be sufficient to bring Lime to consistent profitability.

With the stock currently trading at $3, and expected earnings of $0.21 next year, Lime seems quite reasonably valued for a company growing at 30% a year. However, given the current climate of uncertainty, the back-loaded C&I business may turn out to be a little disappointing this year, and possible earnings misses caused by C&I clients deferring energy efficiency projects in order to conserve cash may lead to a somewhat lower stock price in the next few months. The C&I business has been falling as a percentage of revenue, so any such earnings misses are unlikely to be dramatic, but investors are taking any excuse to sell alternative energy stocks in the current climate.

Conclusion

I like Lime's business, and think the company is fundamentally strong, and the valuation is quite conservative. However, I expect the current stock market rally to be short-lived. A renewed market decline, along with a possible earnings miss caused by C&I clients hoarding cash in the climate of uncertainty could easily lead to a lower stock price in the coming months. I'll be watching the stock closely and buying cautiously if either of these comes to pass.

DISCLOSURE: Long AMRC. No position in LIME, but I may initiate one at any time.

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

Posted by Tom Konrad at 11:02 AM | Permalink | Comments (4)

Tom Konrad CFA

It's no secret that the housing market is in the doldrums.  New housing starts in August fell to an annual rate of 571,000, and fewer homes were under construction since record keeping began in 1970.  This has taken a toll on energy efficiency stocks in the housing sector, leading to some very attractive pricing in two of my favorites.

Waterfurnace Renewable Energy (WFI.TO / WFIFF.PK)

I've long been fan of Waterfurnace, an Indiana-based manufacturer of ground source and water-source heat pumps.  A note from a reader Wednesday prompted me to poll my list of green money managers to see what they thought about the stock when it was trading at $17.50, since I could see little reason for the decline beyond the general cleantech sell-off and Waterfurnace's low liquidity.  I'm glad I did, as the company promptly fell another $2 on Thursday.



While heat pumps have traditionally mostly been used in new construction, the company has done a "very good job shifting to the replacement market," according to Brad Tirpak of Locke Partners.  Tirpak sees Waterfurnace as a high yield stock with a "free call option on housing," meaning that if housing does recover, we can expect to see significant price appreciation.  

Waterfurnace has also been cushioned from the housing downturn by its "deals to provide systems to the military and other larger entities, partially through its partnership with Johnson Controls (JCI)," according to Garvin Jabusch, chief investment officer at Green Alpha® Advisors. He also likes the company's international distribution and the vertical integration of its systems and controls.

There are downsides for this company though.  Rafael Coven, the manager of the Cleantech Index which includes Waterfurnace as a component (about 0.55% of the index), sees problems in the highly competitive nature of the industry, the stocks poor liquidity, the prospect of reduced subsidies for energy efficiency, and narrow geographic scope (Waterfurnace sells almost exclusively in the US and Canada.)  Coven thinks the company "would be a much better fit inside a bigger HVAC or water heating manufacturer, such as Electrolux, or AO Smith."

All that said, I was buying aggressively on Thursday because of the over 5% dividend which is still covered by earnings and cash flow despite the horrible housing market.  While a cut in Federal subsidies for energy efficiency would certainly hurt the stock, energy efficiency subsidies tend to gain much more bipartisan support than renewable energy subsidies because conservative arguments that renewable energy is too expensive simply do not apply to energy efficiency measures such as ground source heat pumps.

PFB Corporation (PFB.TO/ PFBOF.PK)

If anything, PFB Corporation is even more closely tied to the North American housing market than Waterfurnace.  The vertically-integrated manufacturer of insulating building products such as Structural Insulated Panels (SIPs) and Insulating Concrete Forms (ICFs) sells mostly to the green building market in the US and Canada.  I profiled the company in detail here. The downturn has cut PFB's revenues, with Sales having dropped from a peak of $83 million in 2007 to $66 million in 2009 and 2010.  Despite this drop, PFB has managed to remain profitable with enough income and cash flow to support the C$0.06 quarterly dividend, which makes for a dividend yield of just under 5%.



Part of PFB's resilience has been its presence in the green building and high end sector of the housing market, both of which have been relatively robust during the downturn.  The company's large presence in Canada has also helped, as Canada's housing market has borne up better than that in the US. 

Earlier this year, PFB used their strong financial position to expand its market share by acquiring Idaho-based Precision Craft Homes, positioning the combined firm for rapid growth when the housing market eventually picks up.

In addition to the dividend, PFB  has an ongoing share buyback program funded with the company's cash from operations.  In the first six months of 2011, the company purchased 7250 shares for an average price of $6.07.  While these purchases remain small, they have increased in the third quarter, most likely in response to the fall in the company's share price to well below book value of $6.37.  The company's purchases of stock should help provide a floor for the share price near current levels.
 

Data From Yahoo! Finance, Waterfurnace & PFB Corp financial statements

Key Statistics	Waterfurnace	PFB Corp
Share Price	$15.62	$5.15
Dividend per share	$0.88	$0.24
Trailing 12 month EPS	$1.16	$0.29
Operating Cash Flow/share	$1.09	$0.40
Free Cash Flow/share	$0.96	$0.28
Book/share	$3.08	$6.37
Debt/Equity	24%	22%

Conclusion

I find both of these stock to be extremely attractive at current prices, given the large dividend streams, low debt, and the potential for significant gains when the housing market eventually begins to recover.  That said, both stocks are very illiquid.  This liquidity probably contributed significantly to the current buying opportunities, but it also means that buyers should be cautious about bidding, and stick to limit orders to ensure that they get the prices they expect.

DISCLOSURE: Long WFIFF, PFBOF.

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

Posted by Tom Konrad at 12:50 PM | Permalink | Comments (9)

Tom Konrad CFA

Contrary to common belief, the greatest barrier to the adoption of clean energy is not the cost.  In many cases, cost is not a barrier at all: it's an advantage.  That's because energy efficiency measures are usually so cost-effective that they not only pay for themselves, they can often pay for the addition of flashier clean energy technologies such as solar and wind.

For institutions in the Federal and MUSH (Municipalities, Universities, Schools, and Hospitals) sectors, the main barriers are lack of capital and expertise.  Lack of capital arises because such institutions traditionally consider energy to be an operating expense, not a capital expense, while clean energy projects usually require an initial capital expenditure in return for ongoing energy savings.  Lack of expertise arises simply because finding the best energy solutions is far from simple.  Although there are many simple measures that an interested amateur can take, the greatest savings come from considering buildings and other facilities as integrated systems, not as collections of isolated measures.

Energy Service Companies

Ameresco, Inc. (NYSE:AMRC) was founded in 2000 as an independent, one-stop shop to help Federal and MUSH institutions overcome these barriers.  Last week, I interviewed Ameresco President and CEO George Sakellaris as part of my series of articles on energy service stocks.  Sakellaris pioneered this Energy Service Company (ESCO) model while working for New England Electric System to help industrial customers reduce their power usage in 1979.  Before founding Ameresco, he founded another leading ESCO, Noresco in 1989, which is currently owned by Carrier, a division of United Technologies (NYSE:UTX).

I first became interested in the ESCO model (also known as performance contracting) in 2007, when I heard about it as part of a Western Governor's Association Workshop on Efficient Buildings.  Then, as now, most ESCOs are arms of larger technology companies, like Noresco mentioned above, or are part of energy companies and utilities.  Other publicly traded companies with ESCO arms include AECOM (NYSE:ACM), Honeywell (NYSE:HON), Chevron (NYSE:CVX), Consolidated Edison (NYSE:ED), Constellation (NYSE:CEG), Eaton (NYSE:ETN), NextEra (NYSE:NEE), Johnson Controls(NYSE:JCI), Schneider Electric (Paris:SU.PA/SBGSF.PK), and Ingersoll-Rand (NYSE:IR).

In contrast, Ameresco is independent of any equipment manufacturer or energy company, leaving them technology-agnostic and able to approach the solution from the customer's perspective.  This independence, along with previous customer satisfaction and Ameresco's wide expertise allows the company to win bids such as the $795 million contract to build biomass cogeneration and heating facilities at the Department of Energy's Savannah River Site in South Carolina over the course of 19 years.  According to Sakellaris, Ameresco won this contract (the largest renewable energy performance contract so far in the United States) without being the lowest cost bidder because of their expertise and independence.   He also says Ameresco can compete on price because of low overhead.

Financial Results

The combination of a strong brand and expertise along with low overhead have contributed to strong results.  Annual revenue has grown steadily from $278 million in 2006 to $618 million in 2010, with second quarter revenue up 17% on a year earlier, matching the last five year's compound annual growth rate (CAGR).  Over the same period, earnings per share have risen at a 21% CAGR.  At the current stock price of $10.34, AMRC has a trailing P/E ratio of 14.35, which is modest considering the consensus 20% long term expected growth rate.

Ameresco also has good liquidity, with a current ratio over two.  I would normally consider its Debt to Equity ratio of 1.3 a problem, but much of this debt is project debt which will be transferred to project lenders upon project completion and acceptance by the Federal government.  If this project-related debt is removed from the calculation, the Debt to Equity ratio falls to a quite conservative 0.37.

Although multiple analysts reduced their price targets for Ameresco after the last conference call, the reason they gave was not any deterioration of Ameresco's business, but rather a decline in price of most companies in the sector, meaning that most investors are no longer willing to pay as much for a dollar of earnings or revenue than they were just a few months ago. 

Growth Strategy

Sakellaris told me that he plans to grow using only internal resources without taking on any more debt or issuing additional equity.  Ameresco has and will continue to grow both organically and by acquisition using funds provided by operations. 

In general, it makes sense to be wary of growth by acquisition in public companies, since it often leads to a lack of focus and can distract management from the core business.  That seems not to be the case for Ameresco, which takes a very strategic approach to acquisitions, and only acquires firms that either can expand the range of expertise the company can offer to clients, or allow the company to enter new geographic markets, such as their recent purchase of Applied Energy Group, which allowed them to expand their offering to utility customers.

One type of company Sakellaris says they will never acquire is equipment manufacturing firms, in order to maintain the advantage of being an independent integrator of technologies from all suppliers.  Nor is he interested in buying Demand Response (DR) providers such as Comverge (NASD: COMV) and Enernoc (NASD: ENOC), both of which were previously covered in this series, and whose stocks have fallen enough to look like attractive acquisition targets.  Although Ameresco does provide DR as part of their offerings, it's not a driver for their business.  He sees a "conflict between energy efficiency and demand response" because properly implemented energy efficiency measures reduce the scope for DR.  As he puts it, "More effective air conditioning is better than cycling air conditioning."  To be able to cycle an air conditioner off during peak times without significant thermal storage, the unit will have to be over-sized for its purpose in order to bring the building back to the expected level after the demand event is over, and over-sized units cool less efficiently.

When the company has cash but lacks acquisition targets that meet these criteria, they invest it in renewable energy projects, such as landfill gas, where they extract landfill gas, clean it, and deliver it to local customers for heat and electricity generation.  These projects typically pay back the invested equity in three or four years.

Governmental entities accounted for about 86% of Ameresco's revenues in 2009 and 2010.  Sakellaris is confident that the whole ESCO industry has only penetrated about 20% of the opportunity in the sector, citing a McKinsey study which estimated the potential of this market at $520 billion of performance contracts by 2020, and the market continues to expand as new technology leads to new energy saving opportunities.  The ESCO industry is doing only about six to seven billion dollars worth of contracts a year, leaving plenty of room for growth. 

Company Structure

One worry I had about the company was the company's governance.  Sakellaris completely controls the company through his ownership of all of the company's class B shares, which have privileged voting rights, as well as through his posts as President, CEO, and Chairman of the board.  Purchasers of this stock are buying into Sakellaris' vision for the company.  While the board has an independent nominating committee, which Sakellaris is not on, and he says he obeys the directions of the board and would not block a candidate put forward by the nominating committee, shareholders are essentially putting faith in his self-restraint.

I came away from my conversation with Sakellaris feeling that he is a dedicated entrepreneur who wants nothing more than to make his company an extremely "successful and sustainable enterprise", and that he was being honest when he told me that he kept voting control of the company when he took it public last year in order to be able to negotiate the best possible price in case the company is sold. 

But the company will not be lost without him.  Although he is 65, he is still healthy, but that has not stopped him from making sure the board has an adequate succession plan.  While Ameresco has grown through acquisition, it held on to the leaders of many of the acquired companies, several of whom now run Ameresco's divisions, and four of whom Sakellaris believes would be able to run Ameresco in his absence.  Their continued presence at Ameresco does a lot to ease my worries not only about succession issues, but also gives me some assurance that Sakellaris is a good leader, since such capable people would not have stayed if he were a tyrant.

Conclusion

Ameresco seems to be a well run and sustainable company.  In the short term, the ESCO business may be hurt by government spending cuts, but in the long term, budget pressure will make Ameresco's services all the more necessary.  The ESCO business model is also helped by current low interest rates, because the lower the interest rate, the more energy efficiency and renewable energy measures become economic, and the more business Ameresco can do for a single client. 

Although Ameresco is not nearly as cheap in terms of assets as some of the other energy services firms covered in this series, it is more profitable, and a decent value given its earnings and growth prospects.  I recently bought shares in the low $10 range, and will be looking to acquire more if the broad market implosion makes this current good value an absolute bargain.

Thanks to Rafael Coven of the Cleantech Index, Jeff Cianci of Green Science Partners, and Garvin Jabusch of Green Alpha Advisors, for contributing to my research for this article.

DISCLOSURE: Long AMRC, COMV, ENOC.

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

Posted by Tom Konrad at 03:40 AM | Permalink | Comments (0)

John Petersen

Last week Societe Generale published a thematic research report titled "A new world order, when demand overtakes supply" which examines the macro-economic and demographic trends that will transform the global economy over the next 20 years. It mirrored the theme of Jeremy Grantham's April 2011 quarterly letter titled "Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever" and did a great job of summarizing an issue I touched on in "How PHEVs and EVs Will Sabotage America's Drive For Energy Independence."

In the words of Societe Generale:

"So, while up until now less than one billion people have accounted for three-quarters of global consumption, over the course of the next two decades, the new Chinese, Indian, Indonesian, Latin American and African middle classes will bring an additional two billion consumers with similar needs and aspirations as today's North American, European and Japanese consumers." (Page 12)

"Beyond growth in demand for finished products, the most spectacular effect likely to be brought about by the stronger development of the emerging economies will be the enormous rise in demand for raw materials." (Page 14)

"A structural increase in raw materials prices is in fact an inevitable consequence of chronic resource insufficiencies, whether we're talking about industrial, energy or agricultural resources." (Page 19)

The following table from Mr. Grantham's quarterly letter summarizes China's current consumption of key energy, industrial and agricultural commodities as a percentage of total global consumption and drives the point home with the subtle clarity of a sledge-hammer.



If we've seen this kind of demand dislocation as a result of a few decades of growth in China, what's going to happen when the surging middle class populations of India, Indonesia, Latin America and Africa decide to show up for the dinner party? The answer, of course, is that we'll be thoroughly screwed unless we stop wasting time, money and materials on pipe dreams, toys and panacea solutions, and focus instead on finding relevant scale solutions to persistent global shortages of water, energy, food and every commodity you can imagine. We all face a clear, present and persistent danger that can’t even be addressed until we accept the entire ugly reality with all its vulgar implications!

One of the most disturbing conclusions in the Societe Generale report is that while per capita energy demand in advanced economies will remain stable at 5,463 kg of oil equivalent, or maybe even decline to 5,000 kg per person by 2030, global average demand will increase from current levels of 1,818 kg per person to 3,312 kg per person in the low case and 4,228 kg per person in the high case. All of the increased demand will come from emerging and developing economies.

Our fundamental problem is that per capita global production of energy resources is 100 to 200 times greater than per capita global production of the technology metals that underlie all alternative energy schemes. To make things worse, all of those metal resources have critical competing uses that cannot be set aside or ignored in the name of advocacy. At a recent grid-based energy storage conference in Brussels I used the following table to emphasize the point. The orange highlight quantifies available energy resources while the green highlight quantifies technology metal resources.



The mathematically challenged optimists in our midst earnestly believe we can solve our energy problems with cool toys like wind turbines, solar panels, electric cars and other materials intensive energy schemes that fire the imagination but can never be sustainable. These aren’t solutions! They’re the energy and transportation equivalent of graphic novels and just a half-step removed from warp drive. In the final analysis, the dreamers who want to waste metals and other natural resources in the name of conserving coal, oil and natural gas are not saviors. They're unwitting saboteurs who can only make the problems worse!

Whether we like it or not, the only technology that has a prayer of generating enough new energy to satisfy even a small fraction of anticipated global demand is nuclear, a point that was forcibly driven home by Bill Gates in a recent interview at the WIRED Business Conference 2011. The naive idea that we can cut hydrocarbon consumption for the laudable goal of saving the planet is sophistry. Given a choice between freezing in the dark and burning hydrocarbons human beings will always choose the later because immediate personal need will always trump long term societal goals, especially fuzzy green goals.

I'm an unrelenting critic of obscene raw materials users like Tesla Motors (TSLA), A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) that want to build a future out of making toys for our emerging eco-royalty because I've read about the French Revolution and remember how 'Madame Le Guillotine' put a uniquely sharp edge on popular discontent over conspicuous consumption. These business models are doomed to fail because they're diametrically opposed the needs of society.

The only alternative energy investments that stand a chance of survival, much less profitability, are basic efficiency technologies that slash waste and deliver real savings for every ounce of natural resource inputs. Nuclear power, idle elimination, fuel efficiency, demand response, building efficiency, ebikes, recycling and a host of other technologies that do more with less are the only possible future. Wind turbines, solar panels, electric cars and all of the other feel-good graphic novel schemes are merely pleasant distractions, a bit like Nero's fiddle.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock because Axion's disruptive third generation lead-acid-carbon battery technology uses 30% less lead to deliver impressive gains in power, cycle-life, charge acceptance and overall real world utility.

Posted by John Petersen at 04:20 AM | Permalink | Comments (8)

Tom Konrad CFA

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

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

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

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

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

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

Data Driven Energy Efficiency

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

The World Scene

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

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

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

Leading Vendor

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

Conclusion

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

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

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

John Petersen

In 2009, the world produced some 13.2 billion metric tons of hydrocarbons, or about 4,200 pounds for every man, woman and child on the planet. Burning those hydrocarbons poured roughly 31.3 billion metric tons of CO2 into our atmosphere. The basic premise of alternative energy is that widespread deployments of wind turbines, solar panels and electric vehicles will slash hydrocarbon consumption, reduce CO2 emissions and give us a cleaner, greener and healthier planet. That premise, however, is fatally flawed because our planet cannot produce enough non-ferrous industrial metals to make a meaningful difference and the prices of those metals are even more volatile than the prices of the hydrocarbons that alternative energy hopes to supplant.

The ugly but undeniable reality is that aggregate global production of non-ferrous industrial metals including aluminum, chromium, copper, zinc, manganese, nickel, lead and a host of lesser metals is about 35 pounds for every man, woman and child on the planet. All of those metals are already being used to provide the basic necessities and minor luxuries of modern life. There are no significant unused supplies of industrial metals that can be used for large-scale energy substitution. Even if there were, the following graph that compares the Dow Jones UBS Industrial Metals Index (^DJUBSIN) with the Amex Oil Index (^XOI) shows that industrial metal prices are more volatile and climbing faster than hydrocarbon prices, which means that most alternative energy schemes are like jumping out of the frying pan and into the fire.



For all their alleged virtues and perceived benefits, most alternative energy technologies are prodigious consumers of industrial metals. The suggestion that humanity can find enough slop in 35 pounds of per capita industrial metals production to make a meaningful dent in 4,200 pounds of per capita hydrocarbon production is absurd beyond reckoning. It just can't happen at a relevant scale.

I'm a relentless critic of vehicle electrification schemes like Tesla Motors (TSLA) because they're the most egregious offenders and doomed to fail when EV hype goes careening off the industrial metals cliff at 120 mph. Let's get real here. Tesla carries a market capitalization of $2.8 billion and has a net worth of less than $400 million, so its stock price is 86% air – a bubble in search of a pin. Tesla plans to become a global leader in the development of new electric drive technologies that will use immense amounts of industrial metals to conserve irrelevant amounts of hydrocarbons. Even if Tesla achieves its lofty technological goals it must fail as a business. Investors who chase the EV dream without considering the natural resource realities are doomed to suffer immense losses. Tesla can't possibly succeed. Its fair market value is zero. The stock is a perfect short.

I won't even get into the sophistry of wind turbines and solar panels.

Next on my list of investment catastrophes in the making are the lithium-ion battery developers like A123 Systems (AONE), Ener1 (HEV), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI) that plan to use prodigious quantities of industrial metals as fuel tank substitutes, or worse yet for grid-connected systems that will smooth the power output from inherently variable wind and solar power facilities that also use prodigious quantities of industrial metals as hydrocarbon substitutes. Talk about compounding the foolishness.

I can only identify one emerging battery technology that has a significant potential to reduce hydrocarbon consumption and industrial metal consumption at the same time while offering better performance. That technology is the PbC® Battery from Axion Power International (AXPW.OB), a third generation lead-acid-carbon battery that uses 30% less industrial metals to deliver all of the performance and five to ten times the cycle life. There may be other examples, but I'll have to rely on my readers to identify them.

Humanity cannot reduce its consumption of hydrocarbons by increasing its consumption of industrial metals. The only way to reduce hydrocarbon consumption is to use less and waste less.  There are a world of sensible and economic fuel efficiency technologies that can help us achieve the frequently conflicting long-term goals of reduced hydrocarbon consumption and increased industrial metals sustainability. They include but are not limited to:

• Better buiding design and insulation;
• Smarter power management systems;
  
• Telecommuting;
• Denser cities with shorter commutes;
• Smart transportation management to reduce congestion;
• Buses and carpooling;
• Bicycles and ebikes;
• Shifting freight to rail from trucks;
• Smaller vehicles that use lightweight composites to replace industrial metals;
  
• Deploying solar and wind with battery backup for remote power and in developing countries;
  
• Shipping efficiency technologies, such as better hull coatings, slow steaming, etc.; and
• Recycling, recycling and recycling
  

My colleague Tom Konrad wrote a 28 part series on "The Best Peak Oil Investments." While I'm skeptical about the future of biofuels after suffering major losses in the biodiesel business, Tom's work provides an exhaustive overview of the energy efficiency space and a wide variety of investment ideas that have the potential to make a real difference. Since we can't simply take a couple of giant leaps into the future, we'll just have to get out of our current mess the same way we got into it – one step at a time.

We live in a cruel world. There is no fairy godmother that can miraculously accommodate the substitution of scarce industrial metals for hydrocarbons that are a hundred times more plentiful. We can and we must do better, but we can't solve humanity's problems until we accept the harsh realities of global resource constraints without the filters of political ideology and wishful thinking.

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

Posted by John Petersen at 09:28 AM | Permalink | Comments (26)

Chris Williams

In the previous post on understanding the geothermal heat pump industry, we addressed (1) what’s driving the growth in the GHP industry, (2) the advantages of GHPs and (3) what market segments are adopting the technology the fastest. In this article we will continue the discussion and address: 

4. The bottleneck’s to GHP continued and faster growth
5. Possible Investment targets within GHP
6. The 2 best opportunities for investment in public equities.

4. Bottlenecks: There are two major things holding back the GHP industry.

1. Technical knowledge. IGSHPA, The International Ground Source Heat Pump Association, has created a training certification to help spread the knowledge. HeatSpring Learning Institute, along with a number of other private and public education providers, is using the IGSHPA certification to build the base of industry professionals who can install geothermal.
2. Financing. Similar to the solar industry, the large amount of money upfront needed to install geothermal has impeded growth. Until the industry can figure out the financing, like the solar industry has with the PPA, growth will not be rapid. LVestus is a New Hampshire based company that is now offering a TPA, a thermal purchase agreement, and is addressing the financing issue.

If these two items are addressed, the growth of the GHP industry will be much faster than the 30% it has been for the last couple years.

5. How can you invest in this growth? Where is the opportunity in the GHP Industry?

In the solar industry, although it’s very volatile, it’s very easy to find a place to invest. There are a number of large, publicly traded manufactures that are pure plays FSLR, TSL, STP, just to name a few. There’s also a wide range of ETFs, or Exchange-Traded Funds.

The GHP industry is showing strong growth, it’s a sizable market, it’s based on solid technology, and demand will only increase over the next 30 years as our nation invests in upgrading our building infrastructure

With that said, let’s take a look at the products and services provided in every geothermal installation to see where the opportunities exist for investment.

Products and Services

• Heat Pumps - HVAC condensing/evaporate units
• Ducting Installation - Sheet metal and duct seal to deliver hot/cool air to the conditioned space from the heat pump
• Grout - Cement or bentonite based compounds used in the installation of the ground loop
• Pump Package - Standard pumps reconfigured for geothermal use to move water from the ground loop to the heat pump
• Ground Loop - Simple high-density polyethylene (HPDE) plastic installed in th ground to extract or deposit BTUs from or to the heat pump
• Design Software - Used for design of all sizes of systems
• Drill Rig – Required for drilling and installing vertical ground loops
  

Other than the heat pumps, the rest of the products are nearly impossible to invest in because they are:
1. Very small companies that are not large enough to become public. This pertains to most design and installation firms as well as software companies. Loop Link Geothermal design software is a great example of this--they have great software used by many in the industry to design residential and light commercial systems, but it’s a niche play so the company remains small.
2. Commodity products. It is difficult to distinguish a commodity product’s use in geothermal applications versus other applications. For example, ducting and pump packages are used for hundreds of other HVAC applications, and it’s impossible to find a company that just sells “geothermal” ducting or pump packages--they do not exist.
 
6. The only opportunity to invest in GHP is in the heat pumps themselves.

Here is a review of the top heat pump manufacturers in the USA

• Carrier Corporation/Bryant - GHP a small part of HVAC business and Carrier is a subsidiary of United Technologies Corporation (UTX)
• ClimateMaster  - A subsidiary of LSB Industries (LXU), a chemical company.
• DEVI Electroheat Ltd. E - Member of the Danfos group, a Danish pump company.
• Eagle Mountain - Private manufacturing company based in New York .
• ECONAR Geosystems LLC - Part of Geosystems, which is a subsidiary of Research Products Corporation, a private company
• Energycore - A private Australian company
• Florida Heat Pump  - Subsidiary of Bosch, a huge but private German corporation
• Heat Controller  - A subsidiary of Century heat pumps, a private company
• Northern Heat Pump, Inc. - A subsidiary of Electro Industries, a private company
• Ochsner Heat Pumps Ltd.  - A private company based in Ireland
• WaterFurnace International, Inc. - (WFI in Toronto, or WFIFF on the pink sheets) - The only pure play GHP stock.

After a review of GHP manufacturers, there are only three that are public and accessible. UTX and LXU are both large corporations where GHP probably represents less than 10% of yearly revenue. While UTX’s main business units are comprised of defense and aerospace, a minority interest is in the building industry through Carrier, where it has a stake in GHP manufacturing. LXU is less diversified than UTX and has two main business units--climate control and chemicals. The climate control group designs and manufactures a range of HVAC products including ground source heat pumps. WFI is the only pure play on the GHP industry.

Here’s a review of some basic metrics as of June 8th, 2011.

Ticker	Revenue	Stock Price	ROE	Beta	Dividend	Market Cap
UTX	54B	83.24 USD	18.66%	1.01	1.70	76B
LXU	609M	43.71 USD	41.5%	1.54	0	967M
WFI.TO	135M	22.69 CAD	67%	-	.83	27

In the end, I’d suggest that LXU and WFI are the only access routes to the GHP industry in public equities. Both ClimateMaster (LXU) and WaterFurance (WFI) are respected manufacturers within the industry and provide quality products.

After completing the analysis and looking at direct access to the GHP industry, I was surprised how decentralized the industry is for every product within the supply chain. Based on the number of products that go into every GHP installation, I would have thought it would be easier to invest in the industry. However, if you use Porter’s five forces analysis it becomes clear why the GHP industry is structure is so different from solar.  The GHP industry as a whole is highly competitive, very price sensitive, and built around commodities instead of proprietary technology or manufacturing techniques like we see in the solar industry.

If you’re really interested in taking advantage of the GHP industry, WFI and LXU seem to be your best options. While UTX is also possible, it’s much more of a defense/aerospace play than a GHP investment.

Chris Williams is an IGSHPA certified geothermal installed and  works with HeatSpring Learning Institute delivering world-class IGSHPA Geothermal Training, NABCEP Solar Training, and BPI Certification training to professionals who are installing, designing or selling renewable energy systems. Sign up for their newsletter here. Chris can be reached directly at cwilliams@heatspring.com or in the twitterverse @topherwilliams

Posted by Guest Contributor at 03:52 PM | Permalink | Comments (0)

Chris Williams

According to the Solar Energy Industry Association (SEIA), in 2010 solar was the fastest growing industry in the US, growing at 67%. The geothermal heat pump (GHP) industry still grew quickly compared to the whole economy, but it only grew at a modest 32% compared to solar.

According to Solar Buzz, at the end of 2009, the global solar market was $38.5 billion with the US installing nearly 8% solar, or $3.1 billion of the world market.

Source: Solarbuzz 2010 Marketbuzz

According to PMGO, an industry research firm,

“The total market for U.S. GHPs in 2009 is estimated to be about $3.7 billion dollars, including equipment and installation cost (and not reduced by government or other incentives). The dealer who sells the equipment typically installs it. PMG expects a growth rate of 32% to continue for a few years. By 2013, PMG projects the U.S. geothermal heat pump market to be in excess of $10 billion.”

The solar market and the geothermal heat pump market in 2009 were essentially the same size; however, while the solar PV industry is growing much quicker, both have strong positive outlooks.

Will the growth of the geothermal industry continue for the next 10, 15, 20 years, and can we invest in public equities like we can in the solar pv industry to benefit from this growth?

In this article, I will walk through an analysis of
1. What is driving the growth if the GHP industry
2. Why property owners and utilities are adopting GHPs
3. The market segments that are adopting geothermal the fastest
4. The bottleneck’s to GHP continued and faster growth
5. Possible Investment targets within GHP
6. The 2 best opportunities for investment in public equities.

For today’s article, we’ll focus on section 1 through 3.

1. What’s driving the GHP industry?

As good investors, let’s walk through a little industry analysis to get a sense for the geothermal heat pump space.

Geothermal is a reliable energy source and a solid investment that is more broadly applicable than solar because the technology is not susceptible to state policy, like solar pv. Put another way, the financial return that a GHP system provides to property owners is based more on the fundamental technology and the fuel it is displacing rather than government incentives. I’d suggest this means it is less volatile from an investment perspective than the solar pv industry.  

Geothermal heat pump HVAC systems are attractive because the technology is fundamentally sound and super efficient. A typical system is between 300% to 500% efficient--meaning for every unit of energy you put in, you harvest 3 to 5 more units. To understand more, download the Geothermal Survival Kit, written by Kevin Rafferty who co-authored the ASHRAE publication, “Ground-Source Heat Pumps” - Design of Geothermal Systems for Commercial and Institutional Buildings. The Department of Energy also has some great geothermal heat pump resources. ASHRAE is an “international technical society organized to advance the arts and sciences of heating, ventilation, air-conditioning and refrigeration.” (www.ashrae.org)

2. Here’s what you need to know about customer adoption of GHP as an investor:

Geothermal heat pumps offer a number of advantages over traditional heating and cooling methods to property owners, namely they offer the following:

• Highly Reliable
• Combustion Free
• Virtually Zero Emissions
• No On-Site Contribution to Global Warming
• Local Availability (no fuel or transportation expense)
• Electric utilities generally favor GHPs because they provide a stable base demand all year
• Geothermal HVAC also very useful in gaining LEED certification all types of properties. Green building demand has been skyrocketing in recent years and GHPs can provide a significant number of points in the rating system. Learn more about Geo and LEED in this whitepaper: Let Geo LEED The Way

3. GHP Are Becoming the Norm in Some Applications

All day long at HeatSpring, we’re talking to contractors, HVAC professionals and drillers who are taking our IGSPHA geothermal training program because more and more of their customers are asking about geothermal. Many of our alumni have weathered the recession by investing in training and moving their business into this new segment. The residential market is the strongest in new construction, where the systems can be financed from day one. However, the retrofit market is still strong, especially if the building has an old furnace or leaky building envelope. Also, with large commercial or government projects, geothermal is becoming the norm because upfront costs are less of a consideration (like with residential customers) and lifetime savings and NPV are more important.

Chris Williams is an IGSHPA certified geothermal installed and  works with HeatSpring Learning Institute delivering world-class IGSHPA Geothermal Training, NABCEP Solar Training, and BPI Certification training to professionals who are installing, designing or selling renewable energy systems. Sign up for their newsletter here. Chris can be reached directly at cwilliams@heatspring.com or in the twitterverse @topherwilliams

Continue reading A Guide to Geothermal Heat Pump (GHP) Investing, Part II.

Posted by Guest Contributor at 11:56 PM | Permalink | Comments (0)

Marc Gunther

General Electric Co. (GE) is betting big on natural gas.

The $150-billion a year company, whose power plants generate about one-fourth of the world’s electricity, today announced a new natural-gas power plant that it says is more efficient and flexible than any other in the market.

By phone from Paris, where the announcement was made, Steve Bolze, president of GE Power & Water, told me:  “This is about transforming the industry over the next five or 10 years.”

GE says it invested more than $500 million in the new plant development. It will be manufactured in France and sold first in Europe and Asia, and then later in the U.S.

One key selling point of the new plant is its unprecedented flexibility: It can ramp up and down rapidly, and thus be easily combined with wind and solar power plants that generate electricity intermittently.

It’s also efficient enough to work as a generator of baseload power, Bolze said. Here’s a GE webpage describing the plant and its operation.

The new GE plant—dubbed the FlexEfficiency 50–is rated at 510 megawatts and offers fuel efficiency greater than 61 percent.  Competing plants burn natural gas at efficiency rates of 57 or 58 percent, Bolze said. Each percentage point of improved efficiency saves a utility about $2 million a year, he said. Capital costs are projected to be CapitaCosts should be somewhere “north of $450 million.” he said.

What this tells you is that, all other things being equal, natural gas has become the fuel of choice for the global electricity business. Wind and solar power can’t compete with cheap gas without government mandates, subsidies or a price on carbon. Nuclear is expensive and it is deemed riskier than ever, for better or worse, after Fukushima. Coal is low cost but dirty and, as a result, politically unpopular in western Europe and the U.S.

Speaking last week at a conference, GE’s CEO, Jeff Immelt, said : “It appears like we’re entering into a natural-gas cycle.”

GE didn’t announce any customers for the plants. The businesses that comprise GE Energy—GE Power & Water, GE Energy Services and GE Oil & Gas—employ about 90,000 people and generated $38 billion in revenues last year. GE is continuing to invest in wind and solar power, the company said.

DISCLOSURE: None.

Marc Gunther is a contributing editor at FORTUNE magazine, a senior writer at Greenbiz.com and a blogger at www.marcgunther.com.

Posted by Guest Contributor at 08:30 PM | Permalink | Comments (1)

Tom Konrad CFA

On March 22, the Conservative Canadian federal government released its proposed 2011 budget. The biggest news about the budget is not what is in it, but the fact that it is likely to lead to a no-confidence motion in Parliament, and bring about a new election. 

One provision of the conservative budget is the C$400 million ecoEnergy Retrofit program was included in the budget as a sop to lure support from the New Democrat party, but proved insufficient to gain their support.

Canadian insulation manufacturers hailed the inclusion of the home insulation program in the budget. Stephen Koch, Executive Director of the insulation industry association, NAIMA Canada, said, “We are pleased to see the renewal of the ecoENERGY program. It is an important tool that will help with economic growth and recovery in Canada.”

I followed up with Koch about the prospects for ecoENERGY in the next budget after the election.  He replied,

"I would be highly surprised if the next federal government did not reintroduce something like the ecoEnergy program. The Conservatives are saying that if that are elected, they would introduce the same budget.  The Liberals have also revealed a platform supporting a similar program, and the NDP also supports it.

"The only concern I see is the length of the program. I believe it must
be at least two years minimium and the requirement of mandatory label of
the energy efficiency of a home be mandated as disclosue to the buyer
should be implemented after the two years."

All the major Canadian parties support the program because Energy efficiency measures help economic growth twice. Like any expenditure, they create economic activity, but they also have the added benefit of saving homeowners more money than they cost on energy bills. This money can then be spent on other goods and services, providing a second boost to the economy.

Canadian Insulation Stocks

When ecoENERGY (or a similar) reinstated, Canadian insulation companies should get a boost along with the economy, although that boost will be limited if the program is for only a year.

The five members of NAIMA Canada are CertainTeed Corp., Johns Manville, Knauf Insulation, Owens Corning, and Roxul, Inc. Knauf is privately held, while Johns Manville and CertainTeed are divisions of the much larger conglomerates Berkshire Hathaway (BRKA) and Saint-Gobain (CODGF.PK), respectively.

For green investors looking at insulation as an energy efficiency play, the two stocks to know are pure-play insulation manufacturers Owens Corning (OC) and Rockwool International (RKWBF.PK), the Danish parent company of Roxul.

Owens Corning is well known in North America for its ubiquitous pink fiberglass insulation, but also makes a wide range of insulation and roofing products.

Rockwool was founded in 1909 number 10 on Forbes’ list of the world’s most respected global companies in 2007. Rockwool makes a range of insulation for buildings as well as marine and offshore environments,

One other company which benefited from ecoENERGY last time around was Waterfurance Renewable Energy (WFI.TO/WFIFF.PK). In Waterfurnaces's 2010 annual report, the company specifically mentioned the end of the ecoRNERGY retrofit program in 2009 as one factor leading to slow sales growth in 2010.
 
Unless extended for more than a year, Canada’s ecoENERGY program will probably not make more than a few percent of difference to either company’s bottom line, but its inclusion by a conservative party in Canada’s deficit-fighting budget, and its support across the political spectrum demonstrates that insulation is one green measure that makes both political and economic sense even when budgets are tight.

More energy highlights of the Canadian budget are here.

DISCLOSURE: Long WFIFF

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

Posted by Tom Konrad at 04:26 PM | Permalink | Comments (0)

Tom Konrad CFA

FLIR Systems' (FLIR) IR cameras save energy not just by spotting leaks, but by spotting intruders in the dark.

When I published my list of dividend paying energy efficiency stocks in January, I missed one, and it is a long-time favorite.  FLIR Systems (FLIR) business is focused around thermography, and I picked FLIR as a stock likely to benefit from the stimulus in March 2009 because FLIR's cameras are used by energy raters.

 
FLIR did benefit from the stimulus, rising 56% by the end of 2009 from the $21 price when I made my call, but the stock has been basically flat since then, despite continued earnings and cash flow growth, and the declaration of a $0.06 (0.8% annual) dividend which was first paid in February, just two weeks too late to be included in my dividend paying energy efficiency stocks list.  The dividend corresponds to a 13% payout ratio, meaning that 87% of the company's earnings will be retained for continued acquisitions, stock buybacks, and investing in the business. 


Thermography

I first became interested in FLIR in 2007, when I expected the use of thermography to grow rapidly in the likewise growing business of energy rating.  Given that stimulus funding for energy rating will be running out this year, it seems likely that growth from this end of the business will slow, at least in the near term.  Over the longer term, I expect the energy efficiency side of the business to remain robust because falling prices and better resolution will rapidly open new markets, and thermography remains one of the most effective ways to help the non-professional understand the importance of heat loss. It's one thing to tell a homeowner that their insulation is poorly installed.  It's quite another to show them in an image like the one to the right.

Nor is thermographic imaging solely a tool for convincing homeowners that there is a problem.  By simplifying the detection and diagnosis of not only problems with insulation, but a long list of residential, commercial, and industrial systems, much time, money, and often energy is saved in fixing those problems. 

One unique application of thermography is FLIR's Gas imaging cameras.  These can help detect leaks of powerful greenhouse gasses such as Sulfur Hexaflouride (used in electric transformers) natural gas, and several other dangerous and expensive industrial chemicals.

Competition

FLIR's major competitor in thermal cameras is Fluke, a division of Danaher (DHR).  I talked to representatives of both Fluke and FLIR at Building Energy 11 in Boston on March 9th and 10th. (I went to conduct a workshop on clean energy investing.)  I asked both of them the same question: If I were an energy rater, why should I buy Fluke's camera over FLIR's, or vice versa?  The Fluke rep's line was that Fluke "builds tools" and that I could expect a Fluke camera to be more rugged and not break, and this is something I should be willing to pay a little more for.  The FLIR rep said simply that their camera offers better resolution at a lower price point, and comes with a 2 year warranty. 

I found FLIR's sales pitch far more convincing than Fluke's.   That's one of two reasons this article is about FLIR, not both FLIR and Fluke.  The other reason is that thermography is such a tiny part of Danaher's business that it's not material from an investing perspective.

Commercial Vision Systems

I used to think that the main reason for energy efficiency investors to be interested in FLIR was the company's Thermography division (26% of 2010 revenues,) but discovered another application while talking to the FLIR representative.  The company's Commercial Vision Systems division (21% of 2010 revenues) is promoting their security cameras for cost-effective intruder detection.  Because the cameras use thermal imaging, they don't require lighting to spot the body heat of intruders at night, which is where the energy savings come in.  The ability to eliminate security lighting allows FLIR's security cameras to be installed at comparable costs with conventional systems, while saving the electricity which would otherwise be used to light unoccupied areas, as well as reducing light pollution.

The commercial division also supplies cameras for traffic monitoring, a service which fits well into my "Smart Transportation" peak oil investment theme.

Government Systems

Despite the many energy saving applications of FLIR's products, socially responsible investors may have a problem with investing in the company because slightly over half of FLIR's revenue comes from their government systems division, which provides vision systems for military and homeland security applications.  It's unlikely that FLIR's products are going to kill anyone, but they help aim, and it should be acknowledged that military customers are a significant source of revenue.

Moral objections aside, FLIR's military business is healthy and growing much faster than Defense budgets in general.  I'm certainly not a defense expert when it comes to stock analysis, but it seems to me that as defense budgets are slimmed, the trend to use more and more sensor and reconnaissance technology should continue, in order to better target the firepower which is still in the budget.  So while this part of FLIR's business may not be environmentally green, it should continue to add green to the bottom line.

Conclusion

The consensus for FLIR's expected growth over the next five years has fallen to 15% per annum, compared to 25% annual growth over the last five years.  That's still a respectable growth rate, but makes the trailing P/E of 21 and the forward P/E of 16 seem a little high at the current stock price of $32.  I'd like to see the price in the high 20's before I'd be completely comfortable buying the stock, but that would not require much of a pullback.  At the right price, FLIR will be a valuable addition to a green (if not socially responsible) portfolio.

DISCLOSURE: No Position. 

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

Posted by Tom Konrad at 09:48 PM | Permalink | Comments (0)

Tom Konrad, CFA

Apple takes on Google in Silicon Valley rivalry to save the world... first.
 
Recently appointed Apple (NASD:AAPL) senior VP of Energy Lester Coulson is unimpressed by Google's (GOOG) efforts to solve climate change. 

"Google has been trying to make renewable energy cheaper than coal for more than three years now, and we haven't even seen a Beta version!" Coulson admonishes.  "Sure, they've made a few headlines by investing in EGS and planning to string wires up and down the Atlantic coast, but after investing $100 million, is renewable energy cheaper than coal (RE<C) yet?  No, and it will be years before it will be if Google is the only Silicon Valley company working on it.  We at Apple believe that the world's energy problems are too severe, and the threat of climate change too acute to be left to the likes of Google to solve."

Apple's plan, instantly dubbed "EE=C", is to make energy efficiency cool.  "It's all about the interface," explains Coulson. "Google is a software firm, but Google is attempting to fix renewable energy.  Renewable energy is a hardware problem, and that's why it takes so long to fix.  We at Apple know better.  We're going to apply our unique skills to solve the problem of climate change though software, in the way that only Apple can.  Unlike renewable energy, energy efficiency is already cheaper than coal.  The problem is, people find energy efficiency unsexy or confusing, or maybe they don't like those twisty light bulbs, so they don't adopt it even when it could save them money.  We have an App for that."

"iEnergy won't just be cool, it will be easy."

How is Apple going to change people's attitudes about energy efficiency?  They claim their software will allow people, companies, and even governments to manage their energy use with a slick graphical user interface (GUI).  Saving energy will be as easy as downloading a hit single from iTunes... and twice as addictive.  "Our interface and Apps are going to make energy efficiency cool," Coulson raves. "First, we're going to rename energy efficiency: We're calling it iEnergy.  That should double its popularity overnight.

"iEnergy won't just be cool, it will be easy.  Saving energy used to require all sorts of dirty engineering and crawling into dark corners with an insulation blower or a caulk gun.  We've changed that: With Apple iEnergy, you can cut your energy use by as much as 50% with a simple, graceful stroke of your finger on your iPhone or iPad.  Finally, we're going to raise the price.  Our studies show that people think of energy efficiency as cheap, and cheap is definitely uncool.  With Apple iEnergy, the more energy you save, the more we charge.  How cool is that?"

Google is taking the threat seriously.  A Google insider, who spoke on condition of anonymity, said: "Apple has really stepped over the line with this one.  Saving the world is Google's turf, and we're not going to take this incursion lightly.  People should think carefully about letting Apple manage their energy use.  Have you tried using an iPod with music from anywhere but iTunes?  Or changing the battery?  I hate to think what might happen if someone using Apple's software tries to install solar panels or even a light bulb bought anywhere other than the Apple Store."

Furthermore, Google takes their own (if no one else's) intellectual property rights seriously.   Google's lawyers have sent Apple a cease-and-desist order regarding the name "EE=C" claiming it is a transparent attempt to profit from Google's branding of "RE<C". 

Apple shares were up 3.1% in aftermarket trading.  Google shares traded flat.

Posted by Tom Konrad at 12:00 AM | Permalink | Comments (1)

Joel Makower

If you start with the premise that many of the solutions to our global sustainability challenges require smart design and systems thinking, it doesn’t take long before you find your way to Autodesk (ADSK). The 29-year-old design software company has made a series of impressive moves into the sustainability realm over the past few years. It’s one of those largely unheralded companies creating the tools used by architects, designers, manufacturers, and — most recently — cleantech entrepreneurs to produce the next generation of greener, cleaner, more efficient products.

Over the past year or so, I've had the opportunity to meet with or interview several members of Autodesk's sustainability team as well as its CEO, Carl Bass, on a number of occasions. Along the way, I have become increasingly impressed with how the company hasn’t merely expanded its offerings to help design professionals achieve sustainability goals, but has also set out to elevate the sustainability knowledge and capabilities of design students and professionals, from high schoolers to seasoned engineers.

Autodesk makes a suite of 2D and 3D design software tools commonly known as CAD, for computer-aided design. Its flagship product, AutoCAD, along with the more advanced tools that integrate with AutoCAD, is the standard design software in architecture, engineering, and construction firms; manufacturing environments, such as industrial machinery, tool and die, automotive, and consumer products; and media and entertainment companies. (Autodesk software has been used in the special effects of dozens of movies, from “Alice in Wonderland” to “X-Men.”)

Starting a few years ago, as green building grew from the margins to the mainstream, Autodesk began integrating components to help architects, engineers, and designers perform “whole building” analysis, optimize energy efficiency, even aim for carbon neutrality. It developed Building Information Modeling, or BIM, software, which allows architects, engineers, construction professionals, facility managers, and owners to break down barriers and bridge communication between design and construction teams, with the goal of optimizing buildings and creating predictable outcomes. Autodesk began using its own facilities as a living laboratory to gain real-world experience. “The idea is to use our own operations as a testing ground for prototyping new products, new features, new workflows that would serve our customers and rapidly green, in this case, existing buildings,” Emma Stewart, senior program lead for the Autodesk Sustainability Initiative, told me.

No Green Button. Those efforts created a gateway into sustainability for Autodesk that has spread beyond buildings to designing everything from products to cities.

Sarah Krasley, a product manager in Autodesk’s Manufacturing Industry Group, works with the company’s industrial customers to help embed sustainability. “We have customers in building products,” she explains. “We have customers who are designing apparel. We have customers that are designing consumer packaged goods. The myriad of sustainable design objectives across those industries is vast, and we realize that there is no green button. That is, there’s not one simple sustainability tool that you can put into a CAD system and solve everybody’s problems. So we’re doing a lot of exploration at where sustainable design comes up in the workflow, and where it’s most meaningful.”

One outcome of that exploration was a partnership announced last fall with Granta Design, a developer of materials databases, that combines Autodesk's Digital Prototyping technology with Granta's materials information technology to enable industrial designers, mechanical engineers, and others to more easily create products through sustainable design.

At the other end of the spectrum is a partnership with CDP Cities, a project of the Carbon Disclosure Project, which has worked to standardize carbon reporting and risk management. Now CDP is working to do the same with municipalities, from Beijing to New York. Autodesk partnered with CDP to standardize the software platform for how cities are tracking, managing, and reducing their carbon risk over the next 40 years, explains Stewart. “So all of a sudden, Mayor Bloomberg and his team are able to look out at New York City and understand the resource flows of energy, waste, water in a way they’ve never done before, and map that against the way sea level will rise over the next 40 years, and then make financial decisions accordingly.”

Class Acts. The city-level partnership exemplifies one of the things I find most interesting about Autodesk: It invests in educating the marketplace, seeding future customers with free or low-cost versions of its software. This isn’t unique to the sustainability space, but sustainability may be where it’s needed most. To limit sustainable design to the relatively small population of engineers, designers, and architects who already “get it” misses a vast opportunity for both the company and the planet.

Autodesk has more than 1.5 million students in its Education Community, which allows students, both undergrads and grads, to download and test-drive free software and other tools. The idea is that students learn their craft using Autodesk software and, of course, want to use it in their professional lives, too.

Those students, it seems, hadn't been learning much about sustainability in their studies. “The thing that kept coming up as we made new software innovations is that there are a lot of people who are not even familiar with the terminology around sustainable design, and are not familiar with how to take these high-level concepts and break them down into steps that are actionable,” Dawn Danby, Sustainable Design Program Manager at Autodesk, explains. “If we’re going to start building new solutions for doing all kinds of energy analysis or materials analysis, people need to understand why this stuff matters and have a context for it. We’re very aware that the hundreds of thousands of mechanical engineers every year who are being released into the marketplace are about to make very significant resource decisions.”

In response, Danby and her team last year launched the Autodesk Sustainability Workshop, a series of free online instructional videos. They’re short, clever works, produced by Free Range Graphics, the team that created Annie Leonard’s wildly popular viral video, The Story of Stuff, and its growing spinoff projects. Danby herself stars in the segment on Whole Systems Design, with sustainability education guru Jeremy Faludi leading most of the others. It’s a terrific public service and a fun way to learn, even for us non-designer types. (Autodesk also sponsored AskNature.org, a free portal for architects, designers, and engineers on bio-inspired design, produced by the Biomimicry Institute, on whose board I sit.)

Seeding the Market. And then there’s the company’s Clean Tech Partner Program, which aims to pretty much give away suites of software — about $50,000 worth — to hundreds of cleantech start-ups. Entrepreneurs submit an application, explain what they’re doing, and get a complete suite of Autodesk software for a nominal fee. The program started two years ago in the U.S., then spread to Europe and, most recently, to Japan. Again, the idea is to seed these startups with Autodesk tools, with the hopes that they’ll become paying customers as they grow.

“In the short term, [sustainability] is the most pressing problem we face as a society, and I think it's important that we do things to help solve the problem,” Autodesk CEO Carl Bass told me recently. “And I think a lot of the innovation is going to come from small companies.” Along the way, Bass has become a frequent speaker at cleantech conferences and an articulate advocate for cleantech entrepreneurs. (You can watch excerpts from an interview I did with Bass, below. I’ll be interviewing him again, onstage at the Green:Net 2011 conference in San Francisco, on April 21.)

As I said, much of these activities remain unheralded in the wider world of green business; Autodesk isn’t typically one of the companies that springs to mind when people name sustainability leaders. In some ways, that’s what I like most about Autodesk: a company that quietly is building the foundation for a sustainable future, creating tools and partnerships that are fundamentally changing the way things are designed and built. We may never see buildings or products that boast anything along the lines of “Autodesk Inside,” but in some respects, our sustainable future could well be labeled exactly that.

For more than 20 years, Joel Makower has been a well-respected voice on business, the environment, and the bottom line.  He has been called "The guru of green business practices."  This article was first published on his blog, and is reprinted with permission. 

Posted by Guest Contributor at 07:07 PM | Permalink | Comments (0)

Tom Konrad CFA

Clean Edge says the phase-out of incandescent light bulbs is opening the way for low-cost LEDs.  These are the stocks to know.

Federal regulations are flipping the switch on our love affair with incandescent light bulbs.  Research firm Clean Edge's just-released Clean Energy Trends 2011 says this opens the way for a clean energy trend to watch: With compact-fluorescent light (CFL) bulbs the only legal competition in much of the world, Light-Emitting Diode (LED) bulbs need only the arrival of an affordable replacement for the standard 60 watt bulb in order to be met with "an immediate rush of policy-driven demand."

What is an "affordable" 60 watt replacement? Lighting Science Group (LSCG.OB) began providing a 40-watt replacement LED bulb through Home Depot for $20 in May.  Netherlands based Lemnis offers a 60-watt dimmable replacement for $25 online.  That's still high.  With CFLs selling for $3 or less each, the many advantages of LEDs (instant on, no mercury, cold tolerance, dimmability, and slightly better energy efficiency) are not enough to overcome the high first cost barrier.  Clean Edge quotes Lemnis CEO Warner Phillips, who thinks large chunks of the market will start shifting at $15, and the entire mass market will start to shift at the psychologically critical $10 price point.  He expects to see these prices in the next one to three years.  Lighting giant Philips (PHG) is predicting that LEDs will take 50% of the lighting market by 2015.

One to three years is about the right time frame for a stock market investment based on predicted future trends.  Getting in sooner often means your money is tied up longer than it needs to be, while investors who wait too long often find that others have bought first and already driven up the stock price.  I personally think the $10 LED bulb that can truly produce as much light as a 60 watt incandescent will take much closer to three years than one, and 50% by 2015 seems a bit optimistic to me as well.  I'm not rushing to get in, but I think the time to get in will be soon. 

Here are the stocks I'll be considering:

• Lighting Science Group (LSCG.OB), mentioned above, has the advantage of selling retail products, and so may also have the advantage of capturing retail investor attention quickly.  They also retrofitted every Starbucks in California with LEDs last year.
• Aixtron AG (AIXG) produces the equipment used for creating LEDs, meaning that the company's sales should lead those of LED bulbs.
• Cree Inc (CREE) was a pioneer with early high-efficiency white LEDs.  Recently the company has been struggling with strong competition from Asian semiconductor manufacturers, but some observers think the stock has fallen far enough to look attractive again.
• Epistar Corporation (2448.TW), is a Taiwan based manufacturer of LED chips and wafers that partners with customer to produce LEDs customized to their specific applications..
  
• Neo-Neon Holdings (1868.hk) calls itself the world's largest traditional and LED decorative lighting manufacturer, and considers itself a front-runner in white LED manufacturing.
• Nexxus Lighting (NEXS) is an LED integrator producing LED fixtures, and other lighting products for a wide range of specialized applications.
• Philips (PHG), a diversified electronics giant with a strong presence in LEDs and efficient lighting which they augmented when they bought LED company Color Kinetics in 2007.
  
• Rubicon Technology Inc (RBCN) makes monocrystalline sapphire and other crystalline products for light-emitting diodes and other applications.
• Veeco Instruments Inc. (VECO) produces customized LED and solar process equipment.
• Universal Display Corp. (PANL) makes organic light emitting diodes (OLEDs) for the display and lighting industries.  OLEDs are much less expensive than standard LEDs, although they cannot yet acheive comparable brightness.  We're unlikely to see OLED 60w bulb replacements any time soon, but they are behind the most energy efficienct TVs and monitors.  I'm writing this article using an [O]LED display from LG which I believe contains PANL's technology.  It's amazingly thin, and has great performance in terms of sharpness, response time, viewing angle, and contrast.
  
• Vu1 (VUOC.OB) produces not LEDs, but a rival highly-efficient, mercury free lighting technology called Electron Stimulated Luminescence.  I include them as a wild card, since they also stand to benefit from the phase-out of the incandescent bulb.

Which are the best buys?  If you're betting on a rapid take off of LED manufacturing, I think the equipment suppliers are probably the most attractive stocks in this sector, so take a look at Aixtron and Veeco.

UPDATE: I just came across a new LED company that I missed.  SemiLEDs Corporation (LEDS) went public last December.  The company makes blue, green, and ultraviolet LED chips.

DISCLOSURE: No Positions. 

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 08:31 AM | Permalink | Comments (2)

Debra Fiakas

Power One (PWER) looks like a promising contrarian play.

It is a scenario that has plays out quarter after quarter.  A leading company in popular sector reports decent results, but surprises investors with guidance below the prevailing consensus.  Then the stock price crashes as sell-side analysts cut estimates, price targets and ratings.  It is a situation that many investors fear as they see once profitable stock positions lose value.

Not the contrarian investor!  There are potential profits to be made for the obstinate, but fearless investors willing to do their homework.   

This very situation is playing out in shares of Power One, Inc.  (PWER:  Nasdaq), a leading supplier of power conversion and management solutions for renewable energy systems, particularly the solar industry.  The company posted revenue and earnings results for the fiscal fourth quarter ending January 2, 2011, above the prevailing consensus estimate of $352.5 million in sales but a nickel below the EPS estimate.  Power One had consistently beat the consensus EPS estimate in each of the last four quarters.

If those mixed results were not disquieting enough, investors appeared unnerved by management’s guidance for the March 2011 quarter.  Unfortunately, Power One management guided for sales in a range of $260 million to $290 million, well below the prevailing view on Power One’s prospects.  According to Thomson-Reuters analysts had published estimates for sales in a range of $281.6 million to $360.4 million in sales and earnings per shares in a range of $0.28 to $35 for the March 2011 quarter.  This produces a consensus estimate of $0.31 EPS on $313 million in sales.  

Shares of Power One sold off 21.2% in the first day of trading following management’s bombshell.  This may be a bit of an overreaction given that guidance for the March 2011 quarter was in part based on poor weather conditions impacting near-term customer order patterns.  Management did cite a reduction in feed-in-tariffs in European markets and excess inventory in its distribution channels as factors impacting demand in the long-term.  Nonetheless, guidance for sales in 2011 appears to support the prevailing consensus estimate of $1.3 million in total sales for 2011.

Clearly things are not as rosy as analysts had projected.  However, that is not to suggest Power One is going out of business.  The company still appears to have a strong competitive position in both its renewable energy solutions and power solutions segments.  Recent results are not yet available for most of its competitors such as Lineage Power, Delta Electronics, or SMA Solar Technology.  Emerson Electric Co. (EMR:  NYSE) reported sales and earnings in-line with expectations for the December 2010 quarter.  Emerson experienced growth and margin compression in its power segment similar to Power One’s report.

The stock price pullback provides a compelling entry point for investors with the patience to wait out the time it take for the dust to settle on this single quarter report.  The stock is now trading at 9.6 times trailing earnings.  Assuming analysts trim estimates for 2011 by the same margin as they missed in the fourth quarter, we expect the consensus estimate for 2011 to drop to $1.10 (from $1.26).  The implied forward price earnings multiple would then be 8.4 times  -  a compelling deal for the contrary investor.

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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. PWER is included in Crystal Equity Research’s The Mother’s of Invention Index in the Efficiency Group.

Posted by Debra Fiakas at 07:12 PM | Permalink | Comments (0)

John Petersen

Thanks to a recent comment from JLBR, I've found a new hero in Dr. Peter Z. Grossman, an economics professor from Butler University who cogently argues that government attempts to force alternative energy technologies into an R&D model that was created for the Manhattan Project and refined for the Space Program will always result in commercial disaster because "the goal of the Apollo Program was the demonstration of engineering prowess while any alternative energy technology must succeed in the marketplace." In a recent article titled "The Apollo Fallacy and its Effect on U.S. Energy Policy" Dr. Grossman summarized the problem as follows:

"The Apollo fallacy has been detrimental to the development of effective energy policies in the US [and] instead of asking what kinds of programs might be useful, the government holds out the promise of a technological panacea to be delivered simply by an act of Congress. The prospect of an energy panacea actually has some political benefits. It allows politicians to claim that they can provide simultaneously the two outcomes most Americans seek from energy policy: low energy prices and energy independence. In fact, with conventional resources these goals are mutually exclusive. To get low prices, the government should provide incentives to drill for oil and gas not just in the US but also in places where they might be exploited more cheaply – of course making the nation more dependent on outside sources. To lessen dependence (true energy autarky is not a feasible goal) on foreign resources, the only method government can use with conventional resources is to raise prices through taxes. But a new technology presumably can to both at once: provide cheap, US-made energy. Unfortunately, the history of energy programs argues that the pursuit of a technological-commercial panacea will fail."

In a 2008 white paper titled "The History of U.S. Alternative Energy Development Programs: A Study of Government Failure," Dr. Grossman started with the Eisenhower Administration's wildly optimistic plans to commercialize nuclear fission reactors for civilian electricity and offered a brief history of serial energy policy failures including:

• The Nixon and Ford Administrations' support for synthetic fuels from coal and oil shale;
• The Carter Administration's support for synthetic fuels, nuclear fusion and ethanol; and
• The Clinton Administration's "Partnership for a New Generation of Vehicles" that failed miserably while privately funded initiatives from Toyota and Honda were remarkably successful.

My additions to Dr. Grossman's list would include Bush the Younger's support for fuel cells, the hydrogen economy and corn ethanol, and the Obama Administration's support for vehicle electrification and alternative energy in general.

These ambitious energy policies all shared three fatal flaws:

• An inability to distinguish between the technologically possible and the economically desirable;
• A belief that intervention can force innovation and overcome technical challenges on time and within budget; and
• A failure to recognize that generous subsidies invariably lead to increased demand for more generous subsidies.
  

The end result has always been grandiose, unrealistic and extravagant mandates that resulted in catastrophic losses for naive and credulous investors who bought the hopium.

For over sixty years, the government has consistently and predictably failed to understand that industrial revolutions arise from technologies that are perfected by entrepreneurs and prove their value in a free market. The government can accelerate advances in basic science and engineering when cost is not an object, but it can't make technologies cost-effective or ignore the realities of a resource-constrained world. The following cartoon from Jan Darasz appears in the most recent issue of Batteries International Magazine and may overstate the problem a bit, but only a tiny bit.



During the "Sputnik moment" discourse in his recent State of the Union Address, President Obama promised to spend billions of taxpayer dollars to put a million plug-in vehicles on the road by 2015. Back in the business world, Johnson Controls (JCI) and Exide Technologies (XIDE) are spending their own money, together with a $34 million ARRA battery manufacturing grant, to build factories that will make AGM batteries for 14.7 million micro-hybrids a year by 2014. The President's plan will save up to 400 million gallons of gas per year by 2015. The 56 million micro-hybrids that will be built during the same time frame using AGM batteries from JCI and Exide will save 1.6 billion gallons of gas per year. Last time I checked, spending millions to save billions of gallons of gasoline was more sensible than the inverse.

I've frequently argued "Alternative Energy Storage Needs to Take Baby Steps Before it Can Run." A favorite quote from William Martin's novel "The Lost Constitution" says it all – "In America we get up in the morning, we go to work and we solve our problems." Unfortunately government programs never use the tools that are readily available to do the work. Instead they impede sensible actions like using compressed natural gas instead of gasoline and let urgent problems fester while new, exotic and politically popular technologies are invented and refined, but never commercialized. A cynic might suggest that it's a great way for a politician to kick the can down the road while deferring blowback from policy failures and unintended consequences until his successor takes the oath of office.

We have 60 years of experience that proves well intentioned but ill-conceived government alternative energy technology initiatives aren't doing the job. Investing $46 of capital to save a gallon of gasoline with a plug-in vehicle is foolish when you can save that same gallon of gasoline with a $24 capital investment in an HEV. Taxing Peter to underwrite the cost of Paul's new car will impoverish the masses instead of empowering them. Using imported metals to make non-recyclable batteries for the purpose of conserving more plentiful petroleum has all the intellectual integrity and economic appeal of using cocaine as a weight loss supplement.

There are solid growth opportunities in the domestic energy storage sector. JCI and Enersys (ENS) both trade at about eighteen times earnings while Exide trades at about twelve times earnings. In the more speculative small company space, Axion Power International (AXPW.OB), ZBB Energy (ZBB) and Beacon Power (BCON) all present intriguing value propositions as they emerge from the trough of disillusionment and begin to build industry relationships and revenue by proving the value of their products one baby step at a time.

I'm convinced that every manufacturer of energy storage devices that brings a cost-effective product to market will have more business than it can handle as dwindling global energy supplies make storage more cost-effective than waste. That conviction, however, does not extend to market darlings like Tesla Motors (TSLA), A123 Systems (AONE) and Ener1 (HEV) who owe their high profiles and huge swaths of their balance sheets to government largess and glittering promises of an all-electric future once they prove that their wonder products work in the hands of normal consumers and learn how to manufacture better than Toyota Motors (TM), Sony (SNE), Panasonic (PC) and a host of lesser industrial luminaries that have proven their capabilities with decades of successful execution.

Over the last several months I've become convinced that a transition from gasoline to compressed natural gas may be one of the great opportunities of our age. Natural gas is abundant and clean, and an easy domestic substitute for imported oil. While I don't know as much as I'd like to about fiscal multipliers, I have to believe a massive shift from imported oil to domestic natural gas would reduce energy costs to consumers, slash CO2 emissions, generate trillions in additional GDP and go a long way toward ameliorating the looming deficit spending crisis many observers predict.

Just yesterday, the 2011 Honda Civic GX, a conventional vehicle with a CNG fuel system, tied with the all-electric Nissan Leaf for top honors in the American Council for an Energy-Efficient Economy's list of the Greenest Vehicles of 2011, a position it's held for eight years in a row. The Toyota Prius came in fourth, well ahead of the GM Volt, which came in seventh. I can only imagine what the ACEEE ratings would look like if Honda added a hybrid drive to the Civic GX or Toyota added a CNG fuel system to the Prius.

Mark Twain observed that "history doesn't repeat itself but it does rhyme." When it comes to specious and ill-conceived alternative energy technology initiatives that originate on the banks of the Potomac and rapidly mutate into bad investments, I can't help but wonder whether we're just hearing another chorus from the same old song – 99 Bottles of Energy on the Wall.

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

Posted by John Petersen at 10:36 AM | Permalink | Comments (4)

Tom Konrad, CFA

With new climate legislation or a renewable portfolio standard unlikely now that Republicans control the US House of Representatives, progress on clean energy is likely to come mostly from action at the state level, and from regulation at agencies such as the EPA, rather than national legislation. 

Why Energy Efficiency Standards Make Economic Sense

One type of regulation that is fairly uncontroversial is improving energy efficiency standards, that is regulation of the amount of energy an appliance or other device can consume during normal use.  In an efficient market, regulation might bring non-financial benefits, but those benefits would come at a the cost of making the market less efficient.  However, if a market is not efficient, then regulation not only has the potential to bring non-financial benefits, it can also bring financial gains by making the market more efficient.  This is the case with efficiency standards: they not only save energy, they come with a net economic benefit.

For example, when you acquired your last mobile phone, it's extremely unlikely that the energy use of the wall charger even crossed your mind as a factor in you decision of which phone to buy.  Even if you had considered it, you probably would not have been able to determine what any given charger's usage profile was, and the amount of time and effort you put into determining your charger's energy use would have been prohibitive.  Your time would probably have been much more valuable than the energy you might save by buying a phone with an efficient charger.

For all these reasons, the free market does not provide an incentive to makers of phone chargers to expend any effort or money making sure their chargers are efficient.  Even if one cent of added cost to a phone charger would save the owner $1 a year in electricity, the rational manufacturer would choose not to spend that extra cent, because it would bring no benefit in terms of additional sales.

This is where regulation can bring a net benefit. While $1/year might not be a lot of money for an individual cell phone user, the number of cell phones sold each year is enormous, and the collective savings for society are substantial.  Business-minded conservatives can support energy efficiency standards because of the economic benefit, while environmentally minded liberals can support the energy savings and associated reduction in CO2 and other pollution. 

These facts have not been lost on regulators and legislators.  Congress passed the first National appliance standards in 1987, with several pieces of additional legislation passed by both Democratic and Republican controlled legislatures since then.  Currently more than 50 products are covered by a variety of highly cost effective federal standards, most of which were based on existing state standards.  Economic studies by non-partisan economic researchers have established the cost effectiveness of these standards to be at least 2.7 to 1 [source, pdf]. 

For every dollar spent complying with an efficiency standard, there has been a net benefit of at least $2.70.  From an economics standpoint, there is a strong case for tightening existing standards until the marginal benefit only slightly exceeds the cost of more rigorous standards, and also for expanding efficiency standards to other energy consuming devices.

Power Integrations (NASD:POWI)

A significant beneficiary of any trend towards increasingly efficient electronics will be Power Integrations, which I decided to take another look at after it showed up in my search for dividend-paying energy efficiency stocks.  The company is a leading supplier of high-voltage integrated-circuit (IC) based power conversion devices, with about 80% of the market for the most highly integrated power supplies. 

Historically, most power conversion was done with linear transformers.  Linear transformers, which convert power with coils of copper wire, are not only bulkier than IC transformers, they are considerably less efficient.  Typically, half of the power is lost in conversion, and sometimes as much as 80%.  With IC transformers, as little as 20% may be lost, at only about 30% in additional cost.  As copper prices rise and volumes increase, the cost advantage of linear transformers should decrease.  (Most of this information is from an article at The Economist.)

It's not just cell phones that require DC current to operate: nearly all electronics require some DC conversion.  Computers, DVD players, LCD televisions, microwaves, the list is practically endless.  That means there is plenty of scope to expand the market for efficient IC transformers as prices fall and regulators apply efficiency standards to more devices.  LED lighting also requires compact, efficient, power conversion, and Power Integrations highly integrated transformers are particularly well placed for this fast-growing market where space is often at a premium.  (Incidentally, the growth of the market for LEDs is driven not only by lighting efficiency standards, but also by the rapidly falling cost of LEDs.)

Valuation

The problem with all this growth potential is that the market already knows about it.  Over the last 5 years, revenues have grown at a 23% compound annual rate.  Going forward, the consensus prediction is 15% compound annual growth.  The most dangerous time to own a growth stock is when growth begins to slow, because not only do earnings repeatedly fail to meet expectations, but investors begin to re-evaluate lofty P/E ratios as their expectations of future growth fall.

Although Power Integrations has a commendably strong balance sheet, with no debt and a stratospheric current ratio of 6, it trades at a 22 trailing and 20 forward P/E ratio, and 3.5 times revenues (at the $37.32 close on Feb 1).  That's not bad at the historical 23% growth rate, but does not look so good if you're only expecting 15% growth going forward. 

Overall, I like the business, but this seems like a company to watch and buy after a negative earnings surprise or two (the last two quarters beat estimates by 15% and 8%.)  The long term fundamentals of the business are sound, so it makes sense to wait until other investors are depressed about the short term.

The company is expected to release quarterly earnings tomorrow.  If they miss the consensus estimate of $0.41 earnings and $70.2M revenue, I'd wait a couple weeks for the news to sink in, since the market tends to react more slowly to bad news than good.  If they beat estimates, which is more likely given the strong economy last quarter, I plan to just sit back and wait another three months.

Power Integrations: Profiting from Efficient Electronics was written for AltEnergyStocks.com.

DISCLOSURE:  No position.

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 02:20 PM | Permalink | Comments (0)

Tom Konrad CFA

Clean energy investing is not on for growth investors, traders, and speculators.  Conservative income investors can invest in green companies as well, and dividend paying energy efficiency stocks deserve pride of place in their portfolios.

In my clean energy investing workshops, I tell attendees that investing in clean energy stocks does not have to be riskier than investing in any other sector.  The key to investing in clean energy with a low risk profile is the same as low risk investing in any other sector: find stable, profitable companies selling at reasonable valuations.

Identifying stable, profitable companies is not always easy.  Even if a company is profitable today, rising competition, the falling price of alternatives, or changing technology can rapidly undermine business models and profits.  A rapidly changing legal, regulatory, and cultural landscape further complicates the search.   All of these factors apply in clean energy, but much more in rapidly evolving technology and incentive driven sectors such as solar PV and cellulosic ethanol than in more staid sectors such as energy efficiency and conservation.

The Economics of Energy Efficiency

Energy efficiency stocks lack the sex appeal of solar stocks or smart grid stocks, but that very dowdiness makes them much more stable than most other alternative energy sectors.  Further, unlike most renewable energy, much energy efficiency makes economic sense without incentives, so the companies are less dependent on the government to drive sales.  If Google (GOOG) had chosen to make energy efficiency cheaper than coal ("EE<C"), rather than renewable energy cheaper than coal (RE<C) they'd have been done before they started. 

Dividends
One reason firms pay dividends is because it's a way to signal to investors that management is confident about their ability to pay that level of dividend far into the future.  Dividend cuts are embarrassing to management, and even worse for a company's stock price, so companies that pay dividends tend to believe that they will be able to remain profitable and keep on paying that dividend.

Safer Clean Energy Stocks

Given this, dividend paying energy efficiency stocks are a great place to start when looking for relatively stable clean energy investments.  The list that follows is simply a result of me going through our list of energy efficiency stocks and pulling out the ones that pay a dividend.  I plan to look more deeply into many of these companies in future articles.

Company (Ticker)	Yield*	notes / articles
Aixtron AG (AIXG)	0.3%	LEDs
Cabot Corp (CBT)	1.8%	green building
Eaga PLC (EAGA.L)	5.0%**	UK residential energy efficiency
General Electric (GE)	2.8%	A little of everything
Honeywell (HON)	2.2%	HVAC, building controls
Johnson Controls (JCI)	1.6%	Building controls
Kingspan Group, PLC (KGSPF.PK)	0.6%**	Green Building
Linear Technology Corp. (LLTC)	2.7%	Efficient power conversion
Neo-Neon Holdings (1868.hk)	1.5%**	LEDs
PFB Corporation (PFB.TO)	5.0%	Green Building / PFB Corporation
Philips (PHG)	2.5%	Lighting
Power Integrations (POWI)	0.5%	Power conversion / Power Integrations
Waterfurance Renewable Energy (WFI.TO)	3.5%	Geothermal Heat Pumps

*The dividend rates were as of January 28, 2010, and may have changed due to changes in the stock price or dividend policy since then.

**These London and Hong Kong listed companies follow the European practice of declaring a final and interim dividend that varies much more than the typical US-based dividend, so the dividend may be less of an indicator of earnings stability.

If you know of any dividend paying efficiency stocks I've missed, please let me know in a comment.

DISCLOSURE:  Long PFB.TO, WFI.TO

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

Posted by Tom Konrad at 09:31 AM | Permalink | Comments (0)

David Gold

Invest in a solar, biofuels, or LED lighting company, and nobody will question the company’s cleantech pedigree.  Invest in a manufacturer of network switch upgrades for telephone companies, then call it “cleantech” and you’ll see a lot of raised eyebrows.  I know, because we did just that.

We are investors in Aztek Networks, a company that makes replacements for the TDM switches that handle much of the phone traffic from standard landline phones.  Telecom companies are excited about Aztek’s product because it enables them, for the first time, to incrementally switch out their old TDM switches rather than doing an extremely expensive complete system overlay. Aztek’s technology also enables them to provide IP-based functionality.  Aztek’s switches are IP-based but can co-exist in the network architecture with both IP-based and “old world” GR303-based switches.  Our cleantech company, Aztek, is enabling telecom companies to accelerate their entry into modern IP-based technology.

Eyebrows raised yet?  Now, for the rest of the story… 

Aztek’s switches also reduce energy consumption by 90%.  How big of a deal is that?  The roughly 16,000 TDM switches in the U.S. and Canada alone consume about 15,000 gigawatt-hours each year – roughly 0.4% of all electricity used in those two countries.  Given that these switches run 24/7/365, they are a base load draw.  That means that burning fossil fuels produces the vast majority of electricity utilized by them.  The result is over 8 trillion tons of carbon emitted every year.

To put that in perspective replacing the aging TDM switches with Aztek’s technology is equivalent to installing over 42 million square meters of solar panels in Arizona where insolation is extraordinary (assumes insolation of 6.5 kwh/m2/day and 15% overall system efficiency).  That would be almost 20 times the amount of electricity produced by all solar power in the U.S. in 2009.

What’s even more compelling about Aztek’s technology is that it also provides a phenomenal economic return to its customers.  As an example, in California eliminating a pound of carbon emissions per year with solar costs roughly $3.50 or about $1.80 with all federal and state tax credits.  Aztek eliminates a pound of carbon emissions each year for an equivalent cost of less than 50 cents per pound – without any tax credits.  As much as 60% of the operating costs incurred by telecom companies for their TDM switches are from energy costs.  With Aztek that cost is reduced by 90%.  On top of this, those old TDM switches are huge and require extensive maintenance.  Aztek’s technology is 90% smaller, yielding large real estate savings, and requires about 30% less maintenance.  The overall payback on the technology can be as little as one year.  And without Aztek’s technology, telecom companies would not be able to move as fast to replace TDM switches because of the complexities and costs of doing complete network overlays. 

Now that’s what I call turning Green into Gold! Aztek is a cleantech company and the best kind at that – one that also delivers a huge return on investment to customers without any government subsidy.  Our bet is that Aztek’s environmental impact will exceed many companies in more stereotypical cleantech segments.  And that will raise some eyebrows as well. 

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

Posted by David Gold at 05:36 PM | Permalink | Comments (0)

David Gold

Wind turbines stand tall and mesmerize with their motion. Solar cells bask in the sparkling sun.  Meanwhile, hidden down in the dark dirty underworld, a compelling technology sits quietly and gets no respect.  Once installed it largely goes unseen and, it seems, it’s equally invisible in the world of clean technology press, venture funding and government R&D funding.  Yet this technology provides some of the most intriguing economic returns available for reducing a building’s net energy consumption and I would welcome the right opportunity to fund an exciting business in this category.

What is this Rodney Dangerfield of cleantech?  Geothermal heat pumps, also referred to as ground source heat pumps or geoexchange.  Anyone who has gone down a hundred feet or so in a cave on a hot day probably noticed how nice and cool it was down there.  That is because in most geology, a zone of nearly constant 55-degree Fahrenheit temperature exists 50-200 feet below the ground we walk on.  Even at shallower depths the temperature hovers within a much narrower range than on the surface. Geoexchange is technology that uses the constant temperature and huge heat sink that the earth represents to generate heat in the wintertime and to cool in the summer time.  They leverage technology inside the house that has similarities to your refrigerator (which is, itself, a heat pump).  (more detailed explanation of geoexchange here).  

Much like solar and wind, this is not a new technology; it’s been around and used for decades.  Although the economics of a geoexchange system vary from location to location based on geology, local energy rates, and the need for heating/cooling, in most places the payback on a geoexchange system for a home or commercial building beats solar or small-scale wind -- usually sizably.  Whereas solar or wind generate electricity, geoexchange reduces the consumption of energy for space heating and cooling and also can be utilized to generate hot water. It has near year-round benefit, working when the sun doesn’t shine and when the wind doesn’t blow.  It is “base load” energy savings for a building.  A $1,000-$2,500 annual savings in energy costs for a middle class home is fairly typical, and the CO2 reduction is roughly equal to taking two cars off the road – permanently.

(Table from Climate Master)

In many markets, a geoexchange system can be installed with paybacks of 10-15 years without any government incentives. By comparison, except in the best markets (high sun, high electricity cost and high state tax incentives on top of federal incentives), solar still struggles today to provide 10-15 year paybacks with government subsidies. 

And here’s where it get’s really exciting:  The cost of installing the technology can pay itself back in as little as three years.  A geoexchange system isn’t like that of a solar or small-scale wind system, which almost always has a 100% incremental cost because no existing system is being replaced.  In most climates, buildings need either heat or air conditioning to be usable 365 days a year, and in many climates they need both.  Those systems age and need to be replaced (a 20-year lifetime is typical).  So for a building needing new HVAC equipment, the relevant cost is the incremental cost of the geoexchange system.  Netting out the cost that would have been spent on traditional HVAC replacement equipment in most cases drops the payback calculation down to six-12 years.  Add the current federal 30% tax rebate off the full system cost, and the buyers payback can be an incredible three to six years. 

 (Source: Cleantech Consulting Services)

27 Case Studies of Residential Ground Source Heat Pump Paybacks

(Oregon Institute of Technology)

So why is it that solar has received about 33% of all venture capital investment in cleantech and around $1B in government R&D funding over the past ten years while virtually no federal funding or venture capital has gone to geoexchange?  There are several contributing factors:

·      Each geoexchange installation is an “art” project. This is a challenge that the solar industry used to face, when every system required fairly extensive design, engineering and coordination of a potpourri of vendors.  Solar has largely overcome this by better productizing their offerings and streamlining installation; at the same time, the number of solar-focused installation companies has proliferated. Geoexchange has yet to mature in this manner, and many of the companies in the space are largely traditional HVAC vendors that can do geoexchange. 

·      Out of sight, out of mind.  One might think this is a good thing, but I suspect that it hurts geoexchange.  Your neighbor who spent $25k on his solar system is proud to have it on his roof, advertising that he’s green.  But no one knows about the neighbor who invested in a geoexchange; after the drilling rigs leave, nobody can see the good deed being done for the environment. 

·      Fragmented, unfocused installers.  Geoexchange systems are installed by a hodgepodge of mostly small HVAC contractors.  Because most don’t focus exclusively on geoexchange, there isn’t a strong marketing and sales engine to streamline the sales and installation process. 

·      A misconception that geoexchange is “low tech.” What technology advancement could there be in putting pipes into trenches or holes to capture or dissipate heat?  The common view is “not much.”  But the process of heat transfer is a complex engineering challenge that could include advanced materials, fluids and designs to enable increased efficiencies, reduced materials and reduced installation costs for a given performance level.  I believe that technological advancements and economies of scale could result in a reduction in geoexchange system costs of 20-50% with a directly corresponding drop in payback time. 

On the last point, it is truly a shame that there isn’t any federal R&D spending going to innovative technologies in this area.  I would love to find an innovative geoexchange company with compelling technology advantages, innovative financing tools and a great management team that could build a large national business to invest in.  If you know of any, send them my way.  I promise I’ll show them some respect even if I can’t promise that we’ll invest in them.



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

Related Article:  Geothermal Heat Pump Stocks

Posted by David Gold at 12:02 AM | Permalink | Comments (1)

Tom Konrad, CFA

PFB Corporation is a manufacturer of energy efficient building materials, including SIPD and ICFs, based on expanded polystyrene.  The company's sales have fallen in response to the housing downturn, but less so than most of the housing industry, despite a strong balance sheet and cash flow.  I consider the stock a buy below C$6.

NOTE: I'm taking a break in order to take a trip to California for some vacation and to moderate a panel at the San Francisco Moneyshow.  This article was written in January 2010, but I delayed publication for seven months because the company is very thinly traded, and I was still adding to my position.  In July and early August, the stock fell decisively below C$6, due to losses caused by the moribund market for new homes in the first half of 2010.   I saw these losses as providing the opportunity I needed to complete my planned purchases of this very thinly traded stock.

When Bill Paul called PFB Corporation (PFB.TO/PRBOF.PK) an "energy efficiency play" whose managers have the "demonstrated ability to control costs (and maintain the regular 6-cent-a-share divided payout) in tough economic times," he instantly had my attention.  Pure energy efficiency companies are rare, and managers' ability to control costs is priceless.  Any energy efficiency stock which has managed to maintain liquidity (not to mention a dividend) in the current downturn is worth a look.

I look for four things in a stock:

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

The Business

PFB manufactures products based on Expanded Polystyrene (a.k.a. Styrofoam, or EPS,) including Structural Insulated Panels (SIPs) and Insulated Concrete Forms (ICFs) for the green building market.  I first heard of both SIPs and ICFs in a course on homebuilding I took in 2003, and I left the class confident that I would use one or the other if I ever designed my own home.  

For new buildings, SIPs and ICFs are among the simplest and most practical ways to erect a well-insulated building quickly.  SIPs easily achieve high R-Values with minimal air leakage, while ICFs have many of the same advantages as walls, but have the additional advantage of being fireproof and extremely strong.

With a green building code improving the baseline, and green buildings taking a larger market share, PFB's products are in the right place in the housing industry, even if the housing industry is not the best industry to be in.  While neither SIPs nor ICFs are exclusive to PFB, the company has invested in making sure that their products are listed in many local building codes in North America.

I like the business, despite the fact that the market for EPS products, including SIPs and ICFs are competitive, and the company is vulnerable to continued weakness in the North American building industry.  

Balance Sheet and Cash Flow

The company carries little debt, which it has reduced slightly since the onset of the financial crisis, despite a decline in revenues.  It has strong cash flow from operations and current ratio of current assets to current liabilities.  It has a small (relative to the size of the company) pension deficit.  This deficit worsened by the 2008 market crash, but it remains small compared to cash flow.  Furthermore, the last evaluation of the pension deficit was conducted on March 31, 2009, near the stock market bottom.  I anticipate that the next evaluation will show a reduction in the pension deficit due to improved market conditions.  Although the company has relatively little debt, it has extended its credit facilities during the year, although these facilities remain mostly unused.  This should provide them with an additional cushion in case building industry conditions worsen.

Profits are sensitive to input costs, which are mostly denominated in dollars, as well as oil and gas prices, which are major components of cost of goods.  Declining energy prices in 2009 have meant that the company has been much more profitable in 2009 than in 2008, despite a 16% decline in sales.  About 4/5 of PFB's sales are in Canada, which helped insulate the company from the more severe housing downturn in the United States.  

My back of the envelope estimate is that the company would be close to break even if energy prices returned to 2008 levels without any increase in sales volume.  I don't expect this scenario to occur, and so expect the company to remain profitable in 2010, with a good chance of improving profitability.  Although higher energy prices may hurt the company in the short term, over the long term high energy prices will increase demand for green building products as a share of building materials, which will in turn help PFB.

For US investors, the company's sensitivity to the dollar is an advantage.  PFB's profits increase with a falling dollar, which means that gains in PFB's stock price may somewhat offset losses in the investor's purchasing power that result from a declining dollar, and if the company is hurt by a strong dollar, the US investor will be better able to bear any losses because of his general increase in purchasing power.

Management

With a small company such as PFB with little management coverage, it is often difficult to get an accurate idea of management quality.  That said, those indications that I do have are good.  One sign I look for is complex financial structures or excessive related party transactions when reading the annual reports.  I found both the 2008 annual report and the most recent quarterly report (Q3 2009) commendably straightforward and easy to understand.

I was also pleasantly surprised that although all outstanding employee incentive options are considerably out of the money (weighted average execution price C$8.45) the company has not felt the need to revalue these options downward or issue new options at lower strike prices, despite the decline of the stock price from C$12 in 2006 to C$8 in 2008 to below C$6 today.  Option based compensation is charged as an expense against income based on a Black-Scholes valuation at the time of issuance, which, due to the decline in the stock price since options were last issued most likely overstates the value of the options and in turn depresses income.

I recently read Dan Ariely's Predictably Irrational: The Hidden Forces That Shape Our Decisions.  It contains a chapter towards the end on how we actually end up making moral decisions, and it's rather depressing reading for any of us who want to think the best of our fellow man, any company's management, or ourselves.  But one conclusion he draws is that nearly everyone acts much more responsibly when they've recently been thinking about morality, in any form.  With this in mind, I think it's worth noting that PFB displays their corporate Code of Business Conduct and Ethical Policy fairly prominently on the website.  Just having such a code does not necessarily mean much, but the fact that they have one puts them a big step ahead of the many small companies that don't.

Value for Money

The company has a C$0.06 quarterly dividend which I expect it to maintain for the foreseeable future, which translates into a healthy dividend yield of about 4.5% at the C$5.35 price at which I bought most of my shares.  Given the uncertain future of the housing industry, I'm uncomfortable predicting future earnings, but I expect the company to be able to survive a sustained downturn, which would improve its competitive position in the industry.  If the housing market remains stable or recovers slightly without outsized increases in oil and natural gas prices, the company should be able to maintain earnings of C$0.30 to C$0.45 per share, giving a P/E ratio in the 12-20 range, and allow the company to maintain a share price in the $4-$6 range.  Rosier scenarios should produce large increases in profits, which ranged from C$0.60 to C$0.92 per share during the 2005-7 housing boom.  Those levels of profitability need not require a return to the housing boom since a growing market share for green building is likely to increase the market of PFB's products even in a flat housing market.

Liquidity

The biggest negative for PFB is the company's liquidity.  Less than $10,000 worth of shares trade on a typical day.  This means that even one investor with a decent amount of money to invest could significantly raise the price of the stock (or drop it when selling.)  Because of this, I decided to leave PFB out of my Ten Green Energy Stocks for 2010, even though I think it's a better value (at C$6 or less) than the three energy efficiency stocks in the list. The problem is, very few readers will be able to buy this stock at that price, and my annual list is so widely followed that most readers would have ended up overpaying. 

I decided to sneak this article in with a bit less fanfare, to let my most loyal readers get the first chance.  But be careful!  With a stock this thinly traded, you should almost certainly use limit orders to avoid overpaying.

Conclusion

Positives: Energy Efficiency business.  Profitable, decent cash flow, minimal debt.  Reasonable valuation.  C$0.24 annual dividend (4% at C$6).  

Negatives: Very thinly traded.  Housing industry.

Recommendation: Buy below C$6.00, unless homebuilding gets even worse than it is now.

DISCLOSURE: Long PFB.TO/PFBOF.PK
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 08:49 PM | Permalink | Comments (2)

Tom Konrad CFA

In February, I published an interview with Sam Healey portfolio manager at Lamassu Holdings about Pure Technologies (PUR.V, PPEHF.PK), a company that can find and repair leaks in water systems without shutting down the system. Last week, Pure Technologies announced that it intended to acquire Pressure Pipe Inspection Company for cash and stock worth as much as C$34.9 million.  The market's reaction was initially positive with PUR.V gaining C$0.29 on Wednesday, the day following the announcement, but most of these gains were given back on Thursday and Friday.

My initial feeling is that this will be a good merger for Pure Technologies, but since Sam Healey follows the company much more closely than I, I thought I'd ask for his take, and also share it with you.  He was kind enough to share his thoughts even though he was on vacation.  Here is what Sam had to say:

The biggest plus of the PPIC acquisition is that they were PUR largest competitor and were active in Markets that PUR wanted to increase share in.  NA, mostly.  Also, PPIC would have provided an easy entrance into the space for larger competitors looking to expand into the space.  Thus, PUR has effectively increased their "moat".

PPIC did not sell any products, they functioned as a service company which means they ran at higher margins and thus the acquisition will not hurt PUR margins going forward.  The earn out (over 20 MM C$) suggests that annual revs will be in that neighborhood, up from 14.6 MM C$ last year, a 30% growth rate, which is encouraging.

What I am most excited about here is that there may be very large cross selling opportunities for PUR to sell its AFO permanent monitoring product to PPIC existing customers.  PPIC customers rely on PPIC for service related to inspection of large diameter pipe.  Many of these customers would benefit greatly from a permanent monitoring system, AFO, and given the success AFO has demonstrated in DC (recently announced - June I think - do not have my notes here) I suspect the sale will not be difficult should there be customer demand.  If that were to materialize it would result in both a nice ramp in product sales and recurring revenue at high margins for monitoring services.  That is the potential home run here.

That all makes sense to me.  The cross-selling opportunities can be especially important for a company like Pure Technologies which is creating a market for a new technology.

You can read the original Pure Technologies article here.

DISCLOSURE: Long PUR.V
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 03:08 PM | Permalink | Comments (0)

David Gold

While renewable energy often captures most of the cleantech headlines, if anyone doubts why energy efficiency must play a significant part in the cleantech effort – as significant, if not more so, than the role of renewable energy -- just examine the energy flow graphic developed by McCall and Bassett and reprinted in the June edition of Technology Review.  At least half of U.S. energy consumption goes to nothing more than creation of hot air through waste heat.  And, when one realizes that much of the 13.9% of electricity output from power plants shown in the graphic also ends up as hot air from our computers, lights, etc., the portion of energy consumption going up in hot air is actually greater than 50%.

Couple this with the following facts… According to the Energy Information Administration (EIA), on a worldwide basis renewable energy currently supplies roughly 10% of the energy consumed.   Over the next 25 years the EIA forecasts worldwide energy consumption to grow by more than 50%. They also forecast a 100% increase over that period in the supply of renewable energy, which, in isolation sounds modestly impressive.  But this would equate to less than 15% of all energy being consumed because consumption would have increased 50%.   Worldwide renewable energy production would have to increase upwards of four fold to equal just about 25% of the energy consumption forecasted for 25 years from now.  Meanwhile, with 50% growth in consumption, the other 75%, representing fossil fuel consumption, would still equal more fossil fuel than the world consumes annually today!

Energy efficiency not only saves on total energy consumption today but also is magnified as consumption increases because the additional devices consuming energy will consume less if they are more efficient.  For example, increasing the average efficiency of all vehicles on the road an average of 50% (e.g., from 20 mpg to 30 mpg…not such a high hurdle) would reduce overall U.S. energy consumption by over 9%...that’s 9% of today’s consumption and tomorrow’s increased consumption because all the additional miles forecast to be driven would also be in more fuel efficient vehicles.  To achieve that same impact with renewable energy would require about a 150% increase in U.S. renewable energy production and about a 225% increase to achieve the same offset in 25 years.

I’m not diminishing the role of renewable energy as an important piece of the long-term equation.  Disruptive development of cost effective renewable energy sources will need to be a key piece of the long-term equation for removing our addiction to fossil fuels.  However, energy efficiency often doesn’t receive as much press as renewable energy because it isn’t as sexy.  Yet, energy efficiency provides leverage that renewable energy does not because the benefits automatically scale as consumption increases.  To say it another way, if we can figure out how to clear up some of the hot air, we can have a tremendous impact on of fossil fuel consumption! 

  (See Larger Image)


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

Posted by David Gold at 07:18 PM | Permalink

Tom Konrad, CFA

Baldor Electric Company stands to benefit from new Federal energy efficiency standards and other efforts to improve industrial energy efficiency.

One of the lesser-known provisions of the 2007 Energy Independence and Security Act (EISA) will be to require efficiency standards for the majority of industrial electric motors.  This will be a boon for motor manufacturers when EISA comes into effect in December 2010: efficient motors require higher quality materials and manufacturing, and so can be sold for higher margins. 

A major beneficiary of this transition will be Baldor Electric (NYSE:BEZ).  Baldor is the market leader for industrial electric motors in the United States.  Almost two-thirds of Baldor's sales are electric motors (the balance comes from power transmissions, drives, and generators,) and Baldor claims to have more motor types that are in compliance with the EISA standards than any other company in the world.


In addition to gains from selling more premium efficient motors, Baldor has opportunities to benefit from shifts towards energy efficient products, such as replacing single-speed motors and gearboxes with variable speed motors, producing both energy and maintenance savings.  Their motors are also used in hybrid commercial trucks.

Financial Strength and Valuation

Baldor has more net debt than I like, but at about 8 times the last three year's average operating cash flow, it looks manageable.  The debt was mostly acquired in the purchase of another electric motor company at the start of 2007, and Baldor has been payed it down a quarter of it over the last three years.  The company has good liquidity, with a current assets over three times current liabilities, even after last year's very slow sales.

Baldor pays a $0.68 annual dividend, which management has said will not be raised until they have made more progress paying down their debt in order to comply with debt covenants.  With the share price at $38.03 on June 9, the dividend yield was 1.8%.  Compared to depressed 2009 earnings, the P/E is an extremely expensive 45, but I agree with the consensus that earnings are likely to rise significantly in 2010 and 2011, bringing the P/E to a more reasonable 15 or so. 

Conclusion

Given my current bearish outlook on the stock market, I'd wait for a pullback to $25 before purchasing BEZ.  I'd be surprised if the company achieves consensus 50% five year annual growth, mainly because I'm less optimistic about the overall economy than most analysts.  Baldor has great growth potential, but industrial equipment is a very cyclical industry.  Time the cycle right, and the stock will be a great addition to a clean energy portfolio.

DISCLOSURE: No position.

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

Posted by Tom Konrad at 01:36 AM | Permalink | Comments (0)

Jim Fitzpatrick

Watching baseball's first quadruple play was strange. Seeing Wal-Mart (WMT) go green is stranger still.

First the baseball: The scene was a game of T-Ball, where everyone bats every inning, regardless of the number of outs.

The bases were loaded when a line drive ended up in the glove of the pitcher. While he wondered how it got there, all the runners took off without tagging up. The pitcher ran to third, then second, then first.

We kept counting the number of outs and they did not add up. First in our heads: That doesn't make sense. Then on our hand: That's crazy. Then our other hand: It kept adding up to four outs.

It took us a while to believe what we saw right in front of us.

And now Wal-Mart, the original Black Hat, is going green. Or better said, sustainable. Let that sink in because it is true. Big time.

So much so that Treehugger.com says it "could end up being one of the biggest motivators to make truly 'green' products ever."

As in history of the world.

Wal-Mart has made believers out of not just the biggest environmental organizations in the world -- like the Environmental Defense Fund and the World Wildlife Federation -- but also Wal-Mart's suppliers.

It started five years ago when Wal-Mart announced three goals: 1) 100 percent renewable energy; 2) Zero waste; 3) Sustainable products.

Wal-Mart stores have already gone sustainable on dozens of fronts from shipping to selling to storing to recycling. Last year, Wal-Mart saved 4.8 billion plastic shopping bags.

That's how they roll in Bentonville: Big.

Even the combined efforts of 8400 stores with two million associates doing $400 billion in sales every year was not enough: Wal-Mart figured out 90 percent of the carbon was coming from its supply chain. So it reached down to all its 100,000 vendors -- and their vendors and their vendors -- and told them that reducing carbon footprints -- reducing energy -- will save money.

Everyone knows that is what Wal-Mart is all about.

"And vendors are listening," said Tom Rooney, CEO of SPG Solar in Novato, California, one of the largest solar installers in the country. "We are seeing renewed and intense interest in industrial- and commerical-scale solar because of Wal-Mart and Proctor and Gamble and other companies are showing their suppliers how to change their shipping, packaging, storing, selling, heating, cooling, disposing,
recycling and other practices to squeeze energy out of the supply chain and save money. And solar is a big part of that."

Not that many need much coaxing: Financial incentives for solar today are so strong that many companies are essentially getting free energy -- and more -- by buying a new solar array from the money they will save from lower energy bills. And having a big chunk left over.

Now on top of that, the largest companies in the world are saying solar and other renewables have to be a part of their supply chain. By some estimates, 1 in 3 dollars worldwide is associated with a company that does business with Walmart. So, if you shift Walmart and its suppliers, the global economy shifts with it, says R. Paul Herman at hipinvestor.com. Or as the New York Times puts it: "because of its size and power, Wal-Mart usually gets what it wants."

And Wal-Mart wants renewable energy.

Earlier this year, Wal-Mart sent its vendors a 15 part questionnaire to determine what their companies were doing to become more sustainable. Also leading the effort is Wal-Mart's "Sustainabilty Index."

Scholars from around the world are gathering at the Universities of Arizona and Arkansas to create this new measure of the energy created -- and wasted -- during the life cycle of a product found at Wal-Mart.

It won't be ready for at least anothear year. "But that doesn't matter," says Rooney. "No one is fighting Wal-Mart or complaining about the reporting that this new index requires. Just the opposite: They are
racing to out do each other, and surpass Wal-Mart's expectations. Right now. Not next year. "

And why not:

In May, the world's largest consumer product company, Proctor and Gamble (PG), announced its own, similar, sustainability program for its vendors. Joining IBM, GE, and other corporate giants on the sustainability train.

The results are already showing up on the bottom line:

"Perhaps more than any other company, Wal-Mart has pursued this approach" said the Harvard Business Review of Wal-Mart's new vision of sustainability. "The payoffs are already showing up: One of the Sustainable Value Networks, tasked with fleet logistics, came up with a transportation strategy that improved efficiency by 38%, saving Wal-Mart more than $200 million annually and cutting its greenhouse
gas emissions by 200,000 tons per year."

Wal-Mart: Not just for beating up anymore. Or maybe we are just seeing the world's first quintuple play.

Jim Fitzpatrick is a retired civil engineer and solar entusiast living in Delaware.

Posted by Guest Contributor at 08:58 PM | Permalink | Comments (0)

David Gold

While many cleantech companies require very large amounts of capital in order to get to market, there is a quiet group of cleantech companies bucking that trend.  Companies like Heartland Biocomposites (Green Building Materials), RealTech (Water Testing) and TerraLUX  (LED Lighting) all built significant and growing businesses with compelling intellectual property and did so initially without multi-millions in capital from venture funds (let alone tens or hundreds of millions). Because TerraLUX is one of our portfolio companies and I therefore know them best, their story is one I am able to share.

TerraLUX boasts customers like Cooper Lighting, Phillips (PHG), GE Healthcare (GE), Snap-On Tools and many others.  It has six awarded patents and eight more filed.  Dr. Anthony Catalano founded the company in 2003 and, with exceptional technology smarts, creative boot-strapping and some of his own capital, he built a business with significant revenues, exciting gross margins and deep intellectual property – all without a penny of outside investment capital.   And now, only after all those accomplishments, has TerraLUX closed a $5.6M financing from Emerald Technology Ventures and Access Venture Partners.

How did TerraLUX pull this off?  The story starts with an entrepreneur focused first and foremost on how to create revenues.  Catalano, who has a PhD from Brown in physical chemistry and is a previous director of the NREL Photovoltaic (solar cell) Division, had the technical acumen to create a business in a number of cleantech sectors but he wisely chose the LED market. He did so because he saw the industry’s explosive growth.  His dream was to create LED lighting for buildings that could have a disruptive impact on lighting energy consumption.  But Catalano realized he couldn’t just create a science project; he had to be able to sell innovative products quickly to create cash flow. 

Seeing that in 2003 the cost/benefits of LED’s were not yet compelling for the large general lighting market he knew he had to turn to a more ready market – portable lighting.  While this market is an order of magnitude smaller than general lighting, it is still a multi-billion dollar market and, most importantly, the benefits of higher brightness, extended lifetime and increased durability have premium value for users of products like flashlights, work lights and surgical lights. The portable lighting market was (and is) willing to pay a premium for those benefits and, as a result, even with the high cost of LED chips in 2003, TerraLUX was able to create real products and real customers.

I suspect some entrepreneurs would have turned up their noses at the thought of launching a flashlight business when their goal was the much bigger general lighting market.  But Catalano didn’t let his ego get in the way of doing what was needed to do to get the business off the ground.  Instead, he went to market with LED drop-in replacements for existing flashlight bulbs and was soon off and running.  From there the company grew into multiple portable lighting product lines and well beyond just flashlights.  As it turned out, creating high-performing portable LED products is, in many ways, more challenging than designing for general lighting.  Limited space, challenging heat sink options, and a non-constant power source (e.g. batteries) create a plethora of challenges.  But Catalano together with his VP-engineering, Dan Harrison (brilliant Caltech guy), used their considerable technical talent to create innovations to solve these problems.  The result has been the creation of a deep intellectual property portfolio around temperature control, optics and circuitry, and the ability of TerraLUX to deliver LED products with unparalleled performance.

Success begets success, and TerraLUX’s flashlight products created awareness in the market.  A few years later, TerraLUX’s phone began ringing with calls from other portable lighting manufacturing companies desiring to create LED versions of their lighting products. These companies needed something they could plug or screw into their existing products to turn them into high-performing LED versions.  TerraLUX was one of the few companies that could deliver such results, and virtually no competitors could do so with the brightness, lifetime and light quality that they were able to achieve. The company responded to this market demand by leveraging its core intellectual property to create LED Embedded Light Modules (self-contained modules that can be screwed or plugged into other manufacturers’ products) on an OEM basis for manufacturers of a variety of portable lighting products.

As the years progressed, LED chip prices compared to their performance continued to drop rapidly and began to open up the potential in the general lighting market.  TerraLUX then got the call it had wanted for years. A key executive at a large general lighting company had bought a TerraLUX flashlight retrofit kit and was impressed with its performance and extremely compact size.  That company had obtained LED products from numerous potential suppliers, but none could meet TerraLUX’s brightness, consistency and quality requirements.  TerraLUX’s intellectual property around thermal controls, circuitry and optics that grew out of the portable lighting business gave them a fantastic edge. Since TerraLUX already had years of experience manufacturing LED Embedded Light Modules (albeit for portable lighting), the general lighting company had confidence in TerraLUX’s ability to deliver.  And, with that, TerraLUX became the general lighting company that Catalano dreamed of when he founded the company. 

Now TerraLUX was in a position to explode into the general lighting market. Although the company had built a growing business with compelling intellectual property, it lacked the polish that venture capitalists typically look for.  At Access Venture Partners we have a soft spot for entrepreneurs that build companies by finding customers. We like to work with companies that have the foundation of a great business, but may have a few rough edges, to help them get to the next level. In late 2008, we saw the potential that TerraLUX had as a business and worked with Catalano to define the things that were needed to enable TerraLUX to raise the capital it now could use to further accelerate its growth.  These included refining the go to market strategy, enhancing company operations, enabling professional accounting, implementing the company’s first financial plan and recruiting Jim Miller, (formerly VP-sales, Global Geographic Regions for Phillips Lumileds), to join the company as CEO. The last item was a step taken with Catalano’s full support, and he remains a key member of the management team as Chief Technology Officer and a member of the board. To accomplish this we made a modest bridge investment and with those tweaks, TerraLUX was in a position to raise a meaningful round of venture capital to even further accelerate its growth and did just that.

Now with $5.6M in growth capital, TerraLUX is able to invest in the sales, marketing and R&D that will enable it to take a strong growing business with deep intellectual property and grow it even faster.  But this growth comes from a foundation built without the large sums of venture capital that get much of the cleantech press that we read about.  Building a company by bootstrapping may not be as sexy as raising a large venture round right out of the shoot.  But the discipline it instills to focus on customers and revenues can create some of the most exciting real businesses in the long run.

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

Posted by David Gold at 08:55 PM | Permalink

Tom Konrad, CFA

A reader caught my attention with his description of Pure Technologies (PUR.V, PPEHF.PK), a company that can find leaks in water systems without shutting down the system.  Since I was intrigued, I thought my readers might be as well.  Here's what he has to say.  I've asked him to monitor the comments if you have follow-up questions of your own.

Tom Konrad: Tell us a little about yourself and your involvement in environmental investing.

Sam Healey: I invest largely in the cleantech sector. I look for companies solving problems that already exist, rather than companies attempting to create new markets.  I'm particularly focused on energy technologies and conservation.  I see a lot of money going into new systems when the cheaper and more effective use of those same dollars would be to improve the existing systems.   

TK: You contacted me regarding a water leak detection company that I found interesting.  Which is it, and why do you think that company would be interesting to my readers?

SH: The company is Pure Technologies out of Calgary, it trades on the TSX venture exchange under the ticker PUR.V or by extension as PPEHF on the pink sheets.  It is a closely held business at this time, run essentially by two brothers, Peter Paulson who heads the R&D and is the CEO, and his brother James who is the chairman and face of the company.  They have never sold a share, but have offered some of their holdings as part of the green shoe associated with the secondary offering just completed. 

Pure Technologies has its roots in the structure monitoring businesses, primarily bridges and large buildings.  The technology enables them to see weakness in the structures before they fail, thus avoiding disaster.  They still participate in this market to the tune of 20-25% of their current revenue.  However, their technology is also capable of monitoring the water infrastructure systems, .  That is the direction they are now heading.  They address the market in two ways.  The first is through product sales. The main product they sell is a leak detecting system called the smart ball which they can send through water pipes without taking the pipes out of service.  In 2009 they made an acquisition of a new robotic technology that will let them bring a similar service to the waste water market. 

The other part of the business is the inspecting, consulting and monitoring business, which generates the majority of their recurring revenue is.  With their technology, which they call Soundprint AFO and P-Wave electromagnetics, they lay fiber cable into a pipe which can take a snap shot of the pipe to find weak spots (P wave) or can continually monitor the integrity of the pipe (Soundprint AFO) so that weak sections can be identified and breaks can be prevented before they occur.  Current World Bank estimates are that 45MM cubic meters of water are lost a day through leaks, and they estimate the total cost to water utilities by water loss at more than 14 Billion dollars.  So I would say these products meet a large addressable and identifiable market.

TK: Why do they have such strong revenue visibility, and what revenue growth do you expect?

SH: They have the advantage that one product ends up creating a market for the other product.  Smart ball serves as a wonderful introduction for the monitoring business.  Smart ball demonstrations projects almost always result in orders.  The fact that the Smart ball can do its work without taking the pipe out of service makes it very attractive.  Most water systems have leaks, and finding them without discontinuing service is very attractive.  Smart ball then provides the introduction of the Pure team and its P wave products and monitoring business.  Often these products are sold into large multi year projects that have large recurring revenues, leading to a high level of visibility for annual revenue.  Despite seasonality and lumpiness on a quarterly basis, annually I believe they feel confident in their projections.  As far as revenue growth, I forecast 30 MM in 2009, 40 MM in 2010 and north of 50 in 2011.  I'm hopeful that the recurring revenue portion will increase as a share of total revenue over that same period.

TK: What's their profitability?

SH: Pure has reported profits for the last two years and 2009 will be no exception.  I estimate the potential of 3MM in EBIT (in US dollars, they report in C$'s) in 2009 increasing to an optimistic number of 6MM in 2010.  Current share count in about 33MM increasing to 40 MM with the recent secondary offering, so you can do the math.  However these numbers are subject to exchange rate (forex) adjustments because they report in Canadian dollars which will hurt them in 2009.  In 2009 the forex adjustment will be over a negative number of over 1 MM which will hurt the final reported EPS  However, the 2009 forex loss will essentially result in reversing a 2008 forex gain.  The revenue level is not high enough to justify an aggressive hedging program, especially considering that their revenues are global and so many currencies would be involved.  Because I generally focus on the business and its development rather than forex effects I prefer to look at the EBIT per share which effectively smooths out forex adjustments rather than the lumpy EPS.  By this metric the company is executing very well, a trend I expect to continue. 

TK: How is the company funding its operations? 

SH: For the last several years they have funded themselves with cash flow from operations, however in order to continue to expand their reach globally and add a few tuck in acquisitions they have announced and are in the process of closing (on February 23rd) a secondary offering for C$30MM. 

This is a perfect example of "raising money for the right reasons", they are producing cash flow already, and the proceeds from the offering will be directed at further geographical expansion and tuck in acquisitions.   Associated with this transaction may be a move to a bigger exchange in Canada.  They meet all of the listing requirement presently but have not made the move.  One of the issues with the stock is that it is very illiquid.  To the extent that moving to bigger exchange in Canada resulted in a larger daily trading volume, I would consider it a positive for investors and potential investors.  Moving would allow them to potentially be included in some of the water indexes.  At this point I am not aware of any potential listing on a US exchange.

TK: Do you have a price target for the company?

SH: For now I would say $7.00 US but this is very much a moving target.  I think the 7$ is reasonable for the projects they have solid viability on right now.  For example, in 2009 the recurring revenue piece of the business will be in the 3.5MM range.  The project they have in Libya will net 5 MM recurring revenue in 2011 by itself.  As each of the current projects ramps up they achieve higher levels of profitability 7 dollars seems about right.  However, with the recent robotics acquisition enabling them to move into waste water systems monitoring and the expansion into South America and East Asia just beginning, I am hopeful that I will find myself raising the target before we get to it.  That will depend entirely on execution going forward.

TK: How competitive is the leak detecting space?  Are there any competitors with similar products?

SH: Leak detection is a competitive space in the sense that it is a major problem for all water and wastewater systems.  However I am unaware of anybody that has the technology to address these problems without taking the lines out of service.  I am also not aware of anyone competing in the pipe monitoring business with a comparable technology.

TK: How dependent is Pure Technologies on a growing economy?

SH: I would say it isn't.  In the emerging markets the growth is such that need for water and leak detections system is massive and Pure has gained considerable traction in emerging markets.  Pure's customers are generally utilities or governments, so they are not dependent on consumer spending.  Moving into the realm of speculation, I'd guess that difficulties in the ability of utilities and municipalities to float bonds for spending on water system projects could potentially hurt business.  That said, I expect 2009 revenue to be double 2007 revenue, despite the interim lack of economic growth.

TK: Do you own shares of the company in your fund or your own account?

SH: I own shares of the company in my fund.

TK: Thanks for sharing your research.  Water and energy are intimately linked, but I hesitate to spread myself into more areas than I already have.

SH: It's been a pleasure.

DISCLOSURE: None, but I'm considering buying.

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

Posted by Tom Konrad at 01:27 PM | Permalink | Comments (0)

Bill Paul

For my money, energy efficiency (aka, the “fifth fuel”) is the best alternative energy sector for investors because it’s primarily about saving money, only secondarily about saving the planet.

The energy services industry reportedly has grown by more than 20% per year every year since 2004 and efficiency service providers now pull in an estimated $5.6 billion a year just on U.S. commercial buildings. Pike Research says there is a reservoir of untapped projects worth $400 billion. “There’s this huge untapped potential” for energy efficiency, a U.S. Environmental Protection Agency spokesperson was recently quoted as saying. Indeed, of the approximately 70 billion square feet of U.S. office space, only about one billion is believed to have undergone retrofits.

Although Washington can be as dull as a 40-watt light bulb, eventually DC is going to figure out that energy efficiency is the best way to create green jobs here in the U.S., unlike all those other green jobs – like making solar and wind components – that are going to China and Europe. When that finally happens, look for Goldman Sachs (Symbol GS), Morgan Stanley (Symbol MS) or some other big outfit to put out a report that wakes the world up to energy efficiency’s tremendous potential.

By then, investors should have already taken action. Like so much in energy, the bigger the company, the more likely it is to pull in big-buck contracts, so it may be worth laying a few bob on the leaders of the energy efficiency services industry, namely: Johnson Controls (Symbol JCI), United Technologies (Symbol UTX), IBM (Symbol IBM) and my personal favorite: Siemens (Symbol SI). (For more on Siemens, please see If I Could Own Only One Alternative Energy Stock, It Would Be . . ..)

DISCLOSURE: No position.

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

Bill Paul is Managing Editor of  EnergyTechStocks.com.

Posted by Bill Paul at 06:49 AM | Permalink

Bill Paul

Nobody knows the alternative energy landscape better than Clint Wheelock, whose firm, Pike Research, generates in-depth research on everything from smart meters to carbon capture and sequestration.

Now here’s a forecast deserving of far wider attention than it has so far received: by 2020 total revenue generated by energy services companies (ESCOs) could hit $37.7 billion, up a monstrous 573% over 2009’s $5.6 billion. At a minimum, Wheelock expects ESCOs’ revenue to hit $19.9 billion by 2020, a 255% increase.

In an exclusive interview last week, Wheelock explained that as much as demand is already growing for services that cut a commercial building’s energy and operating costs, he’s starting to see what he called a “shift in mindset” by building owners that promises to send ESCO demand into the stratosphere.

Building owners are starting to “see energy as an asset to be managed, not as a cost,” Wheelock said. They’re starting to realize that improving lighting, HVAC and other energy-consuming building systems both decreases operating costs and, in an ever more eco-conscious society, increases the value of the building. “A big difference,” Wheelock added, is that building owners are increasingly willing to accept a two-to-three-year payback on their efficiency investments, compared with only 12 to 18 months previously.

To be sure, Wheelock’s 573% ESCO revenue growth forecast comes with caveats, most notably that the still-nascent trend of counties and other government entities selling bonds that help pay for energy-efficiency improvements in buildings catches on, which he thinks will happen over the next few years. Right now, he said, ESCO demand is concentrated in single-tenant buildings owned by government, educational institutions, etc. With so-called PACE financing (short for property-assessed clean energy), Wheelock sees ESCO demand spreading throughout the commercial sector and even penetrating the residential sector.

And so we come to the drum roll: if Clint’s new forecast is spot on, which companies could give investors the most bang for their buck?

He agreed with me on the usual suspects, namely: Johnson Controls (Symbol JCI), Honeywell International (Symbol HON) and Siemens (Symbol SI). (Click here for more on Siemens)

Then, citing the growing interconnect between energy efficiency and information and communications technology, Wheelock offered up three untraditional “green” choices: Cisco Systems (Symbol CSCO), IBM (Symbol IBM), and General Electric (Symbol GE).

DISCLOSURE: No position.

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

Bill Paul is Managing Editor of EnergyTechStocks.com.

Posted by Bill Paul at 03:13 PM | Permalink | Comments (0)

Tom Konrad, CFA

Pioneering light-emitting diode (LED) maker Cree, Inc. looks overvalued.

Light-Emitting Diodes, or LEDs, can be made to shine more brightly by increasing the power to them.  This has the unfortunate effect of overheating the leads and shortening the lifespan of the LED.  A similar effect may soon hit the stock of LED maker, Cree, Inc. (CREE.)

Since I began the tradition, Cree has been a mainstay of my annual portfolio of ten stocks for the next year, published each January (See the 2008 and 2009 lists.  The Cree-free 2010 list is here.)  LEDs have been among my favorite alternative energy technologies even longer.

While the S&P 500 fell 22%, and the Powershares Wilderhill Clean Energy Index (PBW) fell 60%, Cree rose over 210%.  Despite my conviction that energy efficiency stocks should be a mainstay of a clean energy portfolio, the company's current valuation makes me think the company has come too far, too fast.  At $55, the company is trading at a 109 trailing P/E ratio, and 39 forward P/E based on analysts' consensus estimates.

LEDs, in other words, have become sexy, and cautious investors stay away from sexy investments because they know that you often have to pay too much for them.

LED Overcapacity in 2011?

In addition to overvaluation, there is the additional problem of rapidly growing capacity in LED production.   Many LED manufacturers raised money to build new capacity in 2009, and most of that capacity will come on line in 2011, possibly setting the stage for a shake-out like the one we have recently seen in the market for solar polysilicon, according to Canaccord Adams.  Cree's valuation can only be justified by several years of extremely strong earnings growth, and an industry shake-out would slash Cree's profits.  If investors begin to expect such a shake-out, the stock will have to fall.

Cree is still a good company.  With no debt, it is likely to survive any such shake out, and may emerge stronger because of it.  Investors, however, will probably do better by taking their profits and waiting to get back in at a lower price.  Ten Clean Energy Stocks for 2012, perhaps?

DISCLOSURE: No Position.

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 03:12 AM | Permalink | Comments (0)

Bill Paul

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

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

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

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

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

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

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

DISCLOSURE: No position.

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

Bill Paul is Managing Editor of EnergyTechStocks.com.

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

David Gold

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

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

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

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

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

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

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

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

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

Part 1 of 2

Bill Paul

Looking for alternative energy stocks with undiscovered potential?

Who isn't?

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

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

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

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

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

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

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

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

DISCLOSURE: None

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

Bill Paul is Managing Editor of EnergyTechStocks.com.

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

Portfolio theory can lend insights into which carbon abatement strategies policymakers should pursue.  If policymakers listen, what will it mean for green investors?

Tom Konrad, Ph.D., CFA

Good Info, Not Enough Analysis

I've now read most of my review copy of Investment Opportunities for a Low Carbon World.  The quality of the information is generally excellent, as Charles has described in his reviews of the Wind and Solar and Efficiency and Geothermal chapters.  As a resource on the state of Cleantech industries, it's generally excellent.  As an investing resource, however, it leaves something to be desired.  Each chapter is written by a different expert in a particular field, which means that the information is up to date, and comprehensive, but this approach means that there is little attempt to compare the potential of the different investment opportunities presented.  What is the point of in-depth research into carbon abatement technologies if we do not then take the next logical step and emphasize the technologies with the greatest potential for carbon abatement and investment returns?

A Portfolio Approach

The most useful attempt at investment decision-making is buried in the otherwise uninspiring last part of the book. A summary of a 2007 report from the London Accord, A Portfolio Approach to Climate Change Investment and Policy is buried among self-promoting chapters from companies such as Nissan (NSANY)and BP (BP) promoting their (real) investments in clean technology,   The report uses a Monte Carlo implementation of Modern Portfolio Theory to determine low-risk mixes (portfolios) of carbon-mitigation strategies, and was written by Professor Michael Mainelli of Z/Yen Group, and James Palmer.

While intended primarily for policy decision-makers, A Portfolio Approach attempts to determine which portfolio of carbon reduction technologies is likely to produce a desired level of climate change at the lowest cost (or highest investment returns) at the lowest risk of failing to achieve the reduction goal.  Phrased this way, it is easy to see why portfolio theory is an appropriate tool, since it is designed to minimize systematic (overall) risk even when all individual strategies in the portfolio have significant risks of achieving the expected returns and carbon reductions.

Data

The data on various carbon reduction strategies came mainly from the 2007 IPCC Working Group report, "Mitigation of Climate Change."  This report is not complete, omitting some technologies with significant CO₂ reduction potential, in particular solar thermal collectors such as solar hot water heaters and larger installations for process heat in industrial processes.  "Solar," as referred to in the report, refers solely to solar Photovoltaic and Concentrating Solar Power (CSP.)

One decision I found questionable was to ignore the carbon reduction potential of investments with "negative abatement costs on the basis that these investments should be undertaken under any business-as-usual scenario, and are not strictly investment measures as a response to climate change." (p5/22)  This is circular logic.  For an investment with negative cot to exist, there must be a market failure.  Almost by definition, in a well functioning market, all investments with negative cost will have already been made.  Simply saying that these investments "should" be made assumes that these market failures will correct themselves without any effort on the part of policymakers.  Why should energy market failures correct themselves in the future if they have not already?  

In the authors' defense, they run one scenario (#3) in which investments with negative abatement costs are allowed, and they state "Further examination of negative abatement proposals seems in order, as it should be important to understand why these investments fail to be made under current financial conditions.  Neglected negative abatement may justify regulatory intervention by policymakers, e.g. imposing minimum building or transportation efficiency requirements." (pp.17/22 and 18/22)  

From the hedging in this statement, and the fact that they spend less time discussing scenario 3 than either of their other two, I conclude that something prevents the authors from giving market failures the attention they are due.  I find this an extremely common failing among financial practitioners, and believe it is an unfortunate and common consequence of in-depth training in financial modeling.  Most financial models contain an assumption of market efficiency, and do not produce meaningful results in cases of large and persistent market inefficiencies.  Without tools to model market inefficiencies, practitioners are prone to ignore them, convincing themselves that the inefficiencies are unimportant or will cure themselves.  Most of the critiques of "Green Jobs" programs are based on this fallacy.

Put another way, if you have a hammer (a modeling technique which assumes market efficiency, such as modern portfolio theory), you tend to see all problems as if they are nails (efficient markets.)

Results

Since the authors only look at scenarios 1 and 2 (those which ignore negative cost investments) in depth, these are the scenarios I will focus on.  I believe the results of these scenarios are still relevant answers to the question, "After negative cost investments in energy efficiency have been made, which positive cost investments should we pursue?"  Even if all the necessary carbon reductions could be achieved with negative cost investments, it would most likely be unwise to pursue such an approach to mitigate climate change: like all investments, there is no assurance that the expected reductions/returns will be achieved.  Pursuing a wide variety of carbon-reduction strategies provides the greatest chance that some such strategies will achieve the expected reductions, and others will exceed expectations, thus making up for any investments in the mitigation portfolio which do not achieve the expected reductions.

The chart below shows a series of "frontier portfolios": That is, portfolios of carbon abatement investments which achieve specified levels of carbon abatement at minimal cost.  The vertical axis is gigatons (Gt) of equivalent CO₂ emissions (CO₂e) reduced annually, and the horizontal axis is the annual investment needed to achieve this level of reduction.

 

There are diminishing returns for carbon abatement, with the cost of incremental abatement increasing significantly above 15 Gt CO₂e per year, and no practical increase in abatement beyond 20 15 Gt CO₂e and $400B expenditure per year.  

For comparison, to stabilize the atmospheric concentration of CO₂ at 350 ppm, a goal which, according to Joe Romm, will require 8 Gt CO₂e (approximately portfolio 2) of reduction by 2030, and another 10 Gt CO₂e (for a total of 18 Gt CO₂e, or portfolio 4) by 2060.  Since the model does not include negative cost investments in energy efficiency or solar thermal collectors, it is likely that these levels of abatement could be achieved at considerably lower cost by incorporating these opportunities.

The pie charts in the first column show the fraction of carbon abatement expected from each investment in the selected frontier portfolios, while the second column shows the cost of each investment.  The two columns differ because different investments produce different levels of abatement per dollar of investment.  For instance, the cost wedge for Biofuels in portfolios 3 and 4 are much larger than the corresponding abatement wedges.  This indicates that abatement with biofuels is more expensive on a per-ton basis than for the other investments in those portfolios.

I will focus on portfolios 2, 3, and 4, since those are the portfolios which deliver the necessary levels of abatement, which we will need to ramp up to over the coming years and decades.

Forestry

The most striking thing about these portfolios is that Forestry dominates CO₂ abatement, as well as cost in portfolios 2 and 3.  The more aggressive portfolio 4 has three relatively large cost wedges: Building Efficiency, Forestry, and Biofuels.

Unfortunately, according to the report's authors, the carbon abatement from Forestry is very uncertain.  To make matters worse, the methodology used in the report is extremely sensitive to the expected returns (or abatement, in this case) of particular investment classes.  Small errors in the expected returns can lead to frontier portfolios which are dominated by a single investment class, in this case Forestry.  The report notes that "forestry abatement potential is highly uncertain." (p.8/22)  While we can conclude that forestry is likely to be a significant part of our carbon abatement strategy, there is a good chance that forestry will not dominate the mix as it does in the model.

For stock market investors who want to allocate part of their portfolio to forestry, I recently wrote about investing in forestry stocks and forestry exchange traded funds (ETFs). While I was focusing on the potential for forestry to benefit from biofuels and bio-electricity in the article, any marginal demand for forestry services (including carbon sequestration) should benefit this sector.

Hydropower

Hydropower is also a significant investment in these portfolios.  Much of this investment will probably take place in the developing world, but there are also significant opportunities for upgrades to facilities at existing dams in the developed world.  I looked at the potential for hydropower stock market investments last year.

Biofuels

Biofuels also contribute significantly to all the portfolios, especially in the higher abatement scenarios, although the costs are high relative to other investments.  I don't believe that this is very realistic if we are also going to have large contributions to carbon abatement from forestry.  My guess here is that the authors did not take into account the negative interactions between forestry and biofuels, where an increase in one will drive up the costs of the other because of competing land and water use.  Land used for forestry cannot also be used for biofuels, and vice versa.

Wind

We see significant contributions from wind in portfolios 3 and 4, and the costs and potential for wind are much better understood than for many of the other scenarios.  Better yet for stock market investors, investments in wind are simple, with two wind energy ETFs allowing a simple investment in the sector.  Of the two, I have a slight preference for FAN (you can see my reasoning here.)

Efficiency, in all its Forms

Finally, port folio 4 shows considerable investment in Building Efficiency and Industrial Efficiency (which we usually refer to as just Energy Efficiency), while portfolio 2 has a good slice of Transport efficiency (what we usually call Clean Transportation.)  Keep in mind that these slices are only investments that do not have "negative cost," that is they do not cost less than new investments in conventional generation.  Since efficiency dominates investments with negative cost, the total investments in all forms of efficiency are likely to be many times what we see in these graphs.  While there is not yet an energy efficiency ETF available, there is one focused on clean transportation, the Global Progressive Transport ETF (PTRP).  I also have a few stock picks in clean transport.

For industrial and building efficiency, there is no ETF, but here are five of my favorite efficiency stocks, and you can find a much larger list of energy efficiency stocks here.  It's also important to note that smart grid stocks will fall into this category as well, at least for the purposes of the report.   Here are five of my favorite smart grid stocks.

Geothermal

Geothermal also has a small slice of portfolios 2 and 4.  This is significant given the small current size of the industry: even these small slices imply rapid growth for an underappreciated sector.  I mentioned three geothermal stocks to consider here, but I have since sold my stake in Raser Technologies (RZ), and will probably not repurchase it.  Our Twitter followers saw that first.  Charles did a good run-down of the public geothermal stocks in June.   

Other Thoughts

It's also worth looking at what is not in the efficient portfolios, but since this entry is already quite a thesis, I'll save that for later.

DISCLOSURE: None.

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

Posted by Tom Konrad at 12:52 PM | Permalink | Comments (6) | TrackBacks (0)

Charles Morand

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

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

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

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

Putting Your Money Where Your Signature Is?

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

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

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

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

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

Approaching Climate Change Like An Investor

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

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

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

	Opportunity	Risk
Physical	DESCRIPTION: Companies that stand to gain  from strengthening or repairing the physical infrastructure because of an increased incidence of extreme weather events or a changing climate. Examples include electric grid service companies such as CVTech Group (CVTPF.PK), Quanta Services Inc (PWR) and MasTec Inc. (MTZ).  TIMELINE: Medium-term	DESCRIPTION: Companies that stand to be negatively impacted by more frequent and more powerful extreme weather events, or by a changing climate. Examples include ski resort operators, sea-side resort operators and property & casualty insurers.   TIMELINE: Long-term
Business	DESCRIPTION: Companies that provide technologies and solutions to help reduce the carbon footprint of various industries, be it power generation, transportation or the real estate industry. Renewable energy and energy efficiency are two obvious examples. TIMELINE: Immediate	DESCRIPTION: Companies that make products that increase humanity's carbon footprint and that could fall out of favor with consumers on that basis. Examples include car makers with a large strategic and product focus on SUVs and other needlessly large vehicles. TIMELINE: Medium-term
Regulatory	DESCRIPTION: Firms that have direct positive exposure to the regulatory the responses to climate change enacted by governments. Examples include firms that operate exchanges or auction/trading platforms for carbon emission credits such as Climate Exchange PLC (CXCHY.PK)  and World Energy (XWES). TIMELINE: Near-term	DESCRIPTION: Companies that are in the  regulatory line of fire for carbon emissions. Coal-intensive power utilities are a good example, as are other energy-intensive industries that might have a limited ability to pass costs on to consumers because of high demand elasticity or fierce competition. TIMELINE: Near-term

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

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

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

Conclusion

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

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

What they shouldn't do is pretend to see an investment risk or opportunity where they really don't just to appease a handful of vocal stakeholders. Lobbying to get the SEC to force disclosure on climate change is nothing more than window dressing; investors who think this is real already know where to look and what to look for and - surprise, surprise - it's not rocket science!

DISCLOSURE: None

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

Charles Morand

Last Thursday, I reviewed two chapters from the recently published book "Investment Opportunities for a Low Carbon World"*. This post reviews two more.

 Geothermal Energy

Alexander Richter, Glitnir Bank (now Íslandsbanki)

Geothermal is one of the most interesting forms of clean power generation there is. As noted by the author, the most convincing argument for geothermal electricity is the fact that it operates at capacity factors in the upper 90s. This makes it the only renewable technology suitable for baseload power with the exception of dam-based (i.e. large-scale) hydro.

However, as the chapter demonstrates, global potential is unevenly distributed, with Asia, North America and Latin America having around three to four times more potential than Europe, Africa and Oceania. Besides a brief review of the global picture, the book focuses largely on the US, which will most likely remain the most active market for a few more years (the US currently accounts for a third of global installed geothermal electric capacity).

The author does a good job of breaking the geothermal development business model into its main phases (exploration, pre-feasibility, feasibility and design & construction) and explaining the various types of capital flows required at each stage, as companies move from a mining exploration business model (exploration, pre-feasibility, feasibility) to a power generation utility model (design & construction). What's missing, however, is a discussion of the probability of project success at each stage, with risk typically culminating in the feasibility phase with important sums of cash being spent on exploration drilling with no guarantee that the resource will materialize.

The chapter's strength is undeniably its assessment of the current state of the US market. The author uses data from a number of different sources to show the future potential of the market. California is expected to lead the way with Nevada coming in second. Based on a database of where the overall pipeline of US projects was at at the end of 2008, the author estimates that several projects will reach the feasibility and design & construction phases in 2011 and 2012, which should lead to greater demand for capital by the industry.

The chapter also touches on direct use geothermal, although the discussion is far less detailed than that on geothermal electricity. This despite the fact that the author writes: "[t]he biggest potential and prospects for the shorter term are in the direct use of geothermal energy, particularly for heating and other applications that use heat directly."

As with the first two chapters I reviewed, I would have liked a few stock picks, and I believe a sub-section on opportunities in the equipment sector might have been interesting. However, this chapter fulfilled its purpose well; it provided a good introduction to the sector and can serve as reference material for later on. The US data was also very useful.

Energy Efficiency as an Investment Theme

Zoë Knight, Cheviot Asset Management

Energy efficiency is the most straightforward way of cleaning up our electricity supply and, given the right incentives, could also be the cheapest one (up to a point, as efficiency investments eventually run into diminishing marginal returns). We learn that in 16 IEA countries with strong efficiency profiles, efficiency measures resulted in aggregate savings worth US$180 billion in 2005 - not bad!

Incentives is thus exactly what a large part of this chapter focuses on. The author provides a thorough review of European policies and US efficiency targets outlined by the Obama administration to date. In both cases, it appears evident now that a trend toward greater energy efficiency incentives and regulations is well underway.

The author also provides a breakdown of global fuel consumption by category and identifies sectoral investment opportunities that could arise in each category. On the manufacturing side, the greatest opportunities are in machine drives (refrigeration, fans, pumps, compressors and materials processing). For households, hot water and central heating are key areas. 

However, as with other chapters I've reviewed so far, there are no specific stock picks. I did learn, however, that Merrill Lynch created an energy efficiency equity index. However, because all substantive info on the index seems to be accessible only to clients, this won't help retail investors much.

I found the review of US and EU policies very useful, but would have appreciated a greater focus on some of the main technologies that are currently commercially available (with the exception of LED lighting which is well covered), as well as some stock picks.

The author makes the following useful point about large companies with exposure to efficiency (most of the opportunities currently available to investors in this area are large conglomerates): "investors need to identify whether the theme is a large enough driver to warrant stock selection or whether there may be other factors that will drive valuation of the stock [...], outweighing the positive structural drivers from increased investment at a government level into energy efficiency. As with any equity investment, positive long-term structural drivers may differ from short-term trading cyclicality."

DISCLOSURE: None 

* We are always interested in reviewing books and reports in the areas of alternative energy, cleantech or other environmental industries, especially where they add value to the investment decision-making process. If your organization would like a new book or report reviewed, please contact us. 

Posted by Charles Morand at 12:03 AM | Permalink | Comments (0)

Stocks may be expensive now, but they won't be forever.  Five energy efficiency plays to buy when they're cheap again in efficient HVAC, desalination, thermal imaging, and lighting.

Tom Konrad, Ph.D., CFA

This article continues my Clean Energy Stocks Shopping List series.  In the first, I looked at five clean transport stocks I'll be looking to buy when the market falls.  In the second, I took a step back, and outlined why it makes sense to wait for better prices than to buy these companies now.  Here are five stocks I'll be looking to buy  in my all time favorite sector, Energy Efficiency.  Future articles in this series will be found here.

#1 Energy Recovery, Inc. (ERII)

Much has been written about how energy and water are increasingly becoming interlinked problems, with the production of energy (especially biofuels) and the pumping, sanitization, and desalination of water requiring increasing amounts of energy.  One way to invest in this theme is by investing in wind stocks or solar photovoltaic stocks, since these technologies require little or no water to generate electricity.  

Another way would be to invest in water rights or water suppliers, or a water ETF.  I have long avoided this method, because I consider water to be far too politically sensitive.  People have a deep distaste of companies making money from water, and this often leads to politicians expropriating water company assets or changing the rules so that owners of water rights don't make "unreasonable" profits from them.  With all this political risk surrounding water, the only way I feel comfortable investing is through an equipment supplier which can make a profit by selling equipment to utilities.  Once the sale is made, the profit can be booked, and there is much less ongoing political risk than there would be by investing directly in such a utility.

Energy Recovery, Inc. is such a company.  They sell systems which greatly reduce the energy used in desalination, making this both an energy efficiency play and a water play.  Better, they are currently profitable, and have an extremely strong balance sheet and good cash flow.  However, its valuation ratios are all quite high because of high expected growth. I'm waiting for the price to fall before I buy any more (I'm currently short a few August $5 puts.)

#2 and #3 LSB Industries and Waterfurnace Renewable Energy (WFI.TO / WFFIF.PK)

I wrote about these two geothermal heat pump companies last December, and Waterfurnace is one of my Ten Clean Energy Stocks for 2009.  Since I wrote those articles, Energy Secretary Chu toured a Waterfurnace plant, and announced $50 million in government support for geothermal heat pump use.  Given all the attention, both stocks have risen sharply, and I'd be happy to increase my stakes if a market decline results in a buying opportunity. 

#4 FLIR Systems, Inc. (FLIR)

I also recently covered Flir, which I expect to benefit from the growing number of energy auditors and energy audits which have been spurred by the stimulus package, and this stock, too, has advanced strongly.  The business case remains strong, and if a market decline takes this high-growth, high P/E stock with it, I'll be ready to buy more.

#5 Cree Inc (CREE)

Cree is probably one of my longest standing favorite stocks. It is in both my Ten Clean Energy Stocks for 2008 as well as the 10 for 2009, and I was writing about investing in LED companies long before I started the annual lists.  Because the stock price has gone up so quickly  recently, I've sold most of my position.  I went into some depth as to why I like the company in both articles, and I still like it and the LED industry in general, because it's a rare energy efficiency play that's a simple product, and hence does not encounter many of the barriers to energy efficiency. Reasonably high powered LED light bulbs are becoming more common in stores, as well as LED fixtures.  I recently purchased an LED Lamp for reading, and an LED Grow Light. If a market decline provides the opportunity, I plan to rebuild my position in Cree.

DISCLOSURE: Tom Konrad and/or his clients own ERII, LXU, WFIFF, FLIR, and CREE.  

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 08:01 PM | Permalink | Comments (0) | TrackBacks (0)

Tom Konrad, Ph.D.

I have a regular column called Greener Money in Smart Energy Living Magazine.  The Spring issue just printed, and I'd like to highlight this column, because it discusses ideas I have not written about elsewhere.  The column begins:

As people become more aware of how we use energy, many become amazed and appalled at the sheer waste of it.  Why are homes built without attention to insulation and sealing that would not only make them more comfortable, but also mean they cost less to live in, even with the slightly larger mortgage payments?  Why do most microwaves use more electricity running the integrated clock than they do heating food?

The financial crisis can inspire similar emotions.  Why did so many institutional investors buy collateralized debt obligations which they knew they did not understand?  Why did regulators assume that these investors understood the risks they were taking?  Why did lenders make loans to people without first verifying their ability to pay? 

The answers to both sets of questions are surprisingly similar: both are manifestations of market barriers. In the realm of energy, these barriers lead to purchases which might be slightly cheaper in terms of first cost, but come with large ongoing energy costs, far higher than the lower initial cost can justify.  In the case of the financial system, these barriers caused the build up of risks which were much greater than could be justified by the potential gains investors might have achieved by taking them on.

What are these barriers? 

You can read the rest of the article here.

Posted by Tom Konrad at 09:16 AM | Permalink | Comments (6) | TrackBacks (0)

I highlighted FLIR Systems (NASD:FLIR) as a way to participate in the growth of the energy auditing industry in late 2007.  I was ambivalent about it at the time: I very much liked the potential growth story, but felt the stock was overvalued.

Flir has fallen about 35% since late 2007, and 50% since its peak in July 2008 (while revenues have grown about 50%), prompting me to give it another look.  

 

Infrared Stimulus

Weatherization of low income housing and Federal building retrofits are a major component of the American Recovery and Reinvestment Act (aka "Stimulus Package.")  This will require the hiring and training of thousands of new energy auditors, for whom infrared (IR) imaging is an extremely versatile tool, both in terms of finding out what problems need to be fixed, and for convincing the customer that they are necessary.  IR imaging is not necessary for an effective energy audit, but it is increasingly becoming part of the energy auditor's standard kit. I expect that new energy auditors are likely to flock to the technology because of its strong visual appeal.  In addition, it requires training to use IR cameras properly, a service which Flir also provides.  

Because an IR audit is cheaper than a full energy audit, some state weatherization programs or utility Demand Side Management programs will choose to to adopt IR audits as the sole energy audit used in their program.  I think that this is likely, because Xcel Energy (XEL) initially proposed the use of IR audits in their most recent Demand Side Management Plan last fall.  Although, due to the efforts of the Energy Efficiency Business Coalition (EEBC), for whom I was consulting at the time, the final plan used the considerably more robust HERS audits.  If EEBC had not intervened, the plan almost certainly would have been approved with infrared audits as the sole requirement, which is why I expect that result in some of the many other national programs starting as the result of the Stimulus package. In cases where IR are not the sole requirement, properly used IR cameras are extremely useful tools in the energy auditor's kit, increasing both the speed and accuracy in detecting problems, so are likly to have some role in all such programs.

Flir's equipment is also used in maintenance and diagnostics of a large range of commercial equipment.  Much like rail maintenance stock Portec (PRPX), while manufactures are delaying new investment, such delays may increase the demand for Flir's imaging equipment to help assure that older equipment continues to function efficiently.  For instance, their GasFindIR range of cameras is designed to detect leaks of organic gasses, such as methane.   While stopping leaks is valuable in its own right, the potency of methane as a greenhouse gas means that a greenhouse gas cap and trade legislation will likely provide additional incentives to detect and fix gas leaks.

Growth Story

FLIR Systems is a growth story based on the rapidly decreasing price of thermal imaging systems, which leads to a rapidly growing market quickly expanding to new applications.  So far, the financial crisis has done little to reduce sales growth, and margins remain extremely robust, with a net operating margin of 26% and a return on equity of 28%, both of which have been increasing even with decreasing minor use of financial leverage.

While the stock price was plunging along with the market, revenue continued to grow at a robust 38% from FY 2007 to FY 2008, and the strength continued in the final quarter of 2008.  Management expects revenue to continue to grow at a more subdued 11-16% in 2009, without assuming any improvements in global economic conditions.  They have a low debt-to equity ratio of 0.23 which fell in 2008 and FLIR has continued to lower debt this year by allowing holders of its senior convertible notes to exchange them for equity.  Even with this declining leverage, their financial statements show no sign of difficulty in collecting payments from customers.  

With the stock at $21, the P/E ratio is now down to 17, about half of what it was when I first looked at the company.  I recently sold puts to acquire shares if the price falls below $15.

The Other 70%

Flir is not a pure-play energy efficiency stock.  According to the most recent annual report, the Thermography division, which includes the energy efficiency applications discussed above, accounted for approximately 30% of revenues in 2008, while its Commercial Vision Systems unit accounted for 17% and its Government Systems unit for 53%.  

Its Government Systems unit supplies military, police, and paramilitary with advanced infrared imaging equipment.  While defense stocks as a whole may not be a safe have in this recession, some analysts see FLIR's military supplier role as an advantage, because they expect government spending on small ticket items (as opposed to tanks and fighter jets) to remain robust.  Since I've never analyzed this sector, I can't take a strong position on this, but imaging systems seem to be military hardware which make a lot of sense in our current wars in Iraq and Afghanistan.

When considering an investment in Flir, it's important to understand that the company's primary markets are military and security, and they are likely to remain so, as all divisions are on robust growth trajectories.  Many clean energy investors may be uncomfortable with military contracting from a moral standpoint, but I feel that sensing systems are as likely to save civilian lives as they are to end them.  

From a financial analysis standpoint, I simply know that I don't understand the industry.  I can say, however, that this segment seems the safest part of the company's business, largely because they have a large an growing backlog in the segment.  One other upside is the fact that Flir is lumped with other military contractors and few other alternative energy investors are looking at the company.  Most of the analysts who follow it specialize in military contractors... such analysts are therefore as unlikely to understand the true potential of the energy efficiency market as we are to understand the potential of the military market.

Tom Konrad, Ph.D.

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

 

Posted by Tom Konrad at 01:16 AM | Permalink | Comments (2) | TrackBacks (0)

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)

Geothermal heat pumps (GHP), also know as Geoexchange, or ground-source heat pumps have been recognized by both the Environmental Protection Agency and the US Department of Energy as the most efficient and environmentally friendly way to heat and cool a building available.  The downside of GHPs has always been the large up-front cost associated with the cost of the ground loop.  

With Obama promising a massive energy efficiency overhaul of federal buildings, the up-front cost is unlikely to be important so long as the expected returns on the investment are sufficient to pay for the upgrade.  Since geothermal heat pumps on medium and large buildings typically have internal rates of return in excess of 28%, this should not be a problem.  Many federal buildings also have significant open space or parking lots near them which can be used t install ground loops.  In addition, a new federal tax credit for geothermal systems was passed in 2008 (10% for commercial installations, $2000 for residential), may provide additional stimulus to the rapidly growing market in the private sector.

Hence, now seems an opportune time to consider investment in companies selling GHPs.  I know of two such publicly traded companies in North America (there are also a large number of private players, especially installers.)

Waterfurnace Renewable Energy (WFIFF.PK)

Waterfurnace manufactures heat pumps for both residential and commercial buildings, as well as heat pump pool heaters.  According to their third quarter financial statements, the company is in good shape from a liquidity perspective, so much so that they eliminated an unused line of credit in the quarter, and paid off the balance of outstanding bonds they had used to build their facilities.

The company has a strong Current Ratio of about 2.5.  In fact, current assets exceed total liabilities.  Their cash flow from operations is growing and more than sufficient to continue funding current levels of investment.  I've previously mentioned Waterfurnace in my articles about Wind and Heat Pumps and how to invest in the Pickens Plan.  As I also pointed out recently, Waterfurnace pays a dividend of over 3%.

LSB Industries,  Inc. (LXU)

A reader recently left me a comment pointing me to LSB as a GHP play.  Unlike Waterfurnace, the company is not a pure-play on heat pumps.  They also sell chemical products for a broad range of industries including mining and agriculture.  Their climate control division, which includes heat pumps and air handling systems, accounts for about 41% of sales.   

Like Waterfurnace, LSB has a strong balance sheet and has been repurchasing convertible notes with available cash from operations.  They also have an excellent current ratio of over 2.5 and current assets exceed total liabilities.  A review of their most recent quarterly statement shows that working capital growth has been a drag on cash from operations, while income has been reduced by losses on natural gas hedging contracts and an unplanned stoppage at one of their facilities.  Despite these hiccups, I see little reason to doubt that they will continue to be able to fund their business growth and investment from cash flow.

Conclusions

Both of these companies boast strong balance sheets and inexpensive valuations.  In today's volatile markets, that is no reason to expect that the stock price cannot fall further, but that would be a (better) buying opportunity for companies I'm comfortable owning for the long haul.  And which are likely to receive short term boost from the stimulus package.

DISCLOSURE: Tom Konrad has long positions in WFIFF and LXU.

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 12:22 PM | Permalink | Comments (0) | TrackBacks (0)

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)

Charles recently recommended a few dividend paying alternative energy companies as safe havens in the current turmoil.  Since I've been thinking along the same lines, I thought I'd add my own picks.  I currently like energy efficiency companies with solid balance sheets, because I believe that Obama's fiscal stimulus will contain significant money for green, energy-efficiency related jobs.  

That said, here are two I'd add to Charles' list.  These two also have the advantage of being pure-play (or nearly pure-play) bets on clean energy.

Name	Ticker	Yield	Focus	Related Articles
Waterfunace Renewable Energy	WFI.TO, WFFIF.PK	3.27%	Geothermal Heat Pumps	Wind and Heat Pumps
New Flyer Industries	NFI-UN.TO, NFYIF.PK	17.7% (based on 12x last monthly distribution)	Bus manufacture	New Flyer Industries

The New Flyer yield is not strictly a dividend payment.  This is an "income deposit security" paying a blend of interest on a subordinated bond plus a cash dividend.  The dividend varies from month to month, based on earnings, but currently about two-thirds of the distribution is interest.

DISCLOSURE: Tom Konrad has owns shares of  WFI and NFI-UN.

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 02:00 PM | Permalink | Comments (0) | TrackBacks (1)

When incandescent light bulbs are phased out in the United States between 2012 to 2014, managers of utility Demand Side Management (DSM) programs will be between a rock and a hard place.  At the Southwest Energy Efficiency Project's 5th annual Energy Efficiency Workshop, this fact seemed to be the elephant in the room that most of the utility executives in attendance did not want to talk about.

One Trick Pony

It's not for nothing that the compact fluorescent bulb, or CFL, has become the international symbol of energy efficiency.  While it is true that we're not going to stop global warming by changing light bulbs, switching out an incandescent for a CFL is one of the most cost effective and simplest steps we can take along the way.  CFLs are so cost effective that current DSM programs get the bulk of their electricity savings from this single measure.

In 2007, Efficiency Vermont saved over 1.7%[pdf] of the state's electric load while the vast majority of DSM programs save only a fraction of 1%. 78% of these savings came from lighting, meaning that the program's outstanding performance is almost entirely attributable to CFLs.

Larry Holmes, the manager of NV Energy/ Sierra Pacific Resources's (NYSE:SRP) DSM program told me that his programs get about half their electricity savings from CFLs, and that, the company's other DSM programs will not be able to ramp up to replace the savings from CFLs.

These programs are not alone... CFLs are a staple of DSM programs everywhere, so it makes sense for utilities and environmental advocates alike to promote the use of this simple, cost effective measure.

What's Next?

Although it will make the job of DSM programs harder, for a societal perspective, the phase out of incandescent bulbs will be a good thing: more people will use energy efficient lights, and they will no longer need to be bribed with bulb buy-downs and giveaways to do something which is already in their best interest, such as saving money by using CFLs.

The problem comes because regulators have mandated fixed amounts of savings for years into the future, and these savings are measured in comparison to a benchmark of what customers would otherwise be doing.  In the case of lighting, when CFLs or other energy efficient options become the legal default, DSM programs will only be able to achieve savings by encouraging even more efficient options.  

A program manager for residential programs at CEE, the industry association of efficiency programs, told me that she has hopes for solid state lighting, a.k.a. light emitting diodes or LEDs.  I'm intentionally omitting her name from this article because a quick examination of that idea shows that it is mathematically impossible.  The fact that industry insiders hold out these hopes for LEDs shows that the industry has little idea of how to replace the CFL in residential DSM. 

To see why LEDs in 2014 will not produce similar savings to CFLs today, consider the following example.    Replacing a 100 watt which is incandescent used for 1000 hours a year with a 25 watt CFL will save 75 kWh a year.  In contrast, replacing a 25w CFL with an 10 watt LED bulb only saves 15 kWh a year, or 1/5 as much.  Currently an LED bulb powerful enough to replace a 25w CFL or 100w incandescent uses 13 watts (and costs $80), so even these savings assume considerable improvements in LED prices and efficiency.  Note that further technology improvement does not solve the core problem.  

Even if we assume that there will be a lighting solution which uses no energy, the potential savings from residential lighting will drop by a factor of three when CFLs become standard, because only 25 watts can now be saved by any technology, where before the savings potential was 100 watts.  Hence, the savings potential in residential lighting will drop by a factor of  at least four between 2012 and 2014, meaning that most of the savings currently achievable in residential lighting will have to be made up by other programs.  

The Investment Angle

For electric utility investors, this is important because utility regulators usually grant incentives to utilities which meet or exceed their DSM targets.  For large DSM programs, these incentives can have a significant impact on earnings, and this impact will only grow as utilities meet more of their resource needs with DSM.  Yet, because of the loss of one very important measure in DSM programs, many utilities are likely to miss their savings targets during the 2012 to 2015 time period, unless regulators decide to ease the targets.  Investors who are buying utilities now as a safe haven during a recession may want to sell these stocks before the utilities start to miss their DSM targets.

As utilities ramp up other programs in an effort to replace the CFL, other household energy efficiency measures will benefit.   Those measures likely to benefit the most will address the projected large uses of residential electricity.   Measures which address heating and cooling efficiency, such as efficient air conditioners and heat pumps, as well as low cost measures such as duct sealing and air conditioning tune ups.  Companies which can figure out ways to inexpensively tune up air conditioners, or seal household ducts will be in an excellent position.  

Another large (and growing) user of residential electricity which DSM programs are just beginning to address is household electronics, especially televisions and set-top boxes, both when in use and in "off" mode.  Finally, even though LEDs will not be able to replace more than a fraction of the savings from CFLs, they will be part of the mix, especially in high usage lighting.

DISCLOSURE: Tom Konrad does not own any of the securities mentioned.

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 12:54 PM | Permalink | Comments (4) | TrackBacks (0)

This article continues a series 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 or poor liquidity may not survive.  In this series, I try to separate the wheat from the chaff.   I generally liked the efficient lighting, and smart metering and energy management companies in the index, but wasn't thrilled by any of the electric vehicle picks. 

General Electric (NYSE:GE).  GE has been a long-time favorite of mine (much to my dismay when it got caught with a small subprime exposure.)  In the short term, GE has shown that it can still raise money even in troubled times by doing a (rather expensive) deal with Warren Buffett's Berkshire Hathaway.  The $3 Billion injection, followed by the $12B public offering was necessary because GE has long maintained a very low current ratio, something they were easily able to do in ordinary times due to their triple-A credit rating.  Even a triple-A rated company (especially one with a large finance division) has trouble raising money in this market, and they need new cash to maintain that credit rating.  I wish I had looked at GE two weeks ago when I started dumping companies which would need to raise financing.  In fact, GE was a company I suggested would become a good buy when this market finds a bottom.  Now that GE has strengthened their balance sheet, I'm comfortable with my stake.  

Nevertheless, GE is a graphic example of what happens to companies which need to raise cash quickly when cash is tight.  Consider the company's recent drop in stock price, and then consider what would have happened without the extra confidence they obtained by bringing Warren Buffett on board first.

Honeywell (NYSE:HON).  Honeywell, which I like for its building controls systems and performance contracting business, has an OK current ratio of 1.3, and a very strong operating cash flow equal to half the company's total (not just short term) debt load, meaning they will probably not need to tap the markets for new funds in the near future.  I'm holding my stake in this company.

International Business Machines (NYSE:IBM).  IBM has a current ratio just over 1, and a strong operating cash flow sufficient to cover their total debt in two years.  Although IBM's push into solar was one of 2007's most blogged stories, I tend to avoid solar companies because of the investor excitement around the sector.  That said, there seems to be no reason to think IBM will have any immediate need to raise cash.

Johnson Controls (NYSE:JCI).  Johnson Controls has long been my top energy efficiency pick among blue chip companies.  With a current ratio of 1.2, and enough cash from operations to pay off their total debt in two years, the valuation is becoming increasingly attractive.  In response to my (negative) article on electric car companies, a reader wondered if Johnson Controls was also risky because of exposure to car buyers needing financing.  I like the current valuation, but, especially in the short term, we can expect earnings and cash flow to drop significantly.   If I didn't already own it, I'd be tempted to wait for the price to drop a little more before getting in, but I would not avoid the company all together, because they are well placed to buy up smaller battery companies to consolidate their lead in that market.  

Siemens (NYSE:SI).  Siemens also has a current ratio of 1.2, and enough cash from operations to pay off their total debt in two years.  I've long liked Siemens for their interests in a wide variety of my favorite sectors, in addition to energy efficiency.  They're a global leader in electricity transmission infrastructure, efficient lighting, rail infrastructure, and have a strong wind turbine unit.  Their wide array of businesses is less exposed to the potentially cash-strapped consumer than GE and Johnson Controls.

DISCLOSURE: Tom Konrad owns GE, HON, JCI, and 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 10:37 AM | Permalink | Comments (1) | TrackBacks (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)

Opportunity

On Friday, October 10, 2008 , I stopped being bearish for the first time since the 1990s.  My long term expectation of a crash that didn't come had been undermining my self confidence.  Even the decline in 2001 and 2002 had not seemed severe enough, given the financial imbalances in the system.  I had begun to worry that I might be genetically bearish, and that my worries had nothing to do with a market that was greatly overvalued.

I am relieved to say that I am not a permabear, and that the market as a whole now seems to me to be fairly valued.  Some sectors and many stocks are still overvalued, but bargains are there for those who look.  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.  We have just seen two weeks where the largest investors in the market have been forced to sell everything they could in order to meet margin calls and cover debts.  The wildcard is how long such distress selling will continue.

Anyone who currently has cash on hand and the courage to buy is in an enviable position.  Selling has been indiscriminate, with the best companies being sold as hard as the worst.  Now is the time to begin buying quality companies at a large discount to their true value.  Forced selling may continue for a while yet, but fundamental buyers are beginning to move into the market, and the best companies may never be this cheap again.

Buy Carefully

I am not calling a bottom here for the market as a whole.  I would not be surprised if the Dow falls as low as 7000, but I do think that the current mispricings from forced selling are as extreme as they are likely to get.  Now is not the time to buy a market index, be it a general market fund, or a green mutual fund or ETF.  

It is extremely timely that I have already begun a series of articles looking into companies which help people and businesses save money by using energy more efficiently.  Energy Efficiency seems to be the most likely alternative energy sector to benefit from an extended recession or depression.  With that said, I will continue my look into the liquidity of companies in the Wise Energy Use Index.  A liquidity screen is a good way to quickly eliminate companies from consideration before you've wasted too much time researching them.

Wise Energy Use Stocks, Part 2: Lighting

Philips (NYSE: PHG).  Philips is a long time favorite of mine, has a current ratio of 1.7, and operating cash flow of $1.7 Billion.  With $3.3 Billion on hand, Philips may be able to continue their acquisition of other lighting firms at reduced prices, and cement their world leadership in efficient lighting.  Energy efficient lighting upgrades typically have paybacks of less than two years, and are a staple of utility demand side management programs.

Cree, Inc. (NASD: CREE).  Cree is a leader in bright white LEDs.  With no debt, and a current ratio of over 4, operating cash flow of $312 million, Cree should be able to weather a financial storm, despite trouble at a major customer.  Cree may even use its healthy balance sheet for a small acquisition or two.

Lighting Science Group (LSCG.OB).  Lighting Science is a manufacturer of LED fixtures, including replacements for normal incandescent household bulbs.  Although the industry is poised for explosive growth in 1-2 years as costs fall, Lighting Science may not survive to benefit.  The company has a marginal current ratio of 1.35, but their twelve month operating cash loss of $19M is far in excess of both their current assets less current liabilities and cash on hand ($2.8M.)  Despite recent good news in a patent case with Philips, and resolution of a dispute with the former CEO, Lighting Science will be in a bind if credit markets continue to be tight.  

According to Bill Paul of Energy Tech Stocks, the company is in his Wise Energy Use Index because it is in a great industry, and a rising tide floats all boats.  That had been my reasoning when I bought the company for myself, and recommended it as a speculative play in 2008, but now I think that a rising tide only floats those boats that don't sink first.  I decided to sell my stake while writing this article.  

Philips may consider buying Lighting Science now that they have been stymied in their patent dispute, but holders of the stock should not count on this to raise the stock price significantly.  Just as Barclays chose to wait and buy Lehman's core assets out of bankruptcy, a potential acquirer of Lighting Science might also choose to wait for the LED Light Bankruptcy Special.   Other potential acquirers include Cree, Osram Sylvania, a division of Siemens (NYSE:SI), and General Electric (NYSE:GE).

DISCLOSURE: Tom Konrad and/or his clients own PHG, CREE, GE, and 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 01:37 PM | Permalink | Comments (6)

Part 1: Introduction

In a financial world where there seems to be little hope, I see a bright spot in energy efficiency.  This is because energy efficiency improvements pay for themselves in a very short time, in addition to being the best thing we can do for energy security and reducing greenhouse gas emissions.  Given the current financial crisis, I also believe that investors should focus on companies with strong balance sheets, which will be able to internally fund their investment needs for the next couple years.

While I was making the above case, Energy Tech Stocks introduced their "Wise Energy Use" stock index, intended to "start every investor thinking about building a portfolio of companies whose fundamental business is to save their customers money by saving them energy."   Since I have been thinking about just that, I thought it worth asking the question, "Which companies in the index might be able to thrive in times when funding is scarce?"  Since there are fifteen companies in the Wise Energy Use index (nor was it intended as a formal index), this will not be an in-depth analysis of each, but rather more of a quick screen to find those which look ready to weather a continuing storm.

In general, using energy wisely is a good business to be in when times are are hard.  When times are easy, conservation falls to a low priority, because the pennies saved will never add up to a big score.  When times are hard, people stop thinking about the big score, and spend more time thinking about making ends meet.  This should be great for companies whose business model is helping customers save money by saving energy, or Wise Energy Use.

In going through the list, I'll be looking for companies with short term assets in excess of short term liabilities (i.e. a Current Ratio greater than 1) and, if cash from operations is negative, it should be small relative to cash on hand, as well as small relative to the difference between short term assets and short term liabilities.  I'll also take a look at how levered free cash flow compares to cash and current assets.

I'm also going to be more interested in companies which are not dependent on consumer demand, but rather will stand to benefit from infrastructure investment, which seems more likely to be a safe haven as governments everywhere attempt to get their economies going again.

Next week, I'll go through the companies.  If you want a preview, here are the EnergyTechStocks articles describing the companies:

Lighting firms; Efficient Cars; Smart Grid and Energy Management; Global Services Companies

Posted by Tom Konrad at 06:19 PM | Permalink | Comments (0) | TrackBacks (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)

On Monday, I told readers that I was getting out of companies some which I feel are likely to need to raise new money over the next couple years.  I also provided a list of stocks I will be buying when I judge we're near the bottom.  This is the first in a series of short articles about those stocks. 

Carmanah Technologies (CMHXF)

I've mentioned Carmanah Technologies (CMHXF) in passing in articles about LED companies.  I first became interested in Carmanah in 2005. The company's integrated LED-solar lighting solutions caught my attention because they were (and are) economic regardless of the price of electricity; the savings come mainly from reduced installation costs.  The downside of this is that they are unlikely to see the spectacular growth that solar photovoltaics will see as solar approaches grid parity in cost.  They struggled with a strong Canadian dollar (loonie) driven by high oil prices.  Because company expenses are mostly denominated in loonies, company earnings tend to fall with a rising oil price, making this company a poor hedge against oil.

Carmanah has done much to recapitalize the company and refocus the business since they were badly hurt by a rising loonie last year, but their currency exposure was  unhedged as of their June quarterly report, so they are exposed to a rise in the value of the loonie (which I expect if oil prices recover.) 

DISCLOSURE: No position.

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

Posted by Tom Konrad at 10:19 AM | Permalink | Comments (0) | 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)

I recently attended the Optoelectronic Industry Development Association's (OIDA) "Green" Photonics Forum.  Unlike dirty industries trying to appear green, the Optoelectronics industry does not really have to try to be green.  Two prominent examples familiar to clean energy investors are Concentrating Photovoltaic Solar (CPV) (i.e. using optics to focus light on high efficiency solar cells) and Light Emitting Diodes (LEDs).

The presentations on Tuesday focused on the above technologies, and I was struck by a common problem faced by both: heat dissipation.  According to Sarah Kurtz, a National Renewable Energy Laboratory scientist leading the team working on high-efficiency, multi-junction solar cells used in CPV, one of the key challenges for CPV integrators is bonding the solar cell to the heat sink.  This bond needs to be uniform, without any bubbles, and needs to be able to withstand large, rapid temperature changes, as the amount of light and heat on the chip goes from practically nothing to hundreds of suns.

What can LEDs not do at 150 lumens per watt?

The keynote speaker at the conference was Jay Shuler of Philips (NYSE:PHG) Lumileds.  He's confident that white, high power LEDs which have been demonstrated in the laboratory to produce up to 150 lumens per watt  will make their way to the marketplace in the next couple years.  At this level of light production, commercially available LEDs will surpass even the most efficient light sources available, low pressure sodium lamps (no, not CFLs, which typically produce about 100 lm/w) with much better color rendering.  But there are lighting markets that LEDs will have difficulty penetrating even when they are the most efficient white light source, namely retrofit markets for standard light bulbs (i.e. you will keep your CFLs for some time yet.)   

The problem with fitting into the form factor of a standard bulb in a standard socket is, once again, cooling.  The first commercially available100W replacement  LED bulb actually contains a fan for cooling... a step away from the solid state reliability we would expect from LED bulbs.  Jay suggested that buyers of such bulbs should be very concerned about quality and durability of such bulbs.  

As an aside, I have been using a 60w replacement (using 5w) in an outdoor light, and four 25w candelabra replacements (at 2w each) in a fan since January, without any problem yet.  On the downside, although the candelabra bulbs have a long, shiny base for cooling.  The light quality (soft white, about 3000K color temperature) has been excellent, and seem brighter than I would expect from the bulbs they are meant to replace. 

Can we invest in heat sinks?

Often the most profitable way to invest in an industry is to invest in the suppliers of hard-to find technology for that industry.  For instance, one of the best ways to invest in solar during the silicon shortage from 2004-2007 was suppliers of silicon.  This may be more difficult to profit from than silicon, because heat sinks are not particularly high-tech, but, as Dr. Kurtz pointed out, the connections to the heat sinks are.

This leads me to look for current industry leaders in thermal management, who might have relevant expertise.  A search for "Thermal Management Solutions" led me to several companies such as Rogers Corp (ROG), which is focused on wireless communication and computer markets.  Given this focus, they probably have some expertise to apply to LEDs, but not necessarily any that might apply to the extreme temperatures of CPV.  I also found a few private companies, of which the most promising for this market was Plansee, because of their experience in both optical and military markets, and claims the "ability to braze metal to metal, ceramic to metal and ceramic to ceramic to exacting specifications and tolerances." 

Unfortunately, as a private company, Plansee is not an option for public market investors.  The question remains open for readers: Is there a publicly traded company with experience in thermal management for the extreme temperatures needed for CPV? 

DISCLOSURE: Tom Konrad and/or his clients have long positions in PHG.

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

Posted by Tom Konrad at 01:11 AM | Permalink | Comments (1) | TrackBacks (0)

I have more ideas than I have time to explore them, and it's getting out of hand.  I still need to write the promised articles on Evergreen Solar (ESLR) and Lithium Technology Corp (LTHU), but there are many others that have caught my attention over the last six months or so.  Since the list keeps getting longer, I thought I'd just give you a taste of some of the companies in my inbox, and why they seem interesting.  Since I may or may not ever write articles about any of these, I thought I'd give people the opportunity to evaluate the companies for themselves.

1. AECOM (NYSE:ACM).  Astute readers of my recent Hydropower overview will have noticed I said: "AECOM Technology Corporation (NYSE:ACM) [is] a global provider of professional technical and management support services to a broad range of markets, including transportation, facilities, environmental and energy," and also that the most promising opportunities were in "suppliers of parts and services to hydropower projects."  Not only is ACM a prominent provider of services to hydro projects, they also get much of their revenue from, and, as one ACM employee described it to me, energy projects which don't involve burning something.  This includes some of my longtime favorite sectors, such as transmission and public transit.  So ACM is on my short list.  I might have already bought some, if the stock price had not been going up since I discovered the company.
2. Kaydon (NYSE:KDN). As a wind industry supplier, I've had Kaydon as part of my portfolio for about a year.   When the company had disappointing earnings last month due to their non-wind business, my instinct was that it was time to buy more, but I wanted to dig a little deeper to make up my mind.  I still have not done that digging.
3. Power Efficiency Corp (OTC BB:PEFF).  This company, which makes software to save energy in industrial motors and such as escalators and rock crushers caught my eye last year by advertising with us for a few months.  After an interesting conversation with the CFO, BJ Lackland, I decided to make a small investment.  It's a niche technology, yet has the potential to save a tremendous amount of energy even so, and it is already working in the marketplace.  If they can get the technology accepted by OEMs, the growth potential (from a tiny base) is enormous, nevertheless, I have not done the deeper digging I require of myself to make a larger investment than I already have.
4. Orion Energy Systems (NasdaqGM:OESX).  Another energy efficiency company that caught my attention a couple months ago, Orion provides a suite of efficient lighting solutions to commercial businesses.  Since I expect the sector to boom in coming years, Orion seems well placed to take advantage of utility Demand Side Management programs.
5. Texas Pacific Land Trust (NYSE:TPL).   A reader sent me this suggestion in response to my comment in my Invest in the Pickens Plan article "I'd prefer a REIT with a rural focus, but have been unable to find one."  According to the company's profile, they "owned the surface estate in 964,813 acres of land located in 20 counties in the western part of Texas" as well as some oil and gas royalties.   West Texas is typically fairly windy, but to really know if this stock would benefit from a rural resurgence driven by massive wind investment, we'd have to know how their lands line up with both wind resources and available transmission capacity... and how management feels about wind... would they sell out as soon as they saw a small price rise due to interest in wind, or would they wait for enhanced economic growth to produce long term superior returns?

DISCLOSURE: Tom Konrad and/or his clients own KDN, PEFF.

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 12:23 PM | Permalink | Comments (3) | TrackBacks (0)

A few weeks ago, I stumbled upon a presentation that was given by FERC officials on the phenomenon of rapidly rising costs in US power generation (presentation link at the end of this post). The FERC, or Federal Energy Regulatory Commission, is America's energy watchdog.

The presentation begins by noting that across America's major electricity hubs, power prices are up significantly on last year (between 62% in the Midwest and 123% in NYC) and that, unfortunately, this probably isn't an anomaly. In fact, the presentation argues, there may be something secular at play. Two main trends are noted.

Energy Costs

Because of gas' prevalence in US power generation, the cost of generating a unit of electricity through gas often sets the unit price in the marketplace across fuels - gas is said to be the marginal fuel. Commodity market watchers and anyone who needs to buy gas on spot or futures markets will have noticed a sharp increase in the price of gas over the past five years. This increase is what is responsible for the vast majority of power price increases currently being experienced by US electricity customers.

Of course, it hasn't helped that the price of coal has been rising as well on the back of a weak US currency and an explosion in demand from India and China. In some parts of the US, such as in the Midwest, coal is the marginal fuel. Tom wrote an interesting piece last year on how to play coal shortages.

Capital Costs

The second factor impacting the cost of power generation is a rapid rise in the cost of many key inputs needed to build a power generation facility. Increases in the price of steel and cement, for instance, have appreciably outpaced inflation as whole over the past few years, as have those for other commodities and even labor (albeit to a much lesser extent).

The result is the chart below, which shows the capital costs of building generation capacity in 2008 as compared to 2003-2004. The caveat with this graph is that accurate data on power plant capital costs is hard to come by given the sensitivity of this information. Nevertheless, the results from these estimates show that while the inflationary environment in power generation capital costs has impacted all fuel sources, wind has been impacted to a lesser extent than competing fuels like coal. While combined cycle and combustion turbine gas remains cheaper than wind, wind has made up some ground on the 2003-2004 period.

The effects of this phenomenon on power prices, however, may not be fully felt for a few more years.

Connecting The Dots

Throw these two factors together (rising capital and fuel costs), and the weighted-average levelized cost of electricity across the system - the levelized cost is the present value of the costs of building and operating a power plant and are used to set prices over the plant's economic life - looks like it could favor wind a few short years down the road.

There are two forces at play improving the economics of wind relative to conventional power generation: (a) growing wind manufacturing capacity currently under construction (this is not apparent at the moment because of the inflationary environment discussed above, but once new manufacturing capacity comes on line and the supply chain loosens up wind costs will decrease) and (b) worsening economics for fossil-fired generation due to increases in capital costs but mostly fuel costs.

Add to this regulation to force fossil generators to internalize the cost of carbon and a growing number state mandates for renewable power, and the picture looks even more positive.

But The Real Winner Is...

Unsurprisingly, the FERC expects there to be a response to rising electricity prices - in other words, demand for power is elastic.

What's the main response likely to be initially? An increase in demand-response (technologies that adjust power consumption based on prices). The FERC estimates that the first round of demand-response (the low-hanging fruit) could come in at about $165/kW, which compares rather favorably to the capital costs of the cheapest option on to the graph above, combustion turbine gas, at between $500 and $1,000/kW. And, like renewable energy, there are no fuel costs.

Somewhat paradoxically, one of the main impediments to demand-response growth could be energy efficiency measures more broadly, or reducing power use at any time instead of only at peak times, which is what demand-response does. Available energy efficiency measures would cost in the order of $0.03/kWh, compared to $0.09/kWh for the fuel alone for a combined cycle gas plant.

Demand-response is likely to be more popular in states where most customers have some exposure to fluctuating daily power prices, whereas energy efficiency measures may gain more ground in states where the pricing is more static for most customers.

It's The Economics, Stupid!

One of the biggest beefs alt energy detractors have with the industry is that "the economics don't make sense without state support." (Of course such detractors generally like to avoid conversing about the mammoth tax breaks the fossil industry receives) This could very well change in the years ahead as the burden of fuel costs on the levelized cost of fossil electricity boosts wind and solar's competitiveness.

However, as shown above, the cheapest kW is the kW saved, and regulators are aware of this. Unlike cars, where the entire vehicle has to be changed to gain access to more efficient technologies, energy efficiency measures in commercial, industrial and residential buildings can be implemented fairly painlessly. Now that the "economics make sense", expect such installations to grow in popularity

Access the FERC presentation here (PDF document).

Posted by Charles Morand at 09:51 PM | Permalink |