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 | Comments (3)

On Monday, I had one of my favorite sorts of opportunities, which was a chance to influence future energy legislation.  The National Conference of State Legislators invited me to give a short presentation as part of a two-day energy efficiency workshop for interested legislators from across the country.  

Given the short time frame, I couldn't say everything I would have wanted, but fortunately, I was part of a large group of excellent presenters, so what I didn't hit, they did.  I focused on my ideas for transforming markets and tackling the many barriers to energy efficiency [PowerPoint presentation, 12MB].

Tom Konrad

Posted by Tom Konrad at 06:26 PM | Permalink | Comments (2)

It's no longer breaking news, Deloitte released earlier this week the results of two surveys, one of state public utility regulators and one of residential electricity consumers (both PDF documents). Deloitte's interpretation of the results can be found here.

The results have also been interpreted by two prominent alt energy/environmental blogs: the WSJ's Environmental Capital and Grist. The former argues that policy-makers and 'smart-money' are out of whack with the little guy, because the little guy simply isn't willing to pay for solutions to climate change out of his electricity bill. The latter, looking at the same data, effectively calls the little guy dumb and selfish. It's true: by-and-large, while respondents (consumers and regulators) express concerns over climate change, neither group is willing to see electricity rates go up to deal with the issue. But as I was reading through the survey slides from the standpoint of an alternative energy investor, different things stood out for me.

Firstly, regulators view transmission as the number 1 impediment to renewables growth (followed closely by cost). We at AltEnergyStocks.com have been on the power grid and transmission stories for quite some time (see our Electric Grid section for investment ideas), so this result is not especially surprising. Nevertheless, the fact that the individuals who have perhaps the best visibility on this issue place transmission above costs speaks volume to the scale of the problem. But while this problem is well understood, it's still unclear how it's going to be resolved. We can all agree that more investment in transmission needs to be made, but who is going to make it and under what model? Governments are increasingly apprehensive to going into massive capital spending sprees, and the incentives for the private sector don't seem to be all there. One thing is clear: something will have give sooner rather than later.

However, the main thing that caught my attention in the survey is the degree of support energy efficiency receives from both consumers and regulators. When asked what approach had the best ability to deal with greenhouse gases (slide 8 for the regulator presentation), more regulators picked efficiency as extremely effective and moderately effective than did for renewables. A resounding 70.8% of residential customers would support their utility boosting profitability on the back of efficiency measures (slide 4 for the consumer presentation), and consumers would prefer energy efficiency to clean coal and nuclear (slide 11). Some 66% percent of regulators believed investment in efficiency should receive similar regulatory treatment as investment in new generation (slide 11).

What does this tell us? What we already know: that efficiency is a win-win. Efficiency can help utilities reduce operating expenses as the cost of generating power goes up (mostly because of fuel), not to mention avoid massive capital outlays as the capital costs of building new generation continue to increase. Efficiency also means flat or decreasing power bills as no or little new electricity needs to be produced to meet growing demand (granted, this is not possible where demand is growing too rapidly).

So why haven't policy-makers embraced efficiency and given it the same incentives as renewables? It's not clear, but I would posit that, for one, efficiency does not have a great job creation angle, quite the contrary. It's also not as sexy and tangible as new renewables project. Lastly, there isn't a well organized efficiency lobby, while wind has some very powerful allies.

No matter the reason, this survey reinforces my belief that the case for efficiency is growing, especially if electricity prices continue to trend up in the near-term as predicted by the regulators. Efficiency measures can be deployed relatively rapidly and have an almost immediate impact on power bills. In many cases, the upfront costs continue to discourage adoption, but that is something that could be remedied through simple fiscal incentives until scale pushes prices down. I expect we'll hear a lot more about efficiency in the months to come, and the investment case is, in my opinion, as strong as ever. Want to know how strong? This recent report by the American Council for an Energy-Efficient Economy provides some interesting numbers.

Posted by Charles Morand at 07:42 PM | Permalink | Comments (2)

    As an expert witness in an energy efficiency ("Demand Side Management" or DSM in utility-speak) docket before the Colorado Public Utilities Commission, I have been making the case that non-energy benefits of energy efficiency measures such as the increased safety and comfort of an efficiently operating home need to be included in evaluating the cost-effectiveness of energy efficiency programs.  There has been much resistance to the inclusion of these benefits, mainly because they can be difficult to quantify.  Yet we omit them at our peril.

Why Energy Efficiency and Health Matter

    Last summer, I explored why the economic benefits of energy efficiency measures had little relation to their actual market acceptance.  I concluded that businesses need strategies beyond touting financial savings to overcome barriers to acceptance.  One strategy I highlighted was making energy efficiency measures an emblem of social status (something I believe is behind the success of the Toyota Prius.)

    In this docket, I have been working with the Energy Efficiency Business Coalition, which brings together manufacturers, distributors, and Retail providers of energy efficiency products and services in order to support energy efficiency-friendly legislation and regulation.  For those who sell to the retail public, their primary messages have little to do with either financial rewards or social status.  Their marketing emphasizes the increased health, safety, and comfort of energy efficient homes.

    A home with properly sealed ducts will not only use much less energy, but it will not pull toxins from the garage or crawlspace into the living area of the home.  Properly functioning furnaces and water heaters save energy, but they also do not emit carbon monoxide.  A well insulated house lacks hot and cold spots, allowing the occupants to be comfortable everywhere in the home.  

    All of these facts are effective marketing tools for energy efficiency.  They're so effective, that a Google search for "insulation comfort" returns 597,000 hits, of which the first six are companies with something to sell.  In contrast, a search for "insulation savings" returns a slightly lower 540,000 hits, but of the first 10, only one (#6) has anything to sell.  The rest are information sites from government, nonprofits, or for DIY'ers.  

Survival of The Fittest (In Competitive Markets Only)

    Those businesses which stay in business by successfully selling insulation do so by selling the comfort benefits, not the energy savings.  The energy savings are instead pushed by organizations (such as government) which will remain in business regardless of who buys what they are selling.  

    I find it quite telling that Xcel Energy (NYSE:XEL), the utility we have been dealing with in the DSM docket, markets their energy efficiency programs almost entirely on financial savings.  But then, Xcel is not going to go out of business if they don't sell as much energy efficiency as possible: their main business is selling energy, not energy savings.  I don't mean this as a condemnation of Xcel; the company is quite progressive, as public utilities go.

    Because public utilities are regulated, it falls on the regulator to ensure that the utilities incentive includes those factors which will actually increase the adoption of energy efficiency.  Normal businesses have found that the factors to emphasize are non energy benefits such as comfort, health, and safety.  These factors are out of favor in regulatory circles, because they are difficult to value in dollars and cents.  

    Difficult to value does not mean without value.  People buy things they value, and when it comes to home energy efficiency, they are buying health and comfort, with a dash of energy savings... not the other way around.  DSM programs which take this into account are likely to be much more successful than those which do not.

    Regulators take note.

Continue reading "Money and Reduced Emissions Don't Sell Energy Efficiency, but Comfort and Health Do" »

Posted by Tom Konrad at 04:05 PM | Permalink | Comments (0)

Over the weekend, EnergyTechStocks published two articles based on an interview with me.

The first was about my conviction that Peak Oil induced rising gas prices is going to lead to a rush into mass transit building by cities, or investing in mode-shifting last September.  I've since written about opportunities in rail transit stocks, (P.TO, TRN, PRPX, and WAB), and more recently Hedging your peak oil risk with your lifestyle.  However, I have been frustrated until now that the only pure play bus stock I've been able to find is Firstgroup PLC (FGP.L, FGROF.PK), the British based owner of Greyhound and owner or operator of many other UK and North American transit services (both bus and rail.)  Back in September, Firstgroup seemed very expensive after a prolonged run-up, but it is now looking more reasonably valued.

Two weeks ago, however, I found a pure-play North American Bus stock, which I will be writing about this weekend.  I'm not ready to reveal the name, because I still have an account which has not yet bought the stock.  This is the company I was not ready to reveal in the EnergyTechStocks interview.

The second part of the interview referred to my conviction that lean economic times will benefit Energy Efficiency over other forms of clean energy.  I highlighted two of the stocks from the 10 Solid Clean Energy Companies to Buy in a Downturn series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in TRN, PRPX, WAB.

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 01:59 PM | Permalink | Comments (0) | TrackBacks (0)

Johnson Controls (NYSE:JCI) has long been one of my favorite energy efficiency picks, with an added bonus coming from their joint venture with Saft to produce batteries for hybrid and electric vehicles.  They have also shown some energy saving innovation making parts for auto interiors.

Building Efficiency

Efficient buildings are much more complex than simply replacing inefficient HVAC and lighting with more efficient versions.  Quite often, the most cost effective measures come from using systems more efficiently.  As an analogy to the home, look at any list of quick tips for energy saving around the home.  This list of ten steps on Squidoo includes five tips for using existing equipment more wisely (programming your thermostat, cleaning air filters, loading your dishwasher fully, and only using the dryer when you can't air-dry.) Considering Squidoo is quite clearly trying to make money by referring people to Amazon to buy products, it's all the more significant that half of the steps need not involve buying anything.

In commercial and industrial buildings, the most economical gains also involve using existing equipment more wisely.  They offer a full suite of products focused on automation and integration to businesses and residential (with the recent York acquisition) customers alike. 

Building efficiency systems comprise about one third of 2007 revenues.

Batteries and Automotive Power Systems

Johnson Controls' joint venture with Saft has been making headlines recently, no doubt in large part due to Johnson Controls automotive industry network.  The partnership has won contracts to supply batteries to Chinese auto manufacturers Chery and SIAC for their Hybrid electric vehicles, and a battery development contract from GM to develop Li-ion batteries for GM's Saturn Vue Green Line Plug-in Hybrid.

I'm extremely enthusiastic about the growth prospects of the automotive battery industry, the reasons for which I detailed in this article about another battery company, and this one about the long term prospects for cellulosic biofuels.  The power systems division comprises about one third of 2007 revenues.

JCI also supplies automotive battery management systems and power systems, with a focus on energy savings, as part of their automotive division described below.

Auto interiors

Energy savings can come from unexpected places... like car seats.  Johnson Controls' EcoClimate seat provides much higher heat absorption and moisture absorption than conventional seating, which in turn provides for passenger comfort with less use of the vehicle's air conditioner.  New bio based materials may also appeal to automotive consumers concerned about environmental health effects and fossil fuel usage.  About half of JCI's 2007 sales were in this division, but most of the company's growth comes from the other two divisions.

Conclusions

With half of the companies 2007 revenues coming from two of my favorite alternative energy sectors (efficient buildings and automotive batteries), and these parts of the company growing much more rapidly than the auto parts division (which is likely to be a great competitive advantage in selling batteries and power systems to automakers,) JCI is a must for alternative energy investors attracted by the superior economics of energy efficiency.  

The stock has declined significantly since the start of the year, but it currently seems only fairly valued to me at the current price of around $34.  However, a decline in auto sales caused by a slowing economy, along with an increased debt burden due to recent acquisitions could easily hurt short-term profits.  With continued stock market weakness, patient investors could easily see some excellent buying opportunities in the next 6-12 months.  If we do, I will be buying more.

Click here for other articles in this series.

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

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

Posted by Tom Konrad at 04:18 PM | Permalink | Comments (0) | TrackBacks (0)

In the future, I plan to avoid doing lists of ten stocks. I've found the writing to be somewhat repetitious, and I suspect some readers feel the same way.  Look for more threes and fives.

That said, there are more than enough solid companies with strong clean energy arms.  These companies are my favorite investments right now, both because I think that now is a time to play it very safe in the stock market (I'm also increasing my cash reserve), and because these companies allow me to use Cash Covered Puts.

Since I do have several companies I nearly put in this list (I've been deciding which ones to write about as I go along... the list order doesn't mean much of anything.) I thought I'd share those with readers, but without extensive discussion of the pros and cons.  Also in no particular order:

General Cable (NYSE: BGC)

This was another transmission pick, but I chose not to include it because the I had two other transmission picks. Here are other articles where I mention it: Electric Transmission, Blue Chip Stocks, Transmission and Clean Transport.

Greenbrier (NYSE: GBX)

This is another rail pick.  I've also mentioned it here, and the price has fallen considerably since then, making it more attractive.

Owens Corning (NYSE: OC)

Another energy efficiency pick, this stock has been badly hurt by the housing bust.  I'm having trouble figuring out what a "good" price for this one is, so I decided to leave it out of the series.  I've also written about it as an Energy Star Summit pick, an efficient housing play, and as one of my  Blue Chip Stocks.

Honeywell International (NYSE: HON)

This stock didn't make it onto the list because I have not been following it.  Honeywell has historically looked rather expensive to me, although it seems to be getting cheaper.  I've mentioned it as a Performance Contracting stock, as an Energy Star Summit pick, and as one of my  Blue Chip Stocks.

Click here for other articles in this series.

REMINDER: I'm still collecting suggestions for companies to write about in a (shorter) series of articles which will appear in March.  I plan to select the companies from all suggestions submitted with a poll next week.

DISCLOSURE: Tom Konrad and/or his clients have long positions in BGC, GBX, and OC.

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

Posted by Tom Konrad at 04:15 PM | Permalink | Comments (0) | TrackBacks (0)

I don't write frequently about solar stocks, especially photovoltaic (PV) manufacturers.  While the industry is almost certain to be a spectacular growth story, it's also a story that everyone already seems to know about.  Trader Mark put it well: "these stocks are too driven by retail hands."  The PV story clicks with people, and when that happens, they often buy stocks with little regard to what they are worth.  PV stocks are so psychological, we'd all do well to lie down on a couch before buying.

As the IRS is unlikely to allow psychotherapy as an "investing expense," I have looked to other, less popular sectors of renewable energy, and to energy efficiency in this series.  I sidestep the issue by investing in conglomerates and related industries such as electricity transmission and distribution, or agriculture which are less exciting, but will benefit from the same trends.  That is why I'm halfway through this series, and only now talking about the most popular form of renewable energy, solar photovoltaics.

Since Sharp (SHCAY (ADR), TSE:6753) is a conglomerate, its PV manufacturing is often overlooked by solar investors, despite the fact that it's the world's largest manufacturer of solar cells (according to Sharp, independent industry statistics are hard to come by.)  Admittedly, PV accounts for considerably less than 10% of their sales: PV falls under "other Electronic components" in their sales breakdown, and that category was only 9.6% of total sales in 2007.  In the last nine months of 2007, solar sales declined, most likely due to limited supplies of crystalline silicon.  They have taken steps to assure future crystalline silicon supplies, and are aggressively expanding their thin film production.

Thin Film Solar

Sharp is also rapidly expanding their production of amorphous Silicon (a-Si) thin film PV.  I find this particularly interesting, because unlike the other thin film technologies, there is no practical limitation on the quantity of a-Si production due to raw materials, unlike the non-silicon CIGS and CdTe technologies.  (You can read my discussion of the impact of possibly limited Tellurium supplies on First Solar (Nasdaq:FSLR) here by scrolling down to the bottom of the linked page.)

While some a-Si manufacturers have given the technology a reputation for low quality, many manufacturers produce high quality panels.  Amorphous Silicon, like other thin film technologies, tends to have a lower conversion efficiency than traditional crystalline silicon modules, but I was surprised to hear in Sharp's New Year Address that because their thin film more thermally robust in hot climates, their thin film panels actually operate at higher efficiency than their crystalline silicon panels in places like Spain.  For this reason, they are targeting large scale PV installations in Southern Europe with their thin film modules, while their crystalline PV modules are targeted at smaller installations in cooler areas.  I had previously thought that thin film was primarily useful for the same things as conventional PV, and also for Building Integrated Photovoltaics (BIPV.)  I had not expected thin film to have higher efficiency in any context.

Energy Efficiency

PV is less than 10% of Sharp's business, but many of their other products should also be of interest to Alternative Energy investors.  Japan is one of the most environmentally and socially aware countries, and as someone more accustomed to listening to investor presentations from North American companies, Sharp's presentations are a culture shock.  Profit numbers play second fiddle to environmental and social responsibility, the reverse of what I'm normally used to.  

Most of Sharp's other products are already familiar.  They include LCD screens and other components for a wide variety devices, as well as televisions and information equipment.  This is where the company's environmental awareness pays off, with Sharp's LCD televisions often near or at the top of energy saving rankings.  This is in contrast to Philips, which is profiled in this series for their efficient lighting business, not for their televisions.

Historically, United States government ratings only accounted for energy use of televisions in standby mode, a problem which will soon be rectified.  As of November 2008, Energy Star 3.0 specifications (see chart) will come into effect in the United States which will also take into account energy use when the television is on, and will make it easier for consumers to compare the true energy usage of televisions.  This should benefit energy-conscious Sharp relative to competitors, and LCDs relative to Plasma displays.

 

Perhaps even more than Europeans, the Japanese have been thinking about energy for a long time (no doubt in large part because they have to import most of it and therefore pay more for it than North Americans.)  Since most North Americans are only now waking up to the need to save energy, a Japanese company which has long known how to please energy-conscious consumers should be able to use those skills as more consumers become aware of the life-cycle costs of their electronic purchases.

Since a large portion of Sharp's revenues come from consumer products, lower consumer spending and a possible recession in the United States could easily lead to a sharp drop in the stock price.  If that happens, clean energy investors should take that opportunity to acquire one of the world's top solar and energy efficiency companies on the cheap.

Click here for other articles in this series.

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

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

Posted by Tom Konrad at 11:21 PM | Permalink | Comments (1) | TrackBacks (0)

Readers of this blog are well aware that I'm a fan for energy efficiency in general and efficient lighting in particular as good investments as more and more people and companies reduce their energy use in order to lower costs and green their image.  With the exception of niche players such as Cree and Lighting Science, efficient lighting is dominated by General Electric (GE), Osram Sylvania (a division of Siemens (SI)), and Koninklijke Philips (PHG.)   I'm a fan of all three of these companies, and both GE and Siemens are honorable mentions in this series.

While Siemens and GE are broad industrial conglomerates, smaller Philips is comparatively focused on electronics, with lighting being one of just four divisions.  Last June, I told readers about my hunch that Philips was "the most serious [of the] lighting manufacturers about pursuing LEDs."  That hunch was quickly confirmed when Philips' announced the acquisition of LED company Color Kinetics a couple weeks later.  That acquisition was followed in November by Philips' announced acquisition of Genlyte, with the apparent intention of using this lighting fixture manufacturer to increase their US market penetration.

These two acquisitions allowed the much smaller Philips (market cap $42B) to surpass the more diversified GE ($363B market cap) as the leading lighting manufacturer in both North America and the world as a whole.  For investors who worry that a possible US recession might turn consumers' and companies' attention away from clean energy, energy efficient lighting is the perfect choice in a more budget conscious green era.  Commercial lighting retrofits often have payback periods of less than a year, and so are likely to appeal to companies seeking to reduce costs.

Philips' other businesses include medical devices and consumer products.  Not much about them seems particularly green, although they recently announced an LED-backlit "Eco-TV," which may appeal to the green aspiring couch potato.  It received faint praise from the green technorati, since a big new TV (even a relatively energy efficient one) is likely to be a lot more wasteful than the smaller TV you already have.  On the other hand, the Eco-TV may be the start of a strategy within Philips to leverage their lighting expertise to their consumer electronics business.

In any case, the lighting business is worth having in your portfolio, especially if a market collapse provides an opportunity to buy it on the cheap.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in PHG, GE, 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 12:05 PM | Permalink | Comments (0) | TrackBacks (0)

Like most conglomerates, United Technologies Corporation (UTC), (NYSE:UTX) won't be found in any of the Clean Energy indices, but its growing portfolio of clean energy businesses makes it fit well into a diversified portfolio with a clean energy tilt.  A conservative capital structure and solid earnings and cash flow, and a decades long history of constantly increasing dividends make this a company that I'm comfortable holding for the long term.  

In terms of sustainability, the company has been recognized by Dow Jones as in the top 10% of the world's most sustainable companies.  Long before it became fashionable for companies to greenwash by reducing their environmental impacts, UTC pledged in 1996 to reduce their power and water usage by 25%, and they have met these goals while growing their business.  Their long track record of reducing their energy usage gives them a significant head start against rivals who have only recently jumped on the climate change bandwagon.

Of the company's eight major business units,  UTC Power and Carrier are both crucial to how we generate electricity and how we use it.  Carrier has a history of pushing for more stringent energy efficiency and environmental standards for air conditioning, a strategy which helps their business strategy since UTC's scale and research allow them to remain on the technological forefront.

UTC Power has a large portfolio of products which will help modernize our energy infrastructure.  They supply microturbines and Solid Oxide fuel cells, as well as integrated combined cooling, heating, and power products, which I feel are likely to become much more popular as more companies seek ways to lessen their environmental impact and energy bills at the same time.

With their PureCycle binary cycle turbine, UTC introduced the benefits of volume production to geothermal power by making slight modifications to an existing line of Carrier's industrial chillers which allow them to operate in reverse.  Raser Technologies (RZ) plans to use this technology in their aggressive plans to develop a large number of lower temperature geothermal resources throughout the Southwest.  According to a personal conversation I had with a Raser employee. UTC's ability to deliver the turbines quickly, and willingness to guarantee performance was key to Raser's selection of that technology in preference to rival products.

One other technology likely to be of great interest to clean energy investors is their molten salt storage technology, which provides a rare opportunity for a US-based public investor to participate in what I consider to be one of the most promising solar technologies: Concentrating Solar Thermal Power (CSP).  The thermal storage provided by molten salt gives CSP the potential to provide power on a dispatchable basis, allowing it to compete directly with expensive electricity from natural gas turbines.

Other divisions of UTC, such as the Sikorsky helicopter division, are major military suppliers, so traditional socially conscious investors may wish to avoid UTC.  On the other hand, the short supply of helicopters needed in modern warfare (as well a a large backlog in their Otis elevator division) have propelled strong earnings growth, while even relatively efficient air conditioners could not prevent Carrier from being hurt by the housing slowdown.  Such are the benefits of diversification.

At roughly $74, and a 17.3 P/E, UTX is not currently cheap.  I currently have only some out-of the money short puts on the company, but it's one that I intend to continue writing puts on until the stock falls and I'm assigned shares.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in UTX, RZ.

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 05:07 PM | Permalink | Comments (5) | TrackBacks (0)

I got a call from my broker this morning asking me if I'd be willing to loan out my shares of Cree, Inc. (NASD:CREE) to a short seller.  Since the only cost to me is that I will not be able to vote my shares, and I will earn 2.5% per annum on the value, I said "yes." 

Normally, brokerages get the shares they lend out to shorts from margin accounts with a margin balance.  Since I never carry a balance (although I do have a margin account in order to trade options) they must ask my permission and pay me interest in order to borrow my shares.  I'm planning on holding these shares for the long term, so I'm happy to earn an extra 2.5% on my money.  (I could still sell them, in which case the short seller would have to find shares to borrow from someone else, or cover his position.)

I also had the idea of creating some synthetic cash-covered short puts (a combination of the long position in the stock with short calls) to give me more shares to loan out, but the relative prices of calls and puts on Cree make this unattractive.  Most likely, other arbitrageurs who are able to earn higher interest on their loaned shares have already pursued this route to the point where it is no longer attractive to me (my return on capital would only be about 8%; I can do better with a plain-vanilla cash-covered puts.)

What to Make of the High Short Ratio?

Cree's short ratio (the ratio between the number of shares short to the company's float, or shares available for trade) is an extremely high 26.9%, and has risen over the last month.  This is why my broker was calling me to borrow shares.  But, other than my opportunity to make an incremental profit on my shares, what does this mean for the future of the stock?

On its face, a high short ratio means that a lot of investors are bearish about Cree's prospects.  This can be good or bad news, depending on how likely the shorts are to be right.  The contrarian position (and I usually lean towards the contrarian) is that most investors are usually wrong, meaning that a high short ratio is a bullish indicator.  We also know, since I'm getting calls from my broker, that few new investors will be able to short.  Finally, there is the potential of a short squeeze, which could be triggered by positive news such as another buyout rumor.  Short squeezes can lead to radical price increases over short periods.

I'm taking the call from my broker as another moderately bullish sign.

DISCLOSURE: Tom Konrad and/or his clients have long positions in 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 03:09 PM | Permalink | Comments (0)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Three more speculative picks available here.

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

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

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

Investing in Renewable Energy Stocks seldom fails to be exciting, although it can lead to crushing losses as well as mouthwatering gains (Think Ethanol stocks and Thin Film Solar in 2007.)  With this in mind, I usually emphasize that the majority of most investors portfolios should be targeted towards larger, profitable companies, especially those focused on Energy Efficiency rather than the more sexy Renewable Energy technologies.  This is the philosophy behind Alternative Energy Stocks' Blue Chip Portfolio: companies which aren't sexy, but which still are well positioned to take advantage of rising oil prices and increasing efforts to reduce and regulation of Greenhouse Gas Emissions.

That said, a small exposure to even extremely volatile stocks can, if kept small, improve the risk-return profile of a portfolios, so long as those stocks are not overly correlated to the portfolio as a whole. 

Other people just like to gamble.   Given the vertiginous returns we have seen in the alternative energy sector recently (First Solar, NYSE:FSLR is up by a factor of ten in 2007,) it's a safe bet that this Alternative Energy has drawn more than our share of gamblers.

This article is for the gamblers (and a little bit for the cautious diversifiers.)  If you're a gambler, these are the gambles I would be taking.  If you're a cautious diversifier, you can consider using a few of these bets as a way to diversify your portfolio of bonds and energy efficiency companies, just keep it small (no more than a few percent your portfolio.)

In either case, be prepared to have any of these bets go wildly wrong, or succeed well beyond your expectations.  

Some Educated Hunches

Many people who see themselves as cautious diversifiers like to set aside a small part of their portfolio as "play money," which they can use without their normal portfolio discipline, to invest in something that makes them feel good.  I feel this is the wrong approach.  Emotional investing is a sure-fire way to stack the odds against yourself.  Even in risky assets, there are good bets and bad ones.

Especially when it comes to highly risky and emotive companies, I'm a great believer in Behavioral Finance, the theory that investors make the same mistakes over and over again because of the way our emotions are wired.  Roughly, this means that we all tend to invest in the same stocks at the same time because it feels good to do so (which means we buy precisely when the price is irrationally high) and sell the same stocks precisely when they're screaming bargains.

My favorite gambles therefore are stocks I think have the potential to be tomorrows feel-good fad, that is currently being ignored.  I call this gambling because it has very little or nothing to do with the underlying fundamentals, an a lot more to do with wild emotional swings of the retail investor.  While it is gambling, it has more in common with card-counting, than with slot machines.

Ten Gambles for 2008

I personally am more a cautious diversifier than a gambler, but I do have some gambler in me.  All the speculations below are ones I am taking with my own money, and some of them are also positions in client portfolios.  I don't see this as play money, but at the same time, I know that any of these gambles cold turn against us unexpectedly, and I keep the positions accordingly small.  In reverse order of my guess at their riskiness, here is the first installment detailing ten bets I'm currently making, and which I expect to pay off as a whole in 2008 (although individual stocks will undoubtedly be losers.)

#10 and #9: Cree, Inc. (NasdaqGS:CREE) $23.50, and Lighting Science Group (LSGP.OB) $0.32.

[Note: Ticker has been changed to LSCG.OB with a 20 for 1 reverse stock split.]

I've been invested in both of these for a long time, and last wrote about these LED stocks in June.  I sold half the holdings of many of my managed accounts  soon after that article when CREE was around $27-$30, about double the price at which I'd bought them.  Smaller positions in Lighting Science Group have followed a similar pattern, mostly due to buyout speculation in LED stocks, with only modest gains over the last year as speculation has died down.

Yet the fundamental reasons to be bullish about LEDs are stronger than ever.  This Christmas season was the Season of LEDs in more ways than one.  In my personal experience, I went to Target on December 15 to get another string to add to the ones I'd bought last spring, and found that they were totally sold out (although conventional lights were well in stock.)  I left empty handed, but I expect that Philips (NYSE:PHG - another holding), will report LED sales well above expectations this quarter.

Also, while solar stocks may suffer with tax incentives removed from the recently signed Energy Bill, the bill did contain a "Ban the Bulb" provision, phasing out incandescent lights by 2014.  Lighting Science saw a 20% jump the day it was signed, but it's still way down from its highs last summer, and Cree didn't budge.  It's true that most incandescent bulbs will probably be replaced with CFLs, but LEDs work better in several sorts of applications: they are dimmable, work better at low temperatures (such as in freezers), and are more tolerant of vibration.  Thus, the new law provides a practically guaranteed, large market.

I'll be surprised if both these stocks don't see significant run-ups sometime in 2008, and Lighting Science could easily see one soon after the New Year, due to the publicity they'll be getting in Time Square on New Year's Eve.  Most likely, we'll have to wait a little longer than that, but even without a run-up or buyout, I see these two as good long-term bets.

For hard-core speculators, one LED penny stock that you might look at is Cyberlux (CYBL.OB.)  Cyberlux was brought to my attention by a reader the last time I wrote about LEDs.  I looked into it again last week, but decided not to invest because of the large overhang of convertible debt.  In my analysis, it will be virtually impossible for long-term shareholders to profit because of the expected dilution due to the convertibles.  That does not mean that short term traders might not make a killing (or lose their shirts.)  For more on Cyberlux, go to this message board (run by the reader who brought the stock to my attention.)  There's a lot of information there, although I don't know if its accurate.

#8 Maxwell Technologies (NasdaqGM: MXWL) $8.10

Maxwell is a developer of ultracapacitors, which are currently used in wind turbines, utility power quality applications, and other industrial applications.  Wind should continue to see strong growth throughout the world, which should continue to help turbine component suppliers.

They also have the potential to be an important component for energy storage in Hybrid Electric and Electric vehicles.  Maxwell has recently announced a partnership with China's Tianjin Lishen Battery to manufacture hybrid powerpacks, which will combine the speed, long cycle life, and low temperature performance of ultracapacitors with the large energy storage capacity of lithium-ion batteries.  Readers and anyone who has seen one of my presentations already knows that I see energy storage as the best way to take advantage of the adoption of hybrid, plug-in-hybrid and electric vehicles.

The downside here is that Maxwell is currently in a large patent-infringement suit with private ultracapacitor company NessCap.  I find patent-infringement suits to be very unpredictable.  Maxwell filed the initial complaint in October 2006, and NessCap countersued in December.  A large negative earnings surprise last June and subsequent analyst downgrades further depressed the stock, possibly aggravated by tax-loss selling.  I see a good chance of a quick rebound in 2008, especially if the courts start ruling in favor of Maxwell, or the two companies reach a settlement. While negative ruling would hurt, they would be unlikely to destroy the company.

Maxwell's top-line revenue has been flat for over a year, so a large part of the recent price drop has likely been due to investor fatigue.  Nevertheless, insiders have been buying the stock on the open market, which I find reassuring with regard to internal confidence at the company.  Any significant uptick in sales volumes would likely bring with it a strong increase in the stock price.

Picks 4-7 are here, and Picks #1-3 are available here.

I decided to split this article into parts because the stocks I'm picking seem to be rising even as I write... I was clearly not the only person who has been thinking along these lines over Christmas...

Here's what has already happened to picks #8,9, and 10 on December 26, as I was writing:.

Cree jumps on American Technology Research Comments (up 10.7%); Lighting Science up 25%; Maxwell Technologies up 6%.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CREE, LSGP, PHG, MXWL, and a short position in FSLR.

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 12:56 AM | Permalink | Comments (3)

The same Fortune interview with Jim Rogers, which I referenced yesterday also contains an excerpt from his new book, A Bull in China.  In it, he goes over a few stock picks, including one I thought worth bringing to the attention of investors interested in profiting from rising CAFE standards and other increases in vehicle efficiency:  Jim says:

Aluminum Corp. of China (Chalco) (NYSE: ACH). Three year trend: profits up 86.7%, revenues up 88.8%.

Chalco is the largest producer of primary aluminum in the world's fastest-growing aluminum market.  Established in 1999 out of state-owned firms, this No. 2 aluminum manufacturer in the world is reported to be planning aggressive acquisitions, including a possible takeover bid for Alcoa. While some new plants are being built, others in China have been closing due to the high electricity costs.  But world demand for this commodity continues to grow.

As petroleum becomes increasingly expensive, there will be an increasing push to improve vehicle efficiency.  One of the simplest and most cost effective ways to do this is to incorporate more aluminum, as I argued in this article about Alcoa (NYSE:AA.)  

I've long been leery about investing in Chinese firms, because I have serious doubts about Chinese commitment to shareholder rights and disclosure, although these may be improving.  Nevertheless, my respect for Jim Rogers has peaked my interest, both in the stock and in his latest book.

DISCLOSURE: Tom Konrad  and his clients have positions in any of the securities mentioned here: AA.

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

 

Posted by Tom Konrad at 11:19 AM | Permalink | Comments (0)

Energy Efficiency breaks the laws of economics.  Despite the fact that it's considerably cheaper then traditional energy sources, as well as providing substantial benefits in terms of comfort, economic growth, safety, and the environment, barriers arising from misplaced incentives and the attitudes, awareness, perceptions, and general level of knowledge all conspire to prevent people from taking steps which would otherwise be extremely rewarding.

The key to better implementation of Energy Efficiency programs are programs to raise people's interest or awareness.  For instance, there is the example of how Woodstock Hydro found that their customers' electricity usage dropped 15% and were more satisfied with their service when they were given real time information about their electricity usage as part of a Pay-as-you-go program.

A Sioux Center Success Story

Another example of how information and awareness motivated people to be more energy efficient was told to me at the 2007 Energy Star Summit by Ron Horstman, the former Municipal Utilities Energy Efficiency coordinator of Sioux Center, Iowa.  Sioux Center achieved almost universal residential participation in that city's energy efficiency program by using infrared images to make aware of their homes' energy use personal.  This is his (lightly edited) description of the outreach efforts:

In 1986, the City of Sioux Center was engaged in a comprehensive community-wide energy management program.  One of the overall goals of this program was to use energy efficiency as an economic development tool.  Because Sioux Center imported over 98% of the energy it used, every dollar spent on energy left the community.  If even a small percentage of that money were retained in the community, it would have a noticeable impact on the economy.

One of the first steps and goals was to raise the energy awareness level of the entire community and to get their attention so that the programs would have high levels of participation and would produce significant results. 

Infrared Photos Raise Awareness and Interest

We chose to use infrared Thermography technology [see last week's article on an IR Imaging Stock] to raise the energy awareness level of everyone in the community.  We took an infrared photo from the street side of every home and business in the community and enclosed the photo with each owner's utility bill, along with an invitation to call my office for an explanation or interpretation of what the infrared photo depicted. 

I was inundated with calls.  The photos touched everyone on a personal level.  Residents and business owners saw their buildings in a new way, and they wanted to know what it meant.  When a customer called for more information, I would pull up my copy of their infrared photo and explain the prominent thermal features.  I used the conversation to tell them that their home or business was a prime candidate for a class "A" energy audit.  People signed up for energy audits right and left and I conducted these audits as quickly as possible.   

The utility had decided to offer these quality audits at a discounted price with the goal of educating each and every customer who decided to have the audit done.  We only charged $10 for an audit valued at approximately $250.  The information provided in each audit gave the building owners the information needed to allow them to make sound energy management decisions.  The audit results sheet provided a list of energy efficiency measures each owner could implement, the cost of installation for each measure, the first-year savings of each measure, and the simple payback in years.  This results sheet provided each recipient with a multi-year road map to energy efficiency.  I conducted audits on 28% of the homes and businesses in the community. 

Greatly Improved Participation in Future Programs

This one program built a great deal of credibility with our customers.  Homeowners and business owners implemented the recommended energy efficiency measures from the audits and began to realize the savings.  After that successful program, we initiated many other energy efficiency programs.  All of the programs were successful to different degrees.  The most important factor was the level of participation we were able to achieve with each program.  One program in particular - the voluntary load management program - achieved 98% participation.  The average utility implementing a load management program was only able to realize participation rates between 10 and 30%.  Our credibility with our customers spurred our success. 

Economic Benefits

After several years of conducting energy efficiency programs, I conducted and economic analysis to determine the impact these programs were having on the community.  The numbers were astounding!  The energy consumption per capita had been reduced by 38%, with millions of dollars retained in the community.   Businesses were growing and expanding, jobs were being created, amenities such as parks, recreation facilities, and cultural opportunities were increasing, and industries moved to the community for its quality of life. 

Societal Benefits

To re-emphasize Ron's point about increased quality of life, this article about a more recent program in Sioux Center highlights the retrofit of the city's fire station. In addition to a less than 12 year payback, the firemen reported being more comfortable (which likely helped the city with retention), increased use of the facility's classroom, and volunteer firemen spent more time in the facility readying the equipment for their next call, which contributed to the safety of everyone in the region.  According to Ron, the firemen's new pride in their facility was felt throughout the community.

Infrared Imaging Stock

I'm still reluctant to buy FLIR at the current prices (even more so since a reader pointed out the P/E I was using was off by a factor of 2.)  Nevertheless, stories like these leave me more convinced that infrared imagery must have a large role to play in promoting adoption of demand-side management.  It may come with more communities publishing energy use maps, like Haringey in the UK, or with Eco-Brokers selling energy efficient homes contrasting IR images of their home with IR images of other nearby homes on the market, or with utility programs like that in Sioux Center using infrared images to make energy use personal.

DISCLOSURE: Tom Konrad  and his clients do not have positions in any of the securities mentioned here.

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 05:12 PM | Permalink | Comments (2) | TrackBacks (0)

On Monday, I wrote that I wouldn't buy a house without an energy audit.  For now, I'm in the minority, but I don't expect that to last.  Each of these trends is likely to lead to more homes getting energy audits:

1. Rising energy costs: as energy prices rise, knowing what to do to improve your home's energy efficiency will become more valuable.
2. Weak real estate market.  Now that the boom is past us, new home builders need to put more effort into providing and advertising a quality product in order to attract buyers and stay in business.  One relatively easy way for a new home builder to differentiate his product from existing homes is to make them energy efficient.  By advertising such efforts, new home builders will raise the general awareness of the importance of good insulation and proper sealing in homes, both new and old.
3. Expected Greenhouse Gas Regulations.  The consensus among scientist is that man made climate change is unequivocally happening, and that we must take immediate action to avert its worst effects.  Politicians are likely to seize on improved energy efficiency as a cost-free way to reduce carbon emissions (which they are.)

Energy auditors will benefit from all these trends, and the industry is entering into a period of rapid expansion.  The makers of the tools they use will benefit as well.  

Tools of the Trade

What tools do energy auditors use?  Blower doors, flow meters (although some just use plastic trash bags), digital pressure gauges, combustion analyzer, Hand held smoke, low-e coating detectors, Kill-a-Watt appliance testers and, the tool only a tiny fraction of the attendees had but most want: Infrared (IR) Cameras (beginning to replace infrared thermometers.)

Among these, infrared imaging seems like the most exciting investment opportunity.  (Note: I am not talking about the images you can take using a filter and a standard digital camera... they go much farther into the infrared spectrum, and allow fine detection of temperature differences.)   

Not only are IR cameras in an early stage of adoption among energy auditors, as prices fall, I expect a host of other applications to emerge.    Indeed, there are already a host of applications for IR cameras, most of which have been recently made possible by the advent of uncooled IR cameras.  Until recently, in order to image in the infrared, the imaging chip had to be cooled to below the temperature of the image subject.  In practice, this meant that IR cameras had to be cooled with liquid nitrogen, which made them too awkward for use in mass markets.

Energy auditors and building inspectors can use them to locate leaks, do fault detection in HVAC equipment, as well as diagnose insulation problems.  

When it comes to energy efficiency, quick diagnostics of mechanical problems are key, and not just in home energy use.  There are a host of applications, including veterinary, electrical, and automotive.  The utility industry uses infrared cameras to diagnose problems at substations and transmission lines to avoid close-up inspections in high voltage areas.  

Another application which will be interesting to those of us who expect increased efforts to reduce Greenhouse Gas (GHG) emissions is the ability of specially tuned IR cameras to see volatile organic compounds (including potent GHGs such as methane) as they leak into the atmosphere.

IR Imaging Companies

The only public company with a large presence in IR imaging is FLIR Systems (NasdaqGS: FLIR), which also sells their cameras and night vision equipment to the military and other government bodies such as homeland security and law enforcement.   The largest competitor in the home inspection market is Fluke, a privately owned general instrumentation company.  

FLIR seems to have a strong lead in consumer awareness.  Most of the searches I did researching this article eventually led me to FLIR cameras.  I also know that FLIR actively markets to the home inspection industry: I sat in on a presentation at the 2007 Energy Star Summit, and no other IR camera manufacturers were present.

In addition, their GasFindIR video camera seems to be the leading tool for the gas leak detection application mentioned above.  

Valuation

FLIR is growing at about 20-25% a year, with most analysts expecting this growth to continue.  The stock price has doubled in the last year.  It has a trailing P/E of only 18, still quite low for a growth stock.  If I were a growth investor, I'd see this as a red-hot opportunity.  Correction: FLIR's P/E at the time of writing was 36, a typical growth stock valuation.  The error arose because I got the number from Yahoo!, where it had been confused because of a stock split. I like to think I would have been more careful valuing a stock I intended to buy.   

I'm always reluctant to buy after a stock has doubled in less than a year, and company insiders have been selling the stock, which also make me cautious.  I'll be keeping my eye on this one, knowing that FLIR may never come down to a price at which I'm ready to buy.  I have a feeling that a year from now I'll be telling stories about "The one that go away."

DISCLOSURE: Tom Konrad  and his clients do not have positions in FLIR.

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 12:59 PM | Permalink | Comments (2) | TrackBacks (0)

Last week, I attended the 2007 Energy Star Summit to keep up with what is going on in home energy efficiency, and, with luck, find a new public company or two to recommend.  

After several workshops for home energy raters, I came away with an idea for an article to help people concerned about home safety and efficiency look for new places to live.  Because it was off-topic for Alternative Energy Stocks, I offered it to my friend Preston at Jetson Green, and he has published it here.

Back on the subject of financial (As opposed to real-estate) investments, I did find and interesting industry (thermal imaging,) with a least one public company, and will write an article about it later this week.  

Also in attendance were representatives of several companies I have been watching for a while.  I've often recommended Owens Corning (NYSE: OC), because of their insulation business.  Trane (NYSE:TT, formerly American Standard), and Honeywell International (NYSE: HON) both came up in my article about performance contracting stocks, although they are also interesting because of their energy efficient products, controls (Honeywell) and plumbing fixtures (Trane).  See this article as to why plumbing is an interesting efficiency investment.

Another efficient home-appliance play is Whirlpool (NYSE: WHR), which was cited by Energy & Environmental Building Association certified trainer Mark La Liberte as having redesigned their new products to be 85-90% recycled.  While it pays to be skeptical of such claims, given many companies' propensity for greenwashing, so I pay attention when an industry professional gives an unprompted endorsement.

Link to my article on searching for an energy-efficient resale home or rental.

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

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

Posted by Tom Konrad at 11:19 PM | Permalink | Comments (0) | TrackBacks (0)

I've begun acting as a consultant to the Colorado Energy Efficiency Business Coalition (CEEBC) in a rulemaking docket for Demand Side Management (DSM) case before the Colorado Public Utilities Commission (PUC).  In the 2007 Legislative session, the Colorado legislature passed enabling legislation calling for utility-wide Demand Side Management programs for natural gas utilities.  To date, all DSM in Colorado has been focused on low income customers. 

Crucially, the legislation allows for non-energy benefits, such as increased comfort, economic multiplier effects (i.e. jobs), and reduced volatility of energy costs be included in the evaluation of the benefits of programs.  Since financial benefits are a relatively small part of net benefit, this allows the implementation of a large number of DSM programs with large net benefit, but which might have only small financial benefits.  The Commission will effectively decide whether those programs will be implemented in this rulemaking.  The utilities in question, led by Xcel Energy (NYSE: XEL), are currently only willing to include minor, easily quantified non-energy benefits, such as water savings in an energy-efficient dishwasher.

A Seemingly Easy Decision

Suppose you have the following choice for your home or business:

A. Spend $1000 to get improved indoor air quality, fewer drafts and hot or cold spots, quieter operation of equipment, less condensation on windows and walls (and associated mold growth), less noise from outside the building, a reduction in greenhouse gas emissions, an increase in the local economy, less air pollution, increased national energy security, and $15 per month for ten years.

B. Spend $750 and save $15 a month on your utility bill for ten years.  You might or might not get some of the benefits in A, but they will be smaller than the benefits you would have gotten with A (except for the cash.)

C. Keep the money.

D. Spend $350 and save $7.50 a month on your utility bill for ten years.  Like B, you may get some small, unknown fraction of the other benefits in A.

Utilities Chose C.

Until a few years ago, electricity regulators and legislators were choosing C on behalf of their customers, by meeting increasing demand for energy with new power generation.  They are now starting to realize that the cash-only internal rate or returns for options A and B are quite attractive.  (These returns are 11% and 19%, respectively, similar to buying a CD with that interest rate.)  Because the non-financial benefits of A are difficult to quantify, most regulators only consider the cash, and pick option B.

Option B is a traditional DSM program, which bases the decisions on which actions to take solely on the financial impact.  It is also essentially what Xcel Energy (NYSE: XEL) is arguing for in the utilities commission docket, despite their widely announced proposed doubling of their DSM target.  What Xcel does not mention is that the current DSM program (choice D, in the above analogy), was the result of a settlement agreement made with environmental groups who had opposed a massive coal-fired power plant in a previous PUC docket.  In my personal opinion, the environmental groups got very little for their concession of not opposing the 750 MW Comanche 3 power plant (now under construction), but at the time, they faced a Public Utilities Commission hostile to environmental concerns, and they may have been lucky to get as much as they did.  I seriously doubt any would have agreed to the settlement in today's political climate.

"A" Excellent Choice

Fortunately, legislators and regulators are awakening to the advantages of A.   The New York State Energy Research and Development Authority (NYSERDA) has been conducting a continuing evaluation of their ongoing Energy $mart DSM program, which means that they chose A, and then went on to quantify the non-cash benefits.  Because of the controversy about valuing emissions, the environmental benefits were not included in this study, but they used a series of questions similar to the poll above, and some advanced statistical analysis, to figure out what people would actually be willing to pay for the other benefits.

What they found was that the net present value of all benefits from the Energy $mart program were worth approximately twice as much as they would seem to be worth when measured on a traditional, cash-only basis (called "Scenario 1 TMET" in the study.)  And this does not include the environmental benefits listed in A, nor energy security.  In other words, people would be willing to pay well over twice as much for the benefits in option A, as they would be willing to pay for the cash alone.

Conclusion

Studying non-energy benefits is still an inexact science, and one of the things CEEBC is pushing for in the PUC docket is to make sure that we do our own study of non-energy benefits in Colorado, so we can better understand what we are getting (besides an excellent financial return) for our money.  That understanding should lead to more DSM programs, because the results will be better and higher valued as people begin to recognize the true worth of energy efficiency.  This has already benefited the companies, such as Energy Service Contractors, and providers of energy efficient products and the controls which enable them as more and more individuals, businesses, and utilities (gently prodded by the regulators), begin to choose A.

DISCLOSURE: Tom Konrad  and/or his clients have positions in these companies mentioned here: XEL.  (They're actually not bad, as utilities go, although they have been much more active on the renewable energy and energy efficiency front in Minnesota than they have been in Colorado.  This is, in my opinion, mainly the result to the proactive stance of regulators.)

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 02:15 PM | Permalink | Comments (3) | TrackBacks (0)

Most studies show that the greatest potential for reducing our carbon emissions comes from energy efficiency technologies.  And, unlike many renewable energy technologies, energy efficiency is almost always less expensive than developing new energy sources, so energy efficiency businesses can be profitable now, and still have a large potential upside which will come with regulatory efforts to reduce our carbon emissions and rising energy prices.

Unfortunately, the reason this free lunch exists is because selling and implementing energy efficiency technologies isn't easy.  It's also much more difficult to find companies that profit from energy efficiency than those that produce identifiable products such as wind turbines or solar panels.   Which is why I'll be attending the Energy Star Summit on December 3rd and 4th.  That, and they gave me a press pass.

Even if I don't see you there, you can look forward to an article on the companies helping to make our housing stock more efficient on December 9.

Posted by Tom Konrad at 08:10 PM | Permalink | Comments (0) | TrackBacks (0)

Being concerned about global warming, but also an investor and advisor who wants to keep my own and my client's money relatively safe is fraught with compromises.  For instance, a lot of environmentalists probably think that Alcoa (NYSE: AA) is an inappropriate investment, although I like it now that it has fallen from its recent highs.

There are two major environmental objections to Alcoa.  First, aluminum is extremely energy intensive to refine, and so has a high embodied energy (although recycled aluminum is much better).  Second, like any large mining company, they are responsible for considerable pollution.

Yes, But.

While mining aluminum is damaging, and refining it energy intensive (recycling is much less so), when incorporated in a vehicle, even virgin aluminum causes a dramatic reduction in life-cycle energy use for vehicles due to the reduced weight.  

In addition, the energy saved in vehicles is almost all from oil, while the energy in aluminum comes mostly from electricity.  While this is a clear benefit to energy security, the global warming impact is less clear.  For now, about half of the embodied energy in aluminum comes from coal, but in the future, as we transition to a more sustainable electric grid, the presence of aluminum smelters may actually allow for a higher penetration of wind energy onto the grid.  Because peak demand can account for as much as 50% of an aluminum smelter's electricity bill, already the biggest expense, smelters are accustomed to curtailing their use during peak times.  It's not that big a stretch to carry this practice a little farther, and use the high embodied energy of aluminum as an economic use for electricity at times of excess supply, which may allow a higher penetration of cheap wind into a local electrical grid.  Wyoming, it's time to change your state metal to aluminum.

In fact, some even hope that Aluminum will be fueling your car, as well as forming the structure.  I have my doubts.

The environmental damage at Alcoa's mines has to be weighed against the environmental damage that need not happen when lighter cars make less oil drilling necessary.  I don't know how these balance out, but at least there is something to balance both sides.  If the lifecycle energy of aluminum is any guide to the lifecycle environmental damage, we end up with a net positive for the environment..  

Green Irony

Neither investing nor environmentalism is as certain or as simple as we'd like it to be.  Every time Bill Paul at Energy Tech Stocks has called me a "Pure Green Stockpicker", I winced a little at the irony.  I'm far from pure, as are my picks.  My Blue Chip Alternative Energy Picks, which this final article in the series was about (and which include Alcoa), are perhaps the biggest compromises of the lot.  I guess it just says something about Wall Street that I'm the greenest analyst he's found, and I own Alcoa.

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

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 12:28 AM | Permalink | Comments (0) | TrackBacks (0)

Two months ago, I was talking to an experienced entrepreneur who was exploring business models to provide geothermal heat pumps to households.  At first blush, it seems like a great idea.  Geothermal heat pumps often have payback periods of under five years, which translates into internal rates or return in excess of 20% over the 30 year life of the system.  With plenty of room for a business to recoup its cost of capital and leave some money on the table for the consumer, it's amazing that there isn't a company in every jurisdiction already active in the market.  

In fact, sellers of geothermal heat pumps are few and far between.  Google searches for "buy geothermal heat pump" and "buy geoexchange" (an alternate name) drew less than 300,000 hits combined, while searches for "buy furnace" and "buy air conditioner" drew over 2,500,000 hits each.  Why is that?

Barriers to Energy Efficiency

When I spoke to the same prospective geothermal heat pump entrepreneur again a month later, he told me he couldn't figure out how to make money on the deal.  Nor can I.  The economics work best with new construction, but builders have no incentive to save their customers money on their utility bills.  In a case study from Delta-Montrose Rural Electric Association (DMEA), a progressive Colorado electric cooperative, they identified purchase cost as the main barrier to adoption. DMEA was able to overcome that by financing the systems for their members (customers) with a payment on their monthly utility bill, something they are in a unique position to do, because they are also the electric utility.  

Most utilities will not support energy efficiency programs without regulatory intervention.  Since energy efficiency programs reduce the total electricity sold, and electric rates are set by regulators, without decoupling, energy efficiency measures reduce the utilities profits.  A utility helping its customers reduce their usage would be like General Motors encouraging people to carpool so they could buy fewer cars.

Utility rate decoupling can fix this disincentive for a utility to work with consumers to reduce their usage, but a mental shift is also necessary for utilities to take on the challenge of working with customers to help them reduce their rates.  After all, DMEA is one of a very few rural electric cooperatives with an aggressive energy efficiency program.  Despite the fact that the co-ops are owned by their members, and so, unlike investor owned utilities, they should be more interested in their customers' welfare, some investor owned utilities (usually spurred on by regulators-- Coops, because of their mutual structure, are mostly unregulated), as wells as municipally owned utilities which are much more likely to embrace energy efficiency programs.  

Eric Hirst of Oak Ridge National Laboratory identifies these barriers to energy efficiency improvements:

Barriers to improving U.S. energy efficiency
Structural barriers—conditions beyond the control of the end user distortions in electricity pricing supply infrastructure limitations	Behavioral barriers—conditions that characterize end users efficiency attitudes and awareness perceived riskiness of efficiency measures obtaining and processing information limited access to capital misplaced incentives inconvenience, loss of amenities

For investor owned utilities (IOUs), the problems are mostly those of misplaced incentives, and attitudes.  When the state regulator changes the incentives, a well run IOU will quickly change its attitude. IOUs are in business to make money, and so they respond to incentives.  For a rural cooperative, I believe the main barriers are attitudes, awareness, limited ability to obtain an process information, and possibly perceived riskiness.   Since co-ops are responsible only to their members, and their customers are typically even less educated about the potential for improved efficiency to increase their well being than the utility that serves them, there is no reason for the coop to change its way of doing business.  Co-op boards' main incentive is to keep their members happy.  Often the simplest way to do that is my keeping them ignorant.

Barriers for Business

The landscape for a traditional business to make money for energy efficiency is different.  The main barriers confronting a business such as an entrepreneur wanting to sell geothermal heat pumps, will be problems of misplaced incentives and the attitudes, awareness, perceptions, and general level of knowledge of their potential consumers.  

Continuing with the heat pump example, if an entrepreneur tries to sell the ground source heat pumps to homebuilders, who would be able to install it most cheaply and thus achieve the highest rates of return, he is confronted by misplaced incentives.  The builder will not be pay the future utility costs of the house he is building, and so does not have any incentive to pay extra for a system from which he will not receive the benefit.  If the entrepreneur attempts to sell the heat pump to the homeowner, he is confronted with the difficulties of drilling holes for the geoexchange loops next to an existing home, which will greatly increase the price of the system and lower the effective rate of return.  If, despite this, the system still has an attractive rate of return, he will still be confronted by the homeowner's limited access to capital or, if he finances the purchase for the customer, there will be the inconvenience and added cost of billing the customer on a regular basis (an inconvenience that DMEA was able to avoid by including the costs in their electric bill.)

There are Opportunities
This is not to say that business will never be successful selling energy efficiency measures to consumers, only that it takes more sophisticated business models and an understanding of the barriers to adoption for the business to succeed.  One type of business that has been successfully overcoming these barriers for a long time are performance contracting companies, which I wrote about a few weeks ago.  By providing its members with comfortable homes rather than simply electricity, DMEA is in some sense following the performance contracting model.

For investors, it is important to understand that a product has to be more than just financially compelling to be successful in the marketplace.  I think the compact fluorescent light bulb (CFL) is an excellent example of how compelling economics are not enough to ensure the adoption of a product.  For CFLs, the economics are clear; the energy savings for a 14 watt bulb used just two hours a day amount to around $3 a year, which is more than the current price of a bulb which will last a decade or more.  Even in the late 1990s, when such a bulb cost three times as much, the internal rate of return for the investment exceeded 30% per annum, which is comparable to the returns that were captivating investors in tech stocks at the time.

Despite these economics, and countless endorsements from Al Gore, Oprah Winfrey, and the US Department of Energy, CFLs currently only have around 5% of the US market.  You'd think that endorsements as powerful as those would have people rushing out to buy them.

While CFLs  are not suitable for some applications (outdoors in cold climates, and places where they will experience a lot of vibration such as ceiling fans, which leads to premature breakage), these weaknesses do not account for our slowness to adopt them.  Instead, I believe the barriers to adopt them are Hirst's behavioral barriers.  For a $2-3 bulb, access to capital is clearly not the problem, but perceived riskiness is definitely part of it: CFL's mercury content has earned them much bad press (they actually contain less mercury than they save by reducing usage of coal plants), despite the fact that the mercury content is much lower than traditional fluorescent bulbs about which I have never heard a complaint about mercury... except from people who don't want to got to the trouble of disposing them properly.

There are often also complaints about light quality, which was indeed a problem with early bulbs. Recent ones, however, uniformly out scored an incandescent bulb in a blind test by Popular Mechanics in several measures of light quality.  In my mind, I feel the real motivation for consumer resistance is fear of change.  While the returns are gigantic when phrased in terms of a return on investment, in absolute terms the gains from using compact fluorescents are fairly small, just a few dollars a year per bulb.  For that amount of money, most people are not willing to go to the mental effort required to change an ingrained way of doing things, and so they latch on to any "reason" not to change they find, and use it to justify it to themselves.

It's cynical, but I believe that your average person would rather waste hundreds of dollars rather than change his habit and learn something new.

Energy Efficiency Success Stories

If I am right that the slow progress of CFLs is really resistance to change, we can use that information to figure out which energy efficient technologies will be most successful: not the ones that have the best economics, but the ones that require nothing of the people who purchase them to do nothing more than provide the cash.  Performance contractors and DMEA's heat pump program have been relative successes because they ask so little of customers.  It's interesting to note that DMEA includes a "Geoexchange Comfort Club" or social aspect to their program.  I wonder how many people joined the program just to get a free dinner.

This, I believe is the secret behind the runaway success of the Prius.  Although Toyota is lambasted for it today, the early ads for the Prius emphasized that, unlike the doomed EV1, it never had to be plugged in.  But on the financial side, there is much debate about how much money they save you, if any.  When stacked against hybrids, comparable diesels get similar mileage for lower upfront cost, and for serious global warming fanatics like myself, they have the advantage of being able to burn biodiesel without any modification.  Yet people look at me strangely when I tell them I have a Jeep Liberty diesel, but they're impressed that I bought a Prius in 2001.

Another example of convenience trumping cents is solar power.  Solar domestic hot water (SHW) has been around since the 70s, and the financial rate of return varies from 5% to 20%, depending on a wide variety of factors.  Solar Photovoltaics (PV), on the other hand has a financial return of between 1 and 5%, depending mainly on rebates (these are all my calculations; your results may vary, but there is a strong consensus that SHW is a better financial bet than PV.)  Yet again, PV is popular, and SHW is a "hidden gem" pushed by earnest environmentalists.  Yet people are used to complex electronics in their lives, but the plumbing is something they only see when there is a leak and they have to call a plumber.  So while PV is much higher tech than SHW, electronics are something people are used to, while plumbing (SHW) is something they only associate with inconvenience.

The Bottom Line: It's Not the Bottom Line.

When it comes to selling energy efficiency to consumers, businesses need to remember that the financial and environmental outcomes are only a tiny part of most consumers decisions.  Recent evolutionary psychology research implies that people do good deeds as  a strategy to attract mates, and so they want to be seen doing those good deeds.  Businesses that realize that the good energy efficiency does for the environment is a better selling point will succeed where businesses peddling economics will fail.   Why was the Accord Hybrid discontinued and Hybrid SUVs are struggling while Prius sales hit records?  I believe it's because they are not conspicuously green.  People want to be seen to be green a lot more than they want to save a few dollars on gas.  The Japanese who buy fake solar panels don't ask about the payback period. Many PV installers have already realized this, and they have learned to counter arguments about the economics of PV by asking, "What is the payback period of granite countertops?"

This lesson can also be turned on its head.  By making energy efficiency an item for display, just like a Terrapass window decal, energy efficiency can become something people aspire to.  When our utility bills are on the internet for everyone to see, that's when we'll see geothermal heat pumps and Built Green and Energy Star homes take off.  Even infrared images of homes posted on Google Street View might do the trick.  Efficiency needs to be conspicuous to sell well.

Posted by Tom Konrad at 03:17 PM | Permalink | Comments (6)

This is the final article in a series on the WGA Energy Efficient Buildings Workshop.

On the morning of day two of the Western Governor's Association Energy Efficient Buildings Workshop, the topic was performance contracting: a way of unlocking the power of a government entity's utility budget to make energy improvements that pay for themselves, but might otherwise never receive the necessary capital.  

Despite the dryness of the subject, the room seemed alive with active interest of the participants.  Many of the workshop participants were government officials who are enthusiastic about energy efficiency, but also beaten down by the tyranny of the budget.  For them, performance contracting must seem like the Holy Grail: a chance to make an improvement that not only improves their department's bottom line, but a way to do it without having to fight for any precious new allocation from the overall budget.

In concept, performance contracting is a deal by which the government body contracts for a certain level of service (such as a level of building temperature and lighting) instead of buying the energy needed to run their building directly from the utility.  The Energy Service Company, or ESCO, takes the money that would have gone to paying utility bills, and uses it to finance a loan which they use to make efficiency improvements to the facility.  Part of the energy savings pay for the loan, and the rest are split between the ESCO and the government body as profit.  As one presenter put it, it's not a free lunch, it's a lunch that you get paid to eat!

While the presentations focused on performance contracting for government entities, it's also applicable in other situations (although many government entities enjoy the advantage of being able to borrow at municipal bond interest rates of 3-4%, there are many projects that can be profitably financed at much higher rates.)  The presenters were also careful to emphasize that a performance contract can include renewable energy and other green or sustainable aspects, as well as energy efficiency improvements... the key is to find enough energy efficiency improvements to fund the more expensive parts of the package.

This area also has investment potential.  While many ESCOs are private companies, quite a few ESCOs, as well as their financiers and suppliers are divisions of public firms.  These companies are well placed to benefit from the raft of initiatives to improve the energy efficiency of government operations that is blossoming at the local level (some of which I discuss in the Political Developments article in this series.)  A good place to look for companies involved in performance contracting is the membership of NAESCO, the National Association of Energy Service Companies.  Prominent publicly-traded NAESCO members include:

Johnson Controls (NYSE:JCI), a company I included in my Blue Chip Alternative Energy Portfolio, in large part because of their activities in efficient buildings, and presenter at the conference.

Honeywell International (NYSE: HON)

Siemens Buildings Technologies, a division of Siemens AG (NYSE:SI), a company I also like for their presence in electricity transmission.

Trane, a leading A/C manufacturer and division of American Standard (NYSE: ASD)

Roger Flud TAC Energy Solutions (a private ESCO) of gave one of the more interesting presentations.  His presentation was on the economic impact of energy efficiency in general and performance contracting in particular, with much of the information drawn from Saving Energy, Growing Jobs, by David Goldstein (you can read an excerpt here.)  Goldstein debunks the myth that there must always be a choice between environmental protection and economic development; instead, the two can, with intelligent regulation, go hand in hand.  A sample statistic: Saving $200 a month in electricity can fund a $2M project, which would create 83.5 man-years of work, plus potential manufacturing jobs if the equipment is manufactured locally.

I'm optimistic the other attendees learned many of the same things out of the workshop that I did, and that those who represent governments will do their parts to bring us intelligent regulation, which will allow better energy efficiency, lower greenhouse gas emissions, improved energy security, and enhanced economic development.

Links:

WGA Energy Efficient Buildings Workshop series overview.

Political Developments for Energy Efficiency in Western States

Investing in Efficient Homes

Energy Efficient Buildings workshop presentations.

Attendee List

DISCLOSURE: Tom Konrad  and/or his clients have positions in these companies mentioned here: JCI, 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 12:09 AM | Permalink | Comments (0) | TrackBacks (0)

This article is part of a series on the WGA Energy Efficient Buildings Workshop.

Sam Rashkin

One highlight of the conference was Sam Raskin's (the National Director a.k.a. "Scary Man" of the US EPA Energy Star program.)  I recommend his presentation for graphic infrared images of poorly sealed homes, showing how little the insulation is doing to retain heat or cold if the building envelope is not tight.  It will make you think twice about buying a home that hasn't been checked to be tightly sealed.

Rashkin believes that the growing affordability of infrared cameras will allow home inspectors to use them so that builders will no longer be able to hide shoddy insulation and sealing of building envelopes, giving a strong competitive advantage (over both "used homes" and other builders) to builders who can get these things right.

Along the way, he commented that wide-scale adoption of Plug-in Hybrids (PHEVs) may lead to $.40/kWh electricity.  While I wish he were correct about this, because of the investments in energy efficiency that such a scenario would catalyze, I doubt that PHEVs alone would lead to such an escalation of electricity prices.  In fact, some studies show that PHEVs may lower per kWh cost of electricity by allowing us to use our grid more efficiently, and spreading fixed costs of generation to more electricity sold.

While current energy Star standards focus on right-sizing HVAC equipment and the building envelope, he expects future versions to include

1. Better solar orientation (long, south-facing walls keep a building cool in the summer and warm it in the winter, with proper overhangs and window sizing.)
2. A move to avoid solid areas of wood support members, where there isn't room for insulation.
3. Making sure that air ducts remain in the conditioned parts of the house.
4. Structured plumbing, which can improve the efficiency of water heating by 25% by reducing the amount of water that cools off in pipes when not in use.
5. Advanced lighting... his presentation also contained a series of pictures effectively debunking the myth that fluorescent lighting has to be harsh.
6. He also expects a move to the "not so big house."  I'm more cynical about that, but it could happen when much higher energy prices really begin to start hitting consumers in the wallet.

Eric Borsting, of the National Association of Home Builders (NAHB)

Mr. Borsting began his presentation by emphasizing that he was there representing NAHB, and I don't blame him from trying to dissociate himself as much as possible from the canned, finger-pointing speech he read to us in a dull monotone.  The NAHB's position (in my words) is that lack of energy efficiency in new homes is not their fault, we should look instead to energy-inefficient occupants, and do something about old homes first. They completely avoid the fact that every inefficient old home was once a badly constructed new home.  They're terrified of mandates for energy efficiency, arguing instead that they should be given incentives to build homes responsibly. 

The NAHB says that every $1000 added on to the price of a new home, "prices out" 240,000 households from the market.   What this study completely ignores is that energy efficiency improvements are extremely cost effective, and actually lower the cost of ownership of the home (when including both mortgage costs and utility bills.)  Recognizing this, the Energy Efficient Mortgage program allows buyers of energy efficient homes to increase the size of the mortgage they qualify for or to lower the interest rate they are charged.  Thus, energy efficiency improvements can actually price in hundreds of households into the home ownership market, in direct contradiction with the NAHB's party line.  Like many entrenched interest groups, they are so afraid of changing the way they do things that they work against their own self interest as home builders by resisting energy efficient building techniques.

Kim Calomino

Kim Calomino, director of the Built Green Colorado program of Home Builder's Association of Metro Denver, stuck a little less tightly to the Home Builder Association's line, arguing that much could be accomplished by voluntary "above code" programs.  While she was persuasive that voluntary programs such as Built Green can do a lot to improve energy efficiency, this argument also presents a false dichotomy between more stringent energy codes and voluntary programs.  There is indeed an effective place for voluntary codes, but that does not mean that they cannot be in addition to mandatory rules that all buildings must include economic efficiency measures.

She did provide a rare example (including actual costs and savings) of the benefits of Built Green improvements, from McStain Neighborhoods.  She listed the itemized costs associated with meeting the Built Green standard (not all of which are energy efficiency improvements), with a total of $555 in annual utility savings for a $4600 premium on a Built Green home.  Her presentation is available here (see slide 9).

I calculate the internal rate of return (IRR) on McStain's investment in a Green Built Home to be a 10%.   That means that the additional cost of this home can be profitably financed at any interest rate below 10%.  My IRR calculation assumes that the improvements continue to produce savings for 20 years, but also that energy prices do not rise over that same period, so the likely errors in the calculation will be in opposite directions (giving a lower IRR for shorter-lived improvements, but a higher IRR if energy prices rise.)

Taking into account the fact (repeatedly stressed by Ms. Calomino) that there are many other benefits to Built Green homes in terms of comfort, air quality, and durability, it seems insane to me that inexpensive improvements such as those required by Built Green should not be required by code so long as the internal rate of return on the investment in energy efficiency is greater than the interest rate on the mortgage used to finance it, because the air quality, comfort, and durability benefits she points to would still be, essentially free.

Gil Rossmiller

Link to Mr Rossmiller's presentation.

Gil Rossmiller, the Chief Building Official of southeast Denver exurb Parker, CO gave us all a reality check, by bringing home the fact that if 12% of new homes meet Energy Star standards, then 88% don't meet these not-too stringent standards.  For that 88%, Energy Star standards are irrelevant, and a focus on proper enforcement of the existing building code for the vast majority of homes will do a lot more for energy efficiency than adding a couple of percent to the number of homes that qualify.  The sad fact is, that even the weak energy codes we do have are only as good as their enforcement... and he showed how he was able to greatly improve builder's standards simply by rigorously enforcing just the existing, much derided code.

Stories like this tempt me to despair because they show just how bad things are, but they can also lend hope.  We don't have to pass a raft of new laws to make progress tackling our energy problems; a lot of progress can be made by just enforcing the code that we already have. 

Investment ideas

All speakers constantly emphasized that bringing up energy efficiency requires extensive education and outreach, not just higher standards.  Because of that, we can expect that there will be an increase in government contracts for that purpose.  Advertising and education are not a sectors I'm familiar with, but if you know of a public company you feel can profit from this trend, I suggest you think seriously about investing.  On a more whimsical note, you might take Sam Rashkin's thoughts to heart, and invest in makers of infrared cameras.

Among homebuilders, Lennar Corporation (NYSE:LEN) was mentioned at least twice as a pioneer in energy efficient building practices.  

When it comes to energy efficient homes, the two big issues will be insulation and sealing.  I had the opportunity to speak with two industry insiders about this, and they felt that proper sealing depends much more on proper installation than the particular product used.  This agrees closely with what most of the speakers were saying during the presentations.  Unfortunately, this means that it will be difficult for any particular product to gain market share unless it is easier to install than rival products.  There isn't currently any product on the market with a real competitive edge in this regard, but a homebuilder with a rigorous training program for installers might be able to capture value, if they were also able to retain staff.

The big public players in the insulation industry are Owens Corning (NYSE: OC), which one of my informants (a research engineer at a rival  firm) says has a quality research department, and Johns Manville (JM), which is owned by Berkshire Hathaway (NYSE:BRKa).  However,JM is too small a part of Berkshire to warrant investment in Berkshire for an investor looking for exposure to the insulation industry.  The final major insulation manufacturer is CertainTeed, but they are a private German firm.  Dow Chemical (NYSE: DOW) also has exposure to the air sealing space, as does DuPont (NYSE:DD) with their household name Tyvek weather resistant barrier.

Unfortunately for investors, I felt that the take away message was that no insulation manufacturer has a strong technical edge, although Owens Corning may be the default investment in this space simply because they provide the purest exposure to the insulation industry.

The largest potential market for insulation in this industry is blow-in insulation in attics, because it is something that is easy to do in an existing home, and you get a lot of energy savings for a very small outlay.  Blow-in fiberglass insulation (which often includes significant recycled glass content) has the best thermal performance, followed by cellulose (usually made from recycled newspaper).  All the major manufacturers have blow-in fiberglass product.

Extremely high R-values can not be achieved with current practices (filling the gaps between studs with insulation).  If forced to much higher standards, builders will most likely move to rigid foam external sheathing, versions of which are made by Johns-Manville, Owens Corning, and Dow Chemical.  While these products may currently be practical for custom homes, production builders don't like to use them, and these three companies might gain a competitive edge from a large increase in home energy standards.  However, I feel such a scenario is improbable within the next five years.

Links:

WGA Energy Efficient Buildings Workshop series overview.

Political Developments for Energy Efficiency in Western States

You can find links to future installments by clicking here.

Energy Efficient Buildings workshop presentations.

Attendee List

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

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

 

Posted by Tom Konrad at 07:46 PM | Permalink

This article is part of a series on the WGA Energy Efficient Buildings Workshop.

Governor Ritter

After arriving slightly late (a gunman had been shot by state troopers outside his office the day before.)   Bill Ritter kicked off the workshop with his thoughts on energy efficiency.  Other than the Governator, I don't know of any other state governor in the US who understands renewable energy as well as Governor Ritter.  And he's dedicated to learning more; when I attended a fundraiser early in his campaign last year, he had not yet heard about plug-in hybrids, but in a more recent interview (podcast download), it's clear that he has learned the ins and outs of the industry.  Here are some highlights from his speech.

• Has committed to achieving the goal of 20% improved efficiency in Colorado by 2020.
• The United States wastes more energy in production and transmission than Japan uses. (See my articles on ABB and transmission for investment opportunities.)
• If China and India are to embrace Renewable Energy and Energy Efficiency, the United States must lead the way.

Ritter Q&A

Q (Howard Geller): Are you planning to issue an executive order on Energy Efficiency, like Governor Hunstman of Utah?

Ritter: He is not planning an executive order, but he would instead be tacking the problem on multiple fronts, including using the Governor's Energy Office to promote energy efficiency and Demand Side Management (something I plan to be personally involved in), and that, if we achieve our goal early, he plans to move the goalposts and aim for even more efficiency, as was done with the doubling of Colorado's RPS.

Q: What can other states do to get legislators on board?

A: (I thought this was particularly insightful.  Activists and politicians take note! -TK)

1.  Education of legislators is essential; 
2. Get Rural Electric Co-ops (RECs) on board. 
3. Make sure there are benefits for rural areas.  In Colorado, we signed law allowing RECs to take out debt to fund transmission, and allowed some accelerated cost recovery. 

Howard Geller (I've mentioned him before)

Dr. Geller gave a summary of the progress on energy efficiency in each of the western States, and his presentation was followed by presentations of other speakers from the individual states.  I'm including some information from individual state presentations here.

• In addition to Governor Ritter's commitment to increase energy efficiency by 20% by 2020, Governor Huntsman of Utah has gone even farther, signing an executive order to achieve a 20% increase in energy efficiency by 2015.  Other governors are considering this commitment, Governor Richardson of New Mexico, in particular.
• Energy Efficiency is a key part of all state Climate Action Plans.
• Western states are leading in the construction of new Energy Star labeled homes, with Arizona, Nevada, and Texas alone accounting for half of the nation's total last year, and Energy Star accounting for 71% of all new home construction in Arizona.  More than 15% of new homes were Energy Star in California and Utah.
• Arizona calculates that the net economic benefits of it's Climate Action Plan, which includes both renewable energy and energy efficiency, at $5.6 Billion from 2007-2020.  To me, this is important because it shows that the "choice" between addressing climate change and increasing economic growth is a false one.  Energy Efficiency allows us to do both.

Rep. Tonya Pullin, Kentucky Energy Committee Chair.

Link to Rep. Pullin's presentation, (PowerPoint)

Despite Kentucky not having been a "Western" state since the 1800s, Rep. Pullin was invited to the workshop to tell us about a bill she had championed to make a simple change with the potential to produce great results at very little cost.  I've written about the potential of giving people better feedback about their energy usage before, and I was very pleased to see that politicians are starting to do something about it.  A simple $100 indoor electric meter that's the size of a credit card can allow users to cut their electricity usage significantly by simply letting them know where it is being wasted.

It's hard to overestimate the giant potential of human behavior to either make well designed systems run awry if they are not designed with real human behaviors in mind, or to make any system perform well above its design if we are just given the right feedback about the effects of our actions.  As Rep. Pullin put it, people want to be empowered with information.  

During the Q&A, a representative from Seattle Power and light asked her how the indoor electric meter could be justified by a utility that not only had to pay for the meter, but then had to spend another $150 to verify the savings.  She responded that her program was just the enabling legislation to allow a utility to do a voluntary trial (which ended up being massively oversubscribed.)

This highlights a problem with utility regulation: by requiring meter-by-meter verification of something which is inherently hard to measure (the effects of human behavior), we prevent implementation of a  program that customers not only want (in Rep. Pullin's experience,) but that is likely to be radically effective because it is nearly impossible to quantify just how effective it will be.  At some point, we simply need to decide that there is likely a large benefit to society, and make the (small) investment.  When it comes to indoor meters, we have a bad case of analysis paralysis.

Links

WGA Energy Efficient Buildings Workshop series overview.

You can find links to future installments by clicking here.

Investment opportunities in Smart Metering

Energy Efficient Buildings workshop presentations.

Attendee List

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

Posted by Tom Konrad at 04:59 PM | Permalink | Comments (0) | TrackBacks (0)

The WGA Energy Efficient Buildings Workshop: Overview

The Western Governor's Association (WGA)  held a two day workshop in Denver on July 17 and 18.  Colorado's Governor Bill Ritter kicked off the workshop (with a slightly late start due to the shooting of a deranged gunman outside his office on July 16.)  The workshop was a step towards achieving the WGA Clean and Diversified Energy resolution which includes a call for a 20% increase in Energy Efficiency in their states by 2020. 

I attended because I believe:

1. Energy Efficiency can and will do more to meet the challenges of Global Warming, Peak Oil, Environmental Degradation, and Energy Security than any other form of Alternative Energy.
2. The speed and choice of energy efficiency measures that are adopted will be strongly influenced by governmental policy.
3. In the United States, it is the states that will become the models for future national policy.
4. Keeping a close eye on these trends will give me an edge in picking companies that are well placed to profit from them.  I'll include some investment ideas in each article.
5. The workshop gave me an opportunity to influence the direction of future policy, which will benefit my managed portfolios.  I also hope to help, in a small way, to guide policy in directions that allow us to deal with our energy challenges more effectively and without as much disruption to the economy.

The first day was mostly presentations from government officials and industry experts, while the second day started with a couple short presentation followed by two brainstorming workshops. Over the next few days, I'll be publishing my thoughts on the highlights of the workshop.  You can also download my notes.

Links

You can find links to future installments in this series by clicking here.

WGA Energy Efficient Buildings workshop presentations.

Attendee List

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

Posted by Tom Konrad at 04:46 PM | Permalink | Comments (0) | TrackBacks (0)

Diamond in the Rough

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

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

T&D Technologies

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

Efficiency High-flyer

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

 

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

Transmission Investment vs. Retail Electricity Sales
Source: IEEE

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

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

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

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

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

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Too Many Brownies Before Dinner

"When you feed your kid six brownies before dinner, you can't expect him to eat the salad, no matter how good it is."  So says Leslie Glustrom, a long term renewable energy advocate.  This is her metaphor for why Xcel Energy (NYSE: XEL) has been reluctant to pursue Demand Side Management (DSM) and renewable energy projects in Colorado as they have been in Minnesota.  Because Xcel is currently constructing 500 MW of new coal-fired generation, and they are also interested in a 300-350 MW IGCC plant by 2013, they may have little demand for new renewable generation.

A Gusher of Energy Efficiency

I heard a similar comment from Amory Lovins of the Rocky Mountain Institute last year.  His point was that high prices for energy resulted from both the construction of new generation as well as investments in energy efficiency.   He expects that the new generation resources will come online shortly after what he terms a "gusher of energy efficiency," causing energy prices to collapse.  This echoes the pattern he saw in the 1986 oil price crash, where "It took nine years for President Carter's fuel-efficiency standards to work their way into the fleet, but they were largely responsible for an 87% cut in imports from the Persian Gulf. Then President Reagan came in, right after the second and more severe oil price sh