Tom Konrad CFA

Volt owners are almost universally happy with their cars, despite the fact that very few will recoup the extra costs of the car in gas savings.   Even though the financial savings are small compared to the large up front payment for the vehicle, the emotional payback more than compensates.

As someone who helps people invest in green stocks, I can tell you from first hand experience that investor enthusiasm has everything to do with recent financial returns, and not much to do with the good we’re doing.

In 2007, when practically any stock which could be labeled green was going stratospheric, my phone was ringing off the hook.  Then came the crash in 2008, with green stocks falling more than the market as a whole.  Worse, they failed to participate in the market recovery since then.  Green investors are a dedicated lot.  Many of my clients worried that the slump might never end, but none left.  But the calls from new clients became very few and far between.

Finally, in late 2012, green stocks began to rally.  The leading clean energy ETF, PBW, is up 40% from its November low.  The leading solar ETF, TAN, is up 65% from its low.

The phone is ringing again.

Why the Difference?

To judge by the comments from Volt owners, their enthusiasm has a lot to do with the regular thrill they get driving by a gas station without stopping.  Whenever they drive, they are reminded that they’re doing good for the environment.  This makes them feel good, and that feeling keeps them feeling good about their cars, even without positive financial returns.

A green stock portfolio is different.  Few investors make the emotional connection between their green stocks and the success of green companies.

Too Cerebral

Green money managers, in general, are not much help.  I asked my panel of thirteen green money managers, ranging from investment advisors to hedge fund managers how buying green stocks helps green companies.  Here is a sample of their responses:

Investment advisor Jan Schalkwijk, CFA at JPS Global Investments:

In theory, higher demand for green stocks –  to which small investors would contribute by purchasing green stocks, mutual funds, and ETFs – should decrease the cost of capital for these companies, thus improving their ability to expand. Additionally, to the extent that the purchase is funded by a redemption of a non-green stock, this should increase the cost of capital for that company; thus reducing its scope for expansion. However, I don’t think small investors have enough clout to make this theory pan out in reality. It really requires big buy-in from large investors to make a dent.

Solar hedge fund manager Shawn Kravetz at Esplanade Capital:

[T]he small investor is in effect providing capital to the green company and depriving capital of other alternatives.  While the green company has already raised the actual capital, the market purchase fuels demand for that sliver of ownership and in essence rewards the green company, making it easier and lower cost for them to raise more capital in the future and thereby spread their greenness.  One investor does not move the needle per se, but the sum of multiple such investors indeed does.

That’s all true, but it does not exactly get the heart racing.  Schalkwijk, Kravetz and I are immersed in the stock market on a daily basis.  To us, moving the price of a stock a smidgen is very real, we do it and see its effects regularly.  To the average small investor, however, this logic must seem hopelessly abstract.

Your Money, Direct to Clean Energy Projects
Fortunately, it’s not the whole story.

With the arguments for investing in green stocks so intellectual, it’s no surprise that even the most environmentally minded prospective investors are more interested in last month’s returns.

On Monday, I spoke to John Fullerton is the Founder and President of Capital Institute.  The Capital Institute’s mission is to transform finance to effect a more sustainable economy.  Its focus is on large institutional investors such as pension funds and endowments, but he agreed to speak with me about my personal focus: small investors.

In general, Fullerton thinks that the focus on trading in the stock market makes it very difficult for the sustainable investor to affect change.  But he sees some exceptions.  In particular, Master Limited Partnerships (MLPs) and REITs return their cash flows to investors, so they need to conduct secondary offerings (sell shares) whenever they make new investments.  Investors in these vehicles are buying the future cash flows derived from the expansion of the enterprise, not just speculating on a future stock price.

At the moment, the MLP structure is limited to depleting resources such as fossil fuels and their transport, and so are not likely to be of interest to green investors.  However, the MLP Parity Act, which was designed to correct this imbalance, has been re-introduced in the Senate with bipartisan support.  If the act passes, small investors will have the opportunity to invest in publicly traded MLPs which will directly use the money to fund solar, wind, geothermal, and other clean energy projects.

For now, there are two publicly traded REITs investing in clean energy projects.  The larger of the two is Hannon Armstrong Sustainable Infrastructure (NYSE:HASI), which went public last month and is investing the proceeds in eight clean energy projects that it had lined up in preparation for the IPO.  Since Hannon Armstrong is a leading financier of clean energy projects, investors can be confident that secondary offerings to fund other projects are not too far in the future.  By buying and holding HASI, they increase the amount of money the company can raise for new projects with a fixed amount of stock.  The profits from those projects will then be returned to the investors as dividends.

With the second clean energy focused REIT, Power REIT (NYSE:PW), the connection between the small investor and the clean energy project they are financing is even more direct.  Power REIT has just signed a term sheet for the acquisition of 100 acres of California land underlying approximately 20MW of to-be-constructed solar projects for $1.6 million.  PW will fund that purchase with a combination of debt and equity.

The equity will be raised by the company selling stock through a broker on the New York Stock Exchange under PW’s existing At Market Issuance Sales Agreement.  In other words, if you buy the stock today, there is a good chance that the money won’t go to another investor; it will go straight to Power REIT to fund a solar farm.  Even new investors who buy from other investors are directly helping by keeping the price up and ensuring that for every share PW sells as much money as possible helps finance the solar farm.  Profits from the solar farm will then flow back to Power REIT and be returned to investors as dividends.

Venture Capital

Many small investors wanting to make an impact envy the venture capitalists (VCs) who can fund a start-up green technology company with a better battery or a more efficient wind turbines design.

They should not be jealous.  VCs take their cues from the stock market, not the other way around.  Without the stock market and the ability to sell a company to ordinary investors in an IPO, the only ways for venture capitalists to get a returns on their investments would be to sell them to other companies, or wait for the start up to generate enough profits to pay them back itself.

Many VC-backed companies are sold to other firms, but this is a second choice option, mostly used when stock market valuations are low.  Waiting for a start-up to pay back its initial investors is simply not an option of VCs: the returns take too long.   They prefer the money sooner, in five to ten years at most, so they can move on and fund the next promising start-up.

Because VCs count on IPOs for their best returns, they’re much more likely to fund start-ups in sectors with high valuations.  When  solar stocks are in the stratosphere, VCs fund solar start ups.  When Smart Grid stocks are all the rage, VCs will be looking for the next great smart grid technology.

It’s not only First Solar’s (NASD:FSLR) management and shareholders who are paying attention to FSLR’s share price.  It’s VCs, and all the entrepreneurs hoping to get those VCs to fund the next breakthrough solar technology.

We’re Invested in More Ways Than One

In addition to pointing out that buying a green company helps its stock price, Shawn Kravetz made another point:

[W]hen people own stocks they tend to patronize and talk about those companies.  This vested interest and evangelism, when aggregated, does move the needle.

Fullerton makes a similar point in a recent blog post.  He argues that we should understand investment in the context of a holistic decision-making process that seeks to harmonize (not trade off) financial, social, and ecological objectives.

Both are saying that it’s too simple to just look at the effect our investment are having on companies, we also have to consider the effect our investments have on us.  People whose retirement depends on the continued profits of a coal companies are much more likely to give those companies a sympathetic ear when they complain that regulations to limit mercury emissions (or any other environmental harm) are too expensive and will undermine their profits.

If we invest in companies that stand to lose from the shift to a sustainable economy, the vested interests we are fighting are our own.  Much better to invest ourselves, both financially and emotionally, in companies that will benefit from the changes we know must be made to protect our planet and our children.

Conclusion

Even the smallest investors’ green investments make a difference.  This is most direct when they buy the shares of companies  in the process of raising money for green investments.  Yet they also makes a difference to a company’s ability to reward valuable employees with shares or options, and to the prospects of start-ups in similar industries.   Higher prices for green stocks mean more green companies having successful IPOs, and more green start-ups secure funding.

Perhaps most important are the effects owning a slice of a green company has on the investor.  It is much easier to make the right decisions for the planet and our future when we know the stocks we own will benefit from those decisions as well.

When green investors understand the very real changes their investments are having on the world, perhaps they’ll love their portfolios as well, like Volt owners love their cars.

Disclosure: HASI, PW

This article was first published on the author's Forbes.com blog, Green Stocks on May 8th.

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

Posted by Tom Konrad at 07:43 AM | Permalink | Comments (0)

Meg Cichon

Just one year after Greenpeace called out Apple, Inc. (AAPL) for its use of fossil fuels in its "How Green Is Your Cloud" report – which graded Apple no higher than a "D" in four categories consisting of energy transparency, infrastructure siting, energy efficiency, and renewables and advocacy – Apple announced that its data centers are now powered by 100 percent renewable energy. In fact, renewables contribute to 75 percent of its entire corporate operations energy needs, according to its website.

The 2012 report cites Apple’s planned expansion into “iDataCenters” to support its booming iCloud services, which at the time were thought to be powered mostly by fossil fuels. Apple was given poor rankings due to its apparent lack of initiative in clean energy and efficiency. Due to this lack of commitment,  “Apple [was] finding itself behind other companies such as Facebook (FB) and Google (GOOG) who are angling to control a bigger piece of the cloud. Instead of playing catch up, Apple has the ingenuity, on-hand cash and innovative spirit to Think Different and make substantial improvements in the type of energy that powers its cloud,” according to Greenpeace.

Shortly after the report was released — and Greenpeace hosted several colorful protests — Apple announced it would power its three new data centers in North Carolina, Oregon and California would be fully powered by renewable energy. Its Maiden, NC facility includes two 20-MW solar PV installations, with its remaining power to derived from a 10-MW biogas plant, fuel cells and renewable power purchased from local and regional sources — which are all set to be up and running by the end of 2013. It is locally sourcing wind power for its Newark, Calif. center and will do the same with a mix of renewable sources at its Prineville, Ore. center. Its next data center in Reno, Nevada will be powered by onsite geothermal and solar sources.

Apple is standing by its commitment to be powered entirely by renewables company-wide. According to its Environmental Footprint Report, “The implementation of our energy strategy results in an energy supply mix unique to each location. In all cases, though, Apple’s goal is to meet our energy needs with 100 percent clean, renewable energy that reduces GHG emissions and other environmental impacts.”

Greenpeace acknowledged Apple’s swift turnaround in a statement: "Apple's announcement shows that it has made real progress in its commitment to lead the way to a clean energy future. Apple's increased level of disclosure about its energy sources helps customers know that their iCloud will be powered by clean energy sources, not coal."

Meg Cichon is an Associate Editor at RenewableEnergyWorld.com, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for RenewableEnergyWorld.com and REW magazine, and manages REW.com social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

This article was first published on RenewableEnergyWorld.com, and is republished with permission.

Posted by Guest Contributor at 08:56 AM | Permalink | Comments (0)

Doug Young

King Vulture Sarcoramphus papa. Photo by Hein waschefort via Wikimedia Commons.

New reports that major car maker Dongfeng Motor (HKEx: 489) is bidding to buy a struggling US hybrid car maker are casting a spotlight on China's emerging role as scavenger for global new energy companies struggling to stay in business. A number of factors are driving this budding trend, led by the fact that many of these Chinese suitors are relatively cash rich and in a good position to provide much-needed funds for cash-starved western new energy firms.

What's more Chinese firms in general love a bargain when they shop for global assets. Then there's also the technology factor, as many of these Chinese buyers are hoping to bring some of the technology they get from their purchases to their operations back home. Lastly there's also the Beijing factor, as many of these buyers are making such purchases to show their commitment to developing new energy technologies, a top priority for the central government. Of course, the only problem in all of this is that most of these factors have little or no foundation in running a commercially viable business, meaning many of these purchases are ultimately likely to result in headaches and quite possibly failure for their buyers.

But now that I've said all that, let's take a look at the latest headlines, which say that Dongfeng is one of several potential bidders for Fisker Automotive, a US maker of high-end hybrid cars. (English article) Dongfeng's bid would see it pay about $350 million for 85 percent of Fisker, whose luxury hybrid cars sell for more than $100,000 each. Fisker was forced to halt production of its Karma model car last year after one of its key suppliers declared bankruptcy, but has said more recently that it plans to restart production soon.

According to the reports, Fisker will face its own cash crunch around the middle of this year if it doesn't find a new big investor by then. If Dongfeng succeeds in buying the stake, it could eventually move some of Fisker's production to China -- a common strategy by Chinese buyers who often think they can fix troubled western companies simply by moving their manufacturing operations to China.

This latest deal follows a series of similar recent Chinese purchases of struggling western new energy firms over the last year. The latest of those deals saw China's Wanxiang Group recently win approval to purchase most of the assets of bankrupt high-tech battery maker A123 Systems. (previous post) That deal previously faced some uncertainty due to national security concerns, but the US government ultimately approved the transaction last month.

Last year also saw a number of Chinese companies make global acquisitions in the solar panel sector, which has been struggling for the last 2 years due to a massive supply glut. Chinese firms Hanergy Holding Group reached a deal last fall to buy struggling Silicon Valley company MiaSole for a bargain price. (previous post) Hanergy also made an acquisition in Germany, buying a unit of QCells for about $500 million. Other deals saw LDK Solar (NYSE: LDK) buy 33 percent of Germany's Sunways AG last year, and TFG Radiant Group buy a 41 percent stake in US firm Ascent Solar Technologies (ASTI) in 2011.

This latest Dongfeng bid for Fisker shows the Chinese appetite for western new energy firms is still strong, and could even accelerate in 2013 for many of the reasons that I described above. These kinds of deals are important in one sense, because they will help to drive consolidation in crowded sectors like solar panels that are suffering from overcapacity.

But as I've already said, I do believe that many of these purchases are destined for difficulties and failure because the Chinese companies lack the resources and experience to turn around the troubled assets they are buying. From a broader perspective, look for more of these purchases in the next 2 years by bargain-seeking Chinese companies, followed by the first signs of trouble for many of these acquisitions starting by the end of this year or even sooner.

Bottom line: Dongfeng Motor's purchase of a struggling US hybrid automaker reflects China's growing appetite for western new energy firms, which is likely to accelerate this year.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters, writing about publicly listed Chinese companies. He currently lives in Shanghai where he teaches financial journalism at a leading local university. He also writes daily on his blog, Young’s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also the author of an upcoming book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China .

Posted by Doug Young at 09:42 AM | Permalink | Comments (0)

By Harris Roen

Some 44 companies active in alternative energy have reported earnings in January 2013. Results have been all over the map, so it is important for alternative energy investors to know where to be cautious, and where the best potential profits are to be found. Below is a summary of selected earnings results from alternative energy companies that the Roen Financial Report tracks.

Date	Linear Technology Corporation (LLTC)	More Info
1/15	Earnings came in on target for this integrated circuit company, but EPS were down 16% for the quarter and down 3% year-over-year. The stock, however is trading at annual highs, up 13% for the quarter and 7% in 12 months. We consider LLTC stock overvalued at these levels.	Conference call
	CLARCOR Inc. (CLC)
1/16	Earnings slightly beat analyst estimates, coming in 22% higher than the previous quarter but still remaining flat year-over-year. The stock shot up over 5% in one day, and 7% in 10 days on the news.	Press release
	Xilinx, Inc. (XLNX)
1/17	This smart grid company announced disappointing earnings, with revenues dropping 6% for the quarter, and both net income and earnings down double digits. Additionally, 2013 guidance dropped below analyst estimates. XLNX stock fell close to 25% on the news.	Reuters article
	Johnson Controls Inc (JCI)
1/18	EPS remain low for Johnson Controls, though earnings have bounced back up since last quarter. Sales remain flat, and profits have dropped slightly. The stock is down 8% for the year, but has gained 33% since its lows in August. Still, the stock is considered undervalued at current prices.	Press release
	General Electric Co (GE)
1/18	Revenues increased 8% for GE last quarter. Both earnings and net income were up double digits, though orders for wind turbines were down. The stock has had solid gains, up 17% for the year.	Webcast
	Rock-Tenn Co. (RKT)
1/22	EPS dropped 8% for the quarter, but this recycling company still beat analyst estimates by 6%. Sales have leveled off but remain strong, and the company retains excellent cash flow. We consider the stock undervalued at the current trading range in the mid to high $70s.	Press release
	Google, Inc. (GOOG)
1/22	Google came in with stronger than expected earnings, up 28% for the quarter and 15% greater than the same quarter last year. This means another in a long uninterrupted string of annual revenues increases for the company. The stock is up 7% since the announcement, and up 22% in one year.	Press release
	Cree, Inc. (CREE)
1/22	Cree's stock price surged after a stronger than expected earnings report, beating analyst expectation by over 8%. Profits increased 15% for the quarter and 27% year-over-year. The stock traded up 22% in one day on historically high volume on the news.	Earnings call transcript
	Siemens AG (SI)
1/23	Siemens posted lackluster earnings, with revenues dropping 16% for the quarter and EPS down 8%. It plans to sell its Solar Thermal business and Water Technology unit. This is in addition to 1,100 job cuts in its energy division due to decreased economic activity in the European Union.	Bloomberg article
	SAP AG (ADR) (SAP)
1/23	This smart grid company issued a strong earnings report, with profits up 36% for the quarter and EPS more than doubling. The stock is up on the news, and has gained 29% in the past year.	Press release
	Hexcel Corp (HXL)
1/23	Revenues were flat and earnings went down slightly for Hexel this quarter. Guidance from the company remains strong for 2013, with revenues projected to be between 4%-10% above 2012 levels. The stock is up 22% off its lows in August, but is still essentially flat for the year.	Reuters article
	Timken Company, The (TKR)
1/24	Even though Timken beat analysts estimates by almost 30%, earnings for the fourth quarter were still sluggish. Revenues, profits, and EPS all fell for the quarter and year. This power transmission company is expecting a 5% drop in sales for 2013.	Press release
	Corning Inc (GLW)
1/29	This silicon company took a big hit on net income this quarter, but EPS gained on rising profits. The stock has been bouncing around between the $11 to $14 price range, and is considered at fair value at current levels around $12/share.	Press release

Disclosure

Individuals involved with the Roen Financial Report and Swiftwood Press LLC owned or controlled shares of GOOG. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

Posted by Guest Contributor at 12:05 PM | Permalink | Comments (0)

By Harris Roen

2013 is poised to be an exciting year for alternative energy investors. Despite the conflagration solar had in 2012 we see opportunities there, as well as in wind and energy efficiency. This article also reveals why 2013 is shaping up to be a good year for the stock market in general, and alternative energy in particular.

________________________

Solar

If 2011 was a bad year for solar, with the bankruptcy of Solyndra, tariff wars with China, and other damaging events, then 2012 was a disaster. The Ardour Solar Energy Index (SOLRX) lost 35% in 2012. This is on top of a blistering 66% loss in 2011!

The chart below shows the change in net profit margin from 2011 to 2012 for the largest solar companies. Performances were not stellar in 2011, only 12 out of the 13 companies turned a profit and the average net profit margin was just over $5 million. In 2012, however, only one of the companies posted a tiny profit, and companies averaged over $28 million in losses. I could throw up similarly downbeat charts for other measures of financial health, including earnings per share (EPS), price to book ratios, and sales growth.

Even analysts’ projections for solar earnings have come way down. In 2011, the average EPS estimate for these large solar companies was a meager 0.57 one year out. In 2012, analyst EPS estimates dropped to a very negative average assessment of -1.72. Though depressing, this reality jived with my forecast at the beginning of 2012, where I predicted another year of rough sledding for solar stocks.

Despite the gloomy statistics, financial and energy analyst may look back at 2012 as the turnaround year for solar. Many individual companies (particularly the upstream photovoltaic (PV) manufacturers) are facing economic realities of oversupply and falling PV prices, which will ultimately lead to bankruptcies or mergers. According to IHS iSuppli Market Intelligence, the number of PV suppliers is expected to plunge by 70% in 2013. Those left standing, however, will profit immensely, since solar is a white-hat energy source that is likely only at the beginning of its long-term growth story.

It is very hard to pick winners and losers in this environment, so a broad collection of solar stocks is likely the best route for adventurous investors to take from here. One good option is a Mutual Fund (MF) or Exchange Traded Fund (ETF) concentrated in solar. For MFs, I currently like Guinness Atkinson Alternative Energy (GAAEX). Market Vectors Solar Energy ETF (KWT) also looks like a good value.

________________________

Wind

One of the fastest growing clean energy sectors is wind. The chart below shows projected growth of installed wind power in the three largest markets—the EU, North America and China. In 10 years, the amount of installed wind could more than triple from current levels, and in 20 years it could grow by 8 times! Moreover, this chart does not even include other important growth regions around the world.

Another exciting and dynamic area in renewable energy is offshore wind, and the Obama administration is starting to move forward on this. According to the U.S. Department of Energy (DOE), the generating potential of offshore wind in areas with less than 100 feet of water equals the entire generating capacity of the U.S. electric system!

Bloomberg reports that at the beginning of January, the Bureau of Ocean Energy Management started to gage interest in offshore wind leases for 127 square miles off the coast of New York. Also, in 2013 the administration plans to conduct competitive lease auctions off the Massachusetts coast.

Since there are very few publically traded pure-play wind companies in the U.S., a good way to add wind to a portfolio is by investing in ETFs. Two good examples are First Trust ISE Global Wind Energy Index Fund (FAN), and PowerShares Global Wind Energy Portfolio ETF (PWND). Though these funds were down between 15% and 20% for 2012, they have bounced back nicely since their July lows. In fact, both funds are up in the 33% range since that time.

________________________

Energy Efficiency

One of the most promising investment areas for 2013 may come from the area of energy efficiency. From an economic standpoint alone, smart efficiency measures that businesses and individuals can deploy have a short payback period, and many can bank immediate cost savings.

In 2012, Fidelity Investments featured energy efficiency as a “compelling investment opportunity.” According to Fidelity, global power needs are expected to rise 50% in the next 25 years, creating an increasing market for more efficiency lighting, engines and buildings.

Energy efficiency companies tracked by the Roen Financial Report have done extremely well in the past three months. Almost three quarters of stocks have been gainers, and 45 companies, or fully 20% of those energy efficiency businesses covered, have gained over 25% for the quarter.

Companies I like as long-term investments in energy efficiency include A. O. Smith Corp. (AOS) and Tetra Tech, Inc. (TTEK). AOS is in the commercial and residential water heating business, which has a strong balance sheet, excellent sales growth, reasonable debt levels, and its stock is considered undervalued in the high 60 to low 70 price range. TTEK is an engineering and management firm whose services include water resources, energy efficiency and carbon management. It is a very well-managed company with excellent free cash flow, but its stock is considered overvalued at current prices. If it dips to the mid to low 20’s, TTEK would merit a look.

I have no doubt that energy efficiency companies with good management and strong balance sheets will do well in 2013 and beyond.

________________________

Oil Prices

Even though the Roen Financial Report does not follow big oil, we do track oil and natural gas prices very closely. As reported previously (Volume 3, Issue 12), the long-term prospects of solar, wind and other clean energy options are clearly tied into the cost of the prevailing dominant energy source, which are petrochemicals.

Until recently, oil was a commodity that traded principally on supply and demand, or on the perception of how supplies may be squeezed due to regional conflicts. In the past several years, however, oil prices have turned into a proxy for how traders believe the economy, and thus the stock market, will fare. The logic goes that the more economic activity occurs, the greater oil consumption will be. Since 2009, the price of a barrel of crude oil has been almost exactly correlated to the S&P 500 index.

Of course, other factors will contribute to the price of oil in 2013. New drilling technologies are on the rise, giving life to what were thought to be unproductive wells, which will increase supplies. This increased production efficiency, though, has associated environmental issues. Also, the increased production will be more than offset by increased consumption, particularly by developing countries. For example, according to the International Energy Agency, energy consumption in China is likely to double in 10 years from 2008 levels, and triple by 2025!

Since I believe increased consumption will continue to more than offset increased production, I envisage that oil prices will continue to be pegged to the stock market. Because of this, domestic crude oil prices should rise slightly to the $100/barrel range by year’s end, but may peak out at $115/barrel at some point in 2013.

________________________

As Goes January…

Alternative energy stocks do not exist in a vacuum, so it is important to look at the prevailing stock market trajectory in 2013.

There is a saying on Wall Street “as goes January, so goes the rest of the year.”  Indeed, since 1950, the direction of the stock market in the month of January foretold the movement of the market for the rest of the year 70% of the time. Additionally, almost all Januarys that had over a 5% gain (11 out of 12) predicted a gain for the rest of the year. In fact, the average gain in those years was 17%, far exceeding historical averages.

So far the stock market, as measured by the S&P 500, is up 4.8% since the beginning of the year, and is on track to have continued gains for the month. Even more impressive, alternative energy stocks are up 9.2% so far for the year on average. Even if you take out volatile penny stocks, gains averaged 8.1%. Considering this I feel all stocks, including the alternative energy sector, will have a very positive 2013.

Another reason I believe stocks will do well in 2013 is that the economy is improving. Unlike the gloomy years of 2009-2011, where a continuum of bad economic news was the rule of the day, 2012 revealed some financial bright spots. These include improved business sentiment, a turnaround in housing, and healthy stock market returns.

Also, companies are still primed for business investment. S&P 500 companies in total have over $4.2 trillion in cash and short-term investments on hand, a 4.2% increase from the previous quarter, and 6.6% above levels of the same quarter last year.

Another positive is that inflation remains low. The chart below shows the annual change in the core rate of inflation over the past 50+ years. Though there was a 2.1% jump in the past 12 months, the graph clearly shows inflation is well below the long-term average. A low inflation rate has always been helpful for the economy.

I believe inflation will remain tame, despite unprecedented amounts of government spending. The “Velocity of Money’ (the rate at which money flows through the economy) is still very low, and actually dropped in 2012. Unless this indicator picks up, we do not see excessive inflation coming any time soon.

The bottom line is that low interest rates and plenty of corporate cash will be a strong driver of stocks in 2013, including the growth industries within alternative energy.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com.

Disclosure

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article, but it is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

Remember to always consult with your investment professional before making important financial decisions.

Posted by Guest Contributor at 04:03 PM | Permalink | Comments (0)

Next Economy Inflection, Pt. III

Garvin Jabusch

Back at the New Year, I thought it’d be fun to write up a short recap of some of the evidence that, finally, the world is waking up to the real need to get our economies on a footing that can allow it to persist indefinitely. In that post I wrote of those observations that “these are just the first few recent ‘tipping point’-like stories to come to mind. I've read dozens more examples recently, and I feel the fact that I can no longer be aware of all the evidence of inflection much less keep track of it all is surely a sign in itself.”

2013 has already revealed key moves forward from institutions not traditionally aligned with post fossil fuels economy thinking.

First is the U.S. Government, which released its somewhat regular (approximately every four years), multi-agency National Climate Assessment (caution: link is to the full report PDF of 147MB) on January 11th. Its message is unequivocal, “…observed climatic changes are having wide-ranging impacts in every region of our country and most sectors of our economy. Some of these changes can be beneficial, such as longer growing seasons in many regions and a longer shipping season on the Great Lakes. But many more have already proven to be detrimental, largely because society and its infrastructure were designed for the climate of the past, not for the rapidly changing climate of the present or the future.” (Italics mine.) Federal scientists and career professionals clearly get the need for transition, as does at least one governor.

In his 2013 State of the State Address, New York Governor Andrew M. Cuomo went far beyond recognition of these facts and expressed his desire to make his state an economic leader in and therefore a beneficiary of the next economy transition: “The economy of tomorrow is the clean tech economy.  We all know it, it’s a foot race – whatever state, whatever region gets there first wins the prize, and we want it to be New York.” On the topic of government inflection, I suppose it’s obligatory to mention that during his second inaugural address, President Obama did appear to be talking the talk on climate. But we’ve heard encouraging words from him before, most notably during his 2011 State of the Union Address, which I discussed at the time as being generally positive. Time will tell. As many have pointed out, the watershed decision for Obama will be final approval or disapproval of the Keystone XL pipeline. Approval would demonstrate beyond any doubt that he prioritizes short term political/monetary benefits over the long term health of the American economy or environment.

Next, in the realm of leading think tanks, the World Economic Forum (WEF), leading up to its annual meeting at Davos, Switzerland, issued its “Global Risks Report 2013,” citing climate change, water scarcity and greenhouse gas emissions among society’s chief risk factors. There’s a slightly longer discussion of WEF’s important acknowledgements towards the end of our 2012 annual shareholder letter.

Finally, Bloomberg last week reported about Goldman-Sachs that, “[t]he investment bank is backing renewable energy that it expects will gain favor in a global shift it says is inevitable. That’s why short-term volatility will be trumped by long-term gains as emerging technologies first become commonplace and then become indispensable, according to Stuart Bernstein, the Goldman partner overseeing its renewables unit.” (Italics again mine.) ‘Inevitable shifts and indispensable technologies’ might as well have been Green Alpha’s motto these past five years, and it’s great to see the world’s leading bank, which for better and worse also influences the highest monetary and fiscal policymakers worldwide, thus publicly recognize reality.

As one colleague remarked to me via email, “nobody can accuse the Goldman boys and girls of being dumb...”

Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog “Green Alpha's Next Economy." 

Posted by Garvin at 11:30 AM | Permalink | Comments (0)

Green Alpha Advisors' Annual Client Letter and Portfolio Commentary

Garvin Jabusch and Jeremy Deems

2012 saw a return to positive performance for the next economy and for markets overall. Generally, global economic conditions, as indicated by some jobs growth, slowly improving industrial output and a housing rebound, improved marginally, but debt crises in Europe and America, exacerbated by eternal dithering, gamesmanship and posturing by politicians and other policy makers on both continents, kept optimism in check and moderated expectations for growth. With respect to the next economy, though, growth and expectations for growth began showing real signs of building momentum as mainstream awareness of the need ensure the longevity of the world economy by changing some of its foundations continued to advance. Thus our ‘next economy’ macroeconomic thesis became still more relevant and closer to fruition.

The basic macroeconomics of the next economy thesis are fundamental, and their essentials don’t change over time.  As we wrote in last year's letter: “Earth’s economies may stagnate or grow; either way, we believe things like renewable energy, clean transportation, sustainable infrastructure and water resources must grow in value. Over time, the value of stocks in our models will not be dependent on Wall Street gamesmanship, but on simple necessity. As awareness of the magnitude of our growing resource-climate-security problems advances, so will the valuations of our portfolio companies.” Even as chronic fiscal imbalances distract world leaders’ attention from climate and resource challenges, business, individual and institutional investors, academia, think tanks and research all are addressing the latter at an ever accelerating pace.

Thus we continue to be very optimistic about our potential to provide competitive long term returns performance to our portfolio shareholders. Essentially, Green Alpha Advisors is an asset manager offering portfolios of stocks in companies with proven business plans responding to the challenges presented by a warming, increasingly populous, resource-constrained world. Portfolios of these companies deliver growth in all sectors including transportation, communications, commerce, infrastructure, materials, energy, agriculture and water. Considering:

I. The world’s population is growing fast, but its resources aren’t,

II. Energy security and national security depend upon the U.S. minimizing use of foreign oil,

III. The fossil-fuels based economy, with its digging, burning, scarring of the landscape, disruption of ecology, and disease causing pollution, is ultimately too expensive to maintain, and

IV. Climate change,

it’s clear the time is past due for serious investment in mitigation and adaptation, and indeed the signs that people and institutions are getting that are becoming omnipresent.

Each of the three Green Alpha portfolios saw a positive return for 2012. Our flagship green economy benchmark, the Green Alpha Next Economy Index (or GANEX) returned 4.21%; our Sierra Club Green Alpha portfolio (SCGA), actively managed and more concentrated than the GANEX, returned 6.79%; and our newest portfolio, the Green Alpha Growth and Income Portfolio (GAGIP), was up 6.96% for the partial year from its inception on October 8^th, 2012.  While we are happy to return to positive performance after a tough year for next economy stocks in 2011, we did nevertheless underperform the legacy fossil-fuels based indices; the S&P 500 was up 16% and the Dow Jones Industrial Average returned 7.26% in 2012. All three of our portfolios did however outperform prominent green economy ETF portfolios (see discussion below).

All Green Alpha portfolios are based on our universe of next economy companies, with individual securities and weights selected to best fit the mandate of each portfolio. We’re especially pleased that December 30^th 2012 saw the fourth anniversary of the inception of the GANEX, reflecting a four year track record milestone measuring the growth and progress of the overall next economy. (On the topic of portfolios, look for an exciting announcement from us later in Q1 regarding our fourth and newest portfolio offering that will greatly enhance our ability to serve current and future clients.)

On the securities level, we saw once again in 2012 the importance of diversification across all sectors of the next economy. We find it hard to overemphasize this point: the post fossil fuels economy is emerging in all sectors, so to invest as though renewable energy (as critical as it is) is the only aspect of a green economy is shortsighted and results in high volatility. Attempting to represent the entirety of the next economy, our Green Alpha Next Economy Index (GANEX) is invested in 27 sectors and 52 sub-sectors, spanning, we believe, nearly everything required for a broad-based economic system to function. Reviewing GANEX’s top five 2012 total return performers gives some indication of its diversification:

1. Badger Meter, Inc. (BMI), 63.98%. Badger makes water meters, “flow measurement and control solutions” for farming, commercial, utility and residential applications. The U.S. drought of 2012 (and continuing) has brought the need for smarter, more productive water management into sharp focus. You can’t manage what you don’t measure.
2. Trex Company, Inc. (TREX), 62.51%.  Trex is the world's largest manufacturer of high performance wood-alternative decking. We consider Trex a prime example of waste-to-value economics that not only keeps huge quantities of waste out of landfills and oceans (Trex used 3.1 billion plastic bags in 2010, participates in a system responsible for 70% of all U.S. plastic bag recycling, and has never harvested a single tree to make its product), but also delivers a superior product with better long term value. In a world of constrained resources, making great stuff from leftovers is the best of all worlds.
3. Cree, Inc. (CREE), 54.17%. Cree is a leading developer of high efficiency LED lighting and systems and semiconductors for radio frequency applications. Cree LEDs can provide illumination as efficiently as 200 lumens per Watt, compared to 14½ lumens per Watt of a 60W incandescent bulb. This translates to big savings in energy and money, and is a straightforward example of one of our primary themes, focusing on innovation in economic efficiencies – getting more output out of less input.
4. Valmont Industries, Inc. (VMI), 51.03%. Valmont Industries provides critical infrastructure such as efficient mechanized poles and towers for wind turbines, lighting, communications and more. In 2012, VMI gave our portfolios exposure to the infrastructure aspects multiple trends such as the booming mobile and mobile web markets as well as the growing wind energy sector without the risk associated with an individual turbine manufacturer. Full disclosure, for valuation reasons, we removed Valmont from our portfolios as of year-end 2012.
5. The Hain Celestial Group, Inc. (HAIN), 47.9%. Hain Celestial is a leader in natural and organic food that vertically integrates manufacturing, marketing sales and distribution. We think of Hain as a macroeconomic bet on efforts of people to improve their individual health, and also on efforts at a policy and advocacy level to manage mushrooming and economically destructive escalation in healthcare costs. In addition, from a long-term agricultural management point of view, we think that that industry’s ever more potent pesticides, herbicides and petroleum based fertilizers will prove so deleterious to human health, land productivity and biosphere health that organic methods will continue to increase in popularity, and may one day even be required.

From the standpoint of our next economy sector classification scheme (NESC), the top performing Industry and Sector in the GANEX Portfolio was the Products (Industry), Capital Goods & Equipment (Sector), with Portfolio exposure of 16.11%. 

The chart below shows the performance of the GANEX, from its inception on December 30, 2008 to the end of 2012, versus two prominent green exchange traded funds, the Guggenheim Solar portfolio (TAN, in gold here), and the PowerShares WilderHill Clean Energy ETF (PBW, the black line). Over this period, the GANEX returned 28.15%, while the TAN was -79.22% and PBW performance was -46.68%. To be clear, GANEX differs significantly from these other two. TAN is a basket of exclusively solar and solar-related stocks, and PBW, though not as sector focused as TAN, is limited primarily (but not exclusively) to renewable energy. GANEX by contrast attempts to capture the entirety of the next economy, including renewable energy and solar, but also everything else we’ll need to have a thriving economic system, including, again, transportation, communications, commerce, infrastructure, materials, energy, agriculture, water and more. So while the comparison with these two may not be exact, we believe it does show the importance of careful diversification into all areas of the emerging green economy.  

Inception to 12/31/12 GANEX chart w/PBW and TAN

While we are generally growth oriented managers, we also in 2012 had good reason to believe that many of our holdings represent excellent values. As of December 31^st 2012, 66 of our 80 holdings were trading below the average (1979 to present) price to book ratio of the S&P 500 index.  Our average price to book was 1.45, compared to 2.27 for the S&P 500.

Finally, a compelling argument, if we needed one, for hastening the transition to an economy that can persist and even thrive in a warming world was recently articulated by the World Economic Forum at Davos. "On the economic front, global resilience is being tested by bold monetary and austere fiscal policies. On the environmental front, the Earth's resilience is being tested by rising global temperatures and extreme weather events that are likely to become more frequent and severe. A sudden and massive collapse on one front is certain to doom the other's chances of developing an effective, long-term solution." In other words, we need to get the economy on a sustainable footing before it comes unraveled. Given the imperative of this reality, we have difficulty imagining a near-future scenario where the best next economy companies don’t become the most important to society and subsequently, potentially the best performing.

The decisions we make as an interconnected global civilization now will be the difference between catastrophe and a thriving society with a healthy economy. Given the stakes, we have no doubts about how to place our bets.

Thanks for your continued support of Green Alpha Advisors and investing in the next economy.

 Sincerely,

 Garvin Jabusch and Jeremy Deems

Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog “Green Alpha's Next Economy."  Jeremy Deems, Co-Founder, Chief Financial Officer & Chief Operating Officer is co-founder and chief investment officer of Green Alpha ® Advisors,

Posted by Garvin at 11:13 AM | Permalink | Comments (0)

By Harris Roen

There have been six earnings reports released so far in 2013 for alternative energy stocks, all small or microcap companies. There were no blowouts, but also no superstars – most were within analyst expectation or somewhat below. 

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

Disclosure

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article, but it is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

Remember to always consult with your investment professional before making important financial decisions.

Posted by Guest Contributor at 09:33 PM | Permalink | Comments (0)

Garvin Jabusch

There are a few truths that make the fundamental case that investing in the emerging next economy is the clearest path to long term competitive portfolio performance. First, innovation – meaning improving economic output without increasing material or capital inputs - always wins. This is simply how capitalism works, money chasing the best ideas, and has been the basis of the industrial revolution. Second, successfully mitigating the worst effects of economically and societally disastrous climate change (that we're not already irreversibly committed to) will save enormous costs, provide generational investment opportunities and also be inestimably economically stimulative.

For over a decade now, Green Alpha cofounders Jeremy Deems and I have been wondering when popular awareness of these truths would emerge. And while I can't represent that we're there yet, I can say that we definitely are noticing a major shift in both frequency and tone of recent journalism and punditry on the subject of sustainability economics. Fellow green economist Tom Konrad got me thinking about all this when he asked me and a few other money managers for thoughts about 2013 for his Forbes piece on the subject. The more I thought about framing an answer, the more I realized how much momentum I’ve been noticing just over the last quarter or so. To give an idea of what I mean, here's a representative but far from complete list of some smart people and organizations articulating a vision of and working towards a next economy wherein society can thrive without exceeding earth's tolerances or threatening the underpinnings of the global economy. Each of these is worth delving into in its own right.

- PricewaterhouseCoopers’ November 2012 report titled “Too late for two degrees?” (N.B., 3.6 degrees Fahrenheit) states flatly that “[i]t’s time to plan for a warmer world.” Since, as they conclude, to limit warming to two degrees Celsius, the world needs to begin slowing its carbon dioxide emissions “by 5.1 percent every year from now to 2050, essentially slamming the breaks on [CO2 emissions] growth starting right now," is not going to happen, we need to take all realistic mitigation steps we can and also plan for adaptation. Coming as it does from a mainstream accounting and auditing firm with no tree hugger ax to grind, this serves as a particularly stark warning, but also signals the truly massive scale of the investment opportunity.

- The National Research Council’s report (via the National Academy) on climate change and national security, “Climate and Social Stress: Implications for Security Analysis,” released in November 2012, was “prepared at the request of the U.S. intelligence community.” It provides a clear-eyed look at economic and politico-social consequences of climate change.  It states, in part, “[a]s a practical matter, [climate change] means that significant burdens of adaptation will be imposed on all societies and that unusually severe climate perturbations will [be] encountered in some parts of the world over the next decade with an increasing frequency and severity thereafter. There is compelling reason to presume that specific failures of adaptation will occur with consequences more severe than any yet experienced, severe enough to compel more extensive international engagement than has yet been anticipated or organized.” When realized, this “more extensive international engagement” means more opportunities for companies providing solutions, and crucially, in this case, the momentum for economic transition is coming from the security and intelligence community. The more disparate the voices urging transition, the closer to popular inflection we become.

- Not to be outdone by the National Academy, the World Bank (also in November 2012) warned that in its opinion, the globe is on track for warming of four degrees Celsius (7.2 degrees Fahrenheit) if mitigation does not commence immediately. The Bank, in asserting that that kind of warming could devastate the global economy, cited in particular “Ocean Acidification,” “Heat Extremes,” “Lower agricultural yields,” and “Risks to Human Support Systems.” The Bank concludes by indicating a pressing need for “increased support for adaptation, mitigation, inclusive green growth and climate-smart development.”

- Warren Buffett’s MidAmerican Renewables has been pouring money into renewable energy projects. In addition to US$11 billion invested in renewable energies over the last year or so, MidAmerican just announced that it’s investing $2.5 billion more for a 579 Megawatt plant in Los Angeles County. As MidAmerican’s Chief Financial Officer Patrick Goodman recently said, “we believe renewables is the better investment right now.” Buffett, certainly not one to invest this kind of money for the sake of being “green,” sums up the opportunity this way: “[m]any more wind and solar projects will almost certainly follow.”

- The U.S. Department of Defense, which cares first about national security, second about costs and traditionally not much about ecology, has nevertheless put together America’s single most impressive list of renewable energy and low and zero emissions transportation initiatives. Why? As then Joint Chiefs Chairman Admiral Dennis McGinn said, “Ultimately, as we gain proficiency in generating sustainable, renewable energy sources as a nation we build national strengths and stability.” How far is the military going with these projects? “The DOD is positioned to become the single most important driver of the cleantech revolution in the United States,” according to Clint Wheelock, president of Pike Research, one of America’s leading pure research firms on the subject of renewable energy.

- The insurance industry, which ultimately has to pay every time there’s a new climate disaster, has had enough. Munich RE, a leading global reinsurer whose climate practice releases key reports on the economic risks of climate change, in October wrote (registration required), "[i]n the long term, anthropogenic climate change is believed to be a significant loss driver…It particularly affects formation of heatwaves, droughts, thunderstorms and -- in the long run -- tropical cyclone intensity."

- Reuters recently published a piece explaining “Why you need a climate change portfolio,” using the cogent argument “[w]hether you believe in man-made global warming or not, it's undeniable that trillions of dollars will be spent on technologies to address the collateral damage of climate change.” We do believe in climate change, so we think there may be reason for all those dollars to flow to the appropriate mitigation and adaptation technologies with even more velocity than Reuters may be assuming.

- 350.org’s “Fossil Free” institutional divestment campaign is, amazingly, already starting to see some traction. Really. From 350’s website: “Seattle Mayor Mike McGinn sent a letter to the city’s two chief pension funds on friday [sic], formally requesting that they ‘refrain from future investments in fossil fuel companies and begin the process of divesting our pension portfolio from those companies.’”

- Even the slow-to-change traditional investment banking industry is showing signs of tuning into reality. In a blog post on its website, the New York Times cites evidence for “A Change in the Weather on Wall Street,” largely as a result of superstorm Sandy, which impacted Wall Street directly. But in addition, “[t]he other new argument is economic. Until this year, the political calculus about climate change had only one side. The oil and coal companies made sure everyone knew about the costs of action. But few people mentioned the costs of inaction. Now they cannot be ignored.”

Public opinion has already begun to change. According to Yale University’s Public Support for Climate and Energy Policies (Nov 13, 2012) report, “A large majority of Americans (77%) say global warming should be a “very high” (18%), “high” (25%), or “medium” priority (34%) for the president and Congress. One in four (23%) say it should be a low priority.”

These are just the first few recent ‘tipping point’-like stories to come to mind. I've read dozens more examples recently, and I feel the fact that I can no longer be aware of all the evidence of inflection much less keep track of it all is surely a sign in itself.

There are several additional trends underway now that may have significant impacts on renewable energy companies and their stocks in 2013: the new, emerging ways to invest in and to monetize electric utility revenues from scale solar and wind plants, and infrastructure upgrades to accommodate a renewables-friendly distributed smart grid (especially where networks have been damaged (such as in the wake of superstorm Sandy). Each of these presents opportunities and interesting ways to invest.

For us, though, the most interesting macroeconomic trend is simply that the green economy is finally showing signs of approaching a meaningful inflection point into mainstream consciousness.   

Adding it all up, it sure seems like the time is now.

Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog “Green Alpha's Next Economy."

Posted by Garvin at 09:51 AM | Permalink | Comments (0)

By Harris Roen

The US is by far the world’s greatest user of energy per capita in the world. Each American uses about 87,000 kilowatt-hours per year – that is twice as much as the European Union (EU), the next closest consumer! Understanding energy trends in this country is extremely important for investors who want to understand how the energy landscape will look 10, 20 or 30 years from now.

The U.S. Energy Information Agency (EIA) made public an early release of its in-depth Annual Energy Outlook. This comprehensive report details likely trends in production, consumption, prices, and sources of energy out to 2040.

Figure 2 shows that although energy consumption will likely be lower in the next five years, this is only a short-term trend. The immediate reduction in energy use is mostly due to increased fuel efficiency standards kicking in, as well as other conservation and efficiency efforts.

Over the longer term, however, total U.S. energy consumption in 2040 is projected to continue to grow by an average of 0.3% annually, to between 9-10% above current levels. Consumption of liquid fuels (oil, gas, etc) is actually projected to drop by about 4.5%, while use of natural gas is expected to increase by almost a quarter above current levels.

The use of biofuels and renewables such as wind and solar are also expected to increase dramatically. Utilization of biofuels is expected to increase by 60%, and use of other renewables should be three quarters greater than they are now.

Figure 3 shows the same information in a different format. Each fuel type is shown as a percent of the total fuels consumed. A sharp eye can see a decrease in the amount of liquid fuels used, and an increase in renewables. Still, those renewables will comprise less than 10% of the overall energy picture, even projected 30 years out! Put another way, fossil fuels are expected to account for 80% of the energy consumed in 2040, which is only 5% less than they do now. The days of drilling and coal mining are not coming to an end any time soon.

Figure 4 illustrates that between 20-25% the oil will remain imported, despite the domestic oil boom going on now in and around North Dakota. Supplies of domestic natural gas, however, are expected to continue to increase at a greater rate than they are being consumed domestically which should feed expanded export markets (this is an investment opportunity for another article).

Despite what looks like a continued status quo for several decades, the dramatic increase in renewables is something energy investors need to pay attention to. Figure 5 reveals the projected growth of electric generation by type of renewable. Photovoltaic is slated to grow by 15% annually, which should make solar panels at least 25 times more ubiquitous by 2040!

The pie slices in Figure 5 measure the share of the projected growth that each type of renewable source will have. It is clear to see that photovoltaic and solar thermal combined should account for well over half of the growth in renewables.

What does this mean for alternative investors today? Despite the fact solar as a sector has been extremely beaten down, it would be foolish for the long-term investor to ignore the industry as a whole. Photovoltaic manufacturers are hurting because of the overproduction of cells. Additionally, the industry is suffering from a widening tariff war between China, the U.S. and the E.U., an atmosphere that is never good for business.

Buying individual photovoltaic stocks now may be a bit like catching a falling knife, since there will likely be more bankruptcies and other disappointments. Having said that, 15% annual growth cannot be disregarded. A well-diversified portfolio of solar stocks could be an excellent move for the long-term investor.

I have written before that I like installation companies as a group within the solar sector. Investors that scooped up shares of the newly issued solar installer SolarCity (SCTY) have done extremely well, up over 20% from its opening on December 13. While SolarCity may be a good long-term play as part of a speculative portfolio, it is not for the faint of heart considering that it has nowhere near positive earnings yet.

An additional installation company that the Roen Financial Report tracks is Ameresco Inc (AMRC). Its stock price was beaten down in November on an earnings release. The company showed decent growth in profits and earnings per share since March, but still showed a 25% drop in revenues compared to the same quarter last year. In addition, the company dropped its revenue guidance to between 7-10% lower than analyst expectations. Still, I think the company is fairly valued in the $10/share range.

In summary, the EIA foresees no game-changing shift in the U.S. energy landscape, and caution is advised for the alternative energy investor. If you want to be where the growth is, though, solar needs to be on your radar.

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

DISCLOSURE: No positions in or plans to purchase any of the stocks mentioned,

DISCLAIMER: Swiftwood Press LLC is a publishing firm located in the State of Vermont. Swiftwood Press LLC is not an Investment Advisory firm. Advice and/or recommendations presented in this newsletter are of a general nature and are not to be construed as individual investment advice. Considerations such as risk tolerance, asset allocation, investment time horizon, and other factors are critical to making informed investment decisions. It is therefore recommended that individuals seek advice from their personal investment advisor before investing.

These published hypothetical results may not reflect the impact that material economic and market factors might have had on an advisor’s decision making if the advisor were actually managing client assets. Hypothetical performance does not reflect advisory fees, brokerage or other commissions, and any other expenses that an investor would have paid.

Some of the information given in this publication has been produced by unaffiliated third parties and, while it is deemed reliable, Swiftwood Press LLC does not guarantee its timeliness, sequence, accuracy, adequacy, or completeness, and makes no warranties with respect to results obtained from its use. Data sources include, but are not limited to, Thomson Reuters, National Bureau of Economic Research, FRED® (Federal Reserve Economic Data), Morningstar, American Association of Individual Investors, MSN Money, sentimenTrader, and Yahoo Finance.

Posted by Guest Contributor at 09:20 AM | Permalink | Comments (1)

Doug Young

Media are buzzing with word that the US securities regulator is once again tussling with major auditors over access to the accounting records of US-listed Chinese firms, in the latest chapter of an ongoing story; but what has me more intrigued is the scramble that is probably taking place behind the scenes, as those same auditors try to figure out what they will do when the inevitable happens and they are forced to share their records with the US Securities and Exchange Administration (SEC).

Right now I can imagine what is happening: the auditors, including big names like Ernest & Young and Deloitte, are probably frantically poring over all their audits for US-listed Chinese firms from the last 2-3 years, and trying to decide which firms to sever their ties with. While big names like Baidu (Nasdaq: BIDU) and Sina (Nasdaq: SINA) are unlikely to see any big changes in their accounting partnerships, mid-sized and smaller players could see a big shuffling of the cards as their auditors abandon them over concerns about some of their past accounting practices.

Let's take a step back and look at the history of this current tussle between the SEC and Chinese firms, which began last summer at the height of a series of scandals caused by aggressive or even fraudulent accounting by some US-listed Chinese firms. As the SEC began to investigate some of those cases, it quickly discovered that the companies' external accountants, which often included big names like Deloitte, were unwilling to share information from their audits. (previous post)

The auditors said they weren't allowed to share such information, since all of the companies being examined were based in China and therefore only Chinese regulators had the authority to demand such sharing of information. Of course, many observers, myself included, suspected the auditors were using the jurisdictional argument to avoid sharing data that would show they had either neglected their duty as auditors or, even worse, had actually colluded with Chinese companies to defraud investors.

The SEC responded by approaching Beijing and opening landmark talks with Chinese authorities designed to facilitate the access to auditing records they were seeking. Those talks are still in progress and could finally result in a breakthrough information sharing agreement by the end of next year.

But in the latest development of this ongoing case, the SEC has taken the equally aggressive tact of actually charging the Chinese units of 5 US accounting firms, including the so-called "Big Four" auditors, of potentially defrauding investors related to their accounting for 9 US-listed Chinese firms. (English article) The auditors have reportedly cited China's "state secrets" law for their refusal to hand over the records, relying on this arcane and highly ambiguous law to avoid complying with the SEC's order.

This SEC move to file criminal charges will add to the pressure on the auditors, and I suspect that we're likely to see some cooperation between the 2 sides before the end of 2013. As this inevitable outcome approaches, the auditors are likely to quickly determine which of their clients might become the biggest liabilities and sever their relationships with those companies sooner rather than later.

We already saw solar panel maker Trina (NYSE: TSL) cut its ties with Deloitte back in June, though it's unclear who initiated the split. (previous post) We should expect to see more similar divorces in the months ahead, with the rate accelerating as the SEC and auditors move closer to their final cooperation. As that happens, look for lots of volatility in the share prices of companies that get dumped by their auditors, as investors fret that such companies could eventually become the targets of SEC investigations and eventual de-listings.

Bottom line: Big US auditors are likely to sever their relations with a growing number of mid-sized and smaller US-listed Chinese firms in 2013 as they face growing pressure to comply with SEC investigations.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters, writing about publicly listed Chinese companies. He currently lives in Shanghai where he teaches financial journalism at a leading local university. He also writes daily on his blog, Young’s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also the author of an upcoming book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China .

Posted by Doug Young at 09:10 AM | Permalink | Comments (0)

by Sneha Shah

Raja Ravi Varma's portrait of the Hindu goddess of wealth, Lakshmi, ലക്ഷ്മി ദേവി. via Wikimedia Commons

Why Invest in Indian Green Energy

India is set to become the 3rd largest market for wind energy after USA and China and is set to enter the top 10 club of countries in installing solar energy capacity in 2012. Massive power deficits, millions of people without power, billions of dollars in oil, gas and coal imports imply that India offers massive opportunities for renewable energy generation. In fact Indian solar energy represents one of the biggest energy opportunities in the 21st century. The Indian government target of 20 GW by 2022 will be beaten by a huge margin in our view.

Rocky Present, Sunny Future

However the performance of publicly listed green stocks in India has been quite abysmal in line with what we have seen in the past few years with global cleantech stocks. The solar and wind stocks have been battered by the global oversupply in solar panels and wind turbines respectively. Some of the solar companies like Moser Baer have gone into restructuring of bad loans while other companies are operating at 10-20% utilization.

However one good area of investing in the Indian renewable energy story is through green focused utilities like Greenko, Orient Green Power etc. Most Investment banks and big Private Equity firms have already committed hundreds of millions of dollars investing in renewable energy focused power generation firms. Larger privately owned electricity utilities in India are also investing heavily into green power generation to meet the Renewable Purchase Obligations (RPO) which mandates that 15% of the electricity generation by 2020 should come from clean energy sources. In Summary while the past few years have not been the best for the green sector in India, the future looks very promising indeed. Read why Private Equity firms are investing millions in India's wind energy industry

Some of the top publicly listed Green Stocks in India

1) Suzlon Energy (NSE:SUZLON)– Suzlon Energy is one the biggest wind energy companies in the world and the poster child of India's green story. The company boasted of a market valuation upwards of $10 billion at its peak. However overzealous expansion and expensive acquisitions of European wind players like Repower has left it with an unsustainable debt burden. Read more about the Suzlon Death Spiral.

2) Moser Baer (NSE:MOSERBAER)– Moser Baer which used to mainly deal in optical media made a strong expansion into all parts of solar energy manufacturing such as polysilicon, solar thin film and crystalline silicon panels. However the global solar panel glut has sent the company into debt restructuring. The company now mainly operates in the solar system and integration part of the solar value chain. Read more about hard times being faced by Indian solar companies.

3) Tata Power (NSE:TATAPOWER)- Not strictly a green company, Tata Power is the biggest private utility in India. It recently acquired the Tata BP Solar JV after BP exited the solar panel business. The company has huge plans in wind, solar and geothermal energy. It has also invested in a geothermal energy project in Indonesia.

4) Orient Green Power (NSE:GREENPOWER)- Orient Green Power is one of the biggest green focused utility companies in India focused mainly on wind and biomass power generation. The company's operations have recently turned around and it is now showing a consistent profit. At its recent stock price of Rs 10-11, it represents a good investing opportunity at its current value. Read more about is Orient Green Power turning around?

5) Greenko (LSE:GKO)- Another big green utility  in India with around 200 MW of Electricity Capacity predominantly in small hydro and biomass plants, it is listed London’s AIM Exchange and has a top notch management team. Its recent performance has been quite good and it is expanding rapidly acquiring small hydro plants in India.

6) Lanco (NSE:LANCOIN)– The Company through its subsidiary Lanco Solar has aggressively expanded into the crystalline silicon solar panel system right from manufacturing to installation. However the recent travails of infrastructure companies in India has seen Lanco making a loss which has impacted the growth of its solar subsidiary as well.

7) Welspun Energy (NSE:WELCORP) - Welspun Energy is a part of the Welspun conglomerate. It has expanded rapidly into solar and wind energy installation in the last couple of years to become one of the top green developers in India.

Summary

There are also a large number of smaller private companies in India operating in the green energy space. There are also a number of bigger industrial companies such as Thermax, Praj Industries, Jain Irrigation which derive revenues from green industry though contribution to overall revenues is quite small. Investing in the green space in India is not easy but offers handsome rewards to those that make the right calls given the massive growth that is going to happen.

Sneha Shah is the editor of Greenworldinvestor.com, a blog about Global Green Industry and Renewable Energy Industry, focusing on Solar Energy, Wind Energy, Energy Storage, Efficiency etc.

Posted by Guest Contributor at 10:14 AM | Permalink | Comments (3)

By Harris Roen

If you follow the energy sector closely, then you know that many questions regarding the direction of alternative energy companies were looming during the 2012 campaign season. Was the country going to continue with the Obama Administration’s “all-of-the-above” strategy with its strong emphasis on renewables, or would there be an accelerated domestic drilling and pipeline bonanza under Republican leadership. When the election finally ended last week, many pundits expected investors to pour money into the beleaguered alternative energy sector resulting in a surge of stock prices. So why, instead, did alternative energy stocks head down?

What Happened?

First, let us look in detail at what happened in the last week of trading. Of the approximately 250 alternative energy companies that the Roen Financial Report tracks, only 21 companies, or less than 9%, were gainers. In other words, losers beat gainers by a 10:1 ratio! On average, alternative energy companies were down 5.8%, with 35 companies showing double-digit losses for the week. Of the 21 gainers, fully half were volatile penny stocks with market caps less than $100 million, so those gains may change very quickly.

Of the six alternative energy industries - wind, solar, smart grid, efficiency, fuel alternatives and environmental companies - wind fared the worst. Only two wind companies posted a gain for the week, Pike Electric Corporation (PIKE) and the highly speculative Quantum Fuel Systems Technologies (QTWW). Otherwise, the average wind company lost 6.0% for the week.

 Why the Decline?

Many people are wondering why alternative energy stocks dropped so dramatically last week. Was it a sell-on-the-news situation? Do investors think alternative energy is doomed as a sector? Was it payback to big oil for all their election contributions? Perhaps some of this was true, but I believe it had more to do with the dog wagging the tail.

Overall, it was a bad week for the entire stock market, with the major averages down in the 4% range. According to Fidelity Investments, all 10 business sectors were down for the week. In fact, energy took the biggest hit of all the sectors, down 5.1%. Of the 68 industries Fidelity lists, only one, Biotechnology, showed a gain.

Most of the loss in stocks came on Wednesday, the day after the election. Apparently, everyone woke up to realize that not much changed concerning the economic crisis de jour – the fiscal cliff. After all the endless political gyrations and hundreds of millions of dollars spent, the country was pretty much back where it started: a democratic white house and a split congress. By Friday some of those losses were recovered, as savvy investors saw the drop as an overreaction, and thus a good buying opportunity.

Why was the energy sector hit in particular? Simply because short term oil price movementa have little to do with supply and demand, but have instead turned into a proxy for the outlook on the economy, and thus the stock market. Since 2009, the correlation between the S&P 500 and oil prices has been ridiculously tight, 1.00 being a perfect correlation. So when people started gazing over the ever-nearing fiscal cliff, the odds of a recession increased, oil futures dropped and energy stocks tanked.

What Lies Ahead?

So where are alternative energy stocks likely to go from here? I remain cautious in the short term, concerned that the broader economic picture will overshadow any sector plays. Between the threat of massive tax hikes and spending cuts in the U.S., and the re-fanning of the dangerous debt embers that are smoldering in Europe, I would not be surprised at all by a market correction in the 15% range or worse. This type of correction would not be surprising, though, considering the S&P 500 reached a high in September that was 33% above its lows at the end of 2011.

I see these market fears as conventional wisdom, however, so the contrarian in me views any major correction as a buying opportunity. As long as the U.S. stays in an ultra-low interest rate environment, as I believe it will for at least the next two years, the long-term trend in the stock market should remain positive.

If Washington continues to move ahead with alternative energy initiatives, and particularly if it takes bold steps such instituting a carbon tax, I believe energy efficiency companies will benefit the most. There is still much low hanging fruit in terms of cost savings and carbon reduction to be gained by reducing current energy usage.

Companies that could benefit include Cree, Inc. (CREE), a well-managed North Carolina based firm that manufactures efficient LED lighting as well as other products. Cree has had growing sales, relatively low debt levels and positive cash flow. A concern is that it has an excessively high PE, but if prices drop from current levels, the stock would become more attractive. Using an average of combined trailing and forward EPS, I see Cree as fairly priced in the $27/share range, and a good value at $25/share.

Because larger economic troubles may continue to put a drag on all sectors, including alternative energy, this looks like a good time for strategic investors to accumulate stocks at the right price.

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

DISCLOSURE: No positions in or plans to purchase any of the stocks mentioned,

DISCLAIMER: Swiftwood Press LLC is a publishing firm located in the State of Vermont. Swiftwood Press LLC is not an Investment Advisory firm. Advice and/or recommendations presented in this newsletter are of a general nature and are not to be construed as individual investment advice. Considerations such as risk tolerance, asset allocation, investment time horizon, and other factors are critical to making informed investment decisions. It is therefore recommended that individuals seek advice from their personal investment advisor before investing.

These published hypothetical results may not reflect the impact that material economic and market factors might have had on an advisor’s decision making if the advisor were actually managing client assets. Hypothetical performance does not reflect advisory fees, brokerage or other commissions, and any other expenses that an investor would have paid.

Some of the information given in this publication has been produced by unaffiliated third parties and, while it is deemed reliable, Swiftwood Press LLC does not guarantee its timeliness, sequence, accuracy, adequacy, or completeness, and makes no warranties with respect to results obtained from its use. Data sources include, but are not limited to, Thomson Reuters, National Bureau of Economic Research, FRED® (Federal Reserve Economic Data), Morningstar, American Association of Individual Investors, MSN Money, sentimenTrader, and Yahoo Finance.

Posted by Guest Contributor at 01:48 PM | Permalink | Comments (0)

Will Natural Gas Crush Alternative Energy in 2013?

By Jeff Siegel

Swami photo via Bigstock

In 2004 a hotshot Wall Street type cornered me after I spoke at a private luncheon in New York.

He told me I had a lot of balls wasting his time talking about alternative energy — declaring he was an “important man” who didn't find it amusing that some tree hugger in a suit (yes, that's what he called me) would lecture him about a coming boom in solar...

I never forgot that guy. In fact, over the years I had hoped to run into him again, just so I could remind him that not only was I 100% right about and made a fortune as a result of the solar bull market from 2005 to 2008, but that he was also kind of an asshole.

Of course, it's not healthy to hold grudges. And quite frankly, after all these years my success in playing the modern energy space more than makes up for my inability to engage him in a spirited debate back then, when I was still fairly new to the public speaking circuit and hadn't quite built up the confidence to take on guys like him.

Since then, I've come to realize that a lot of these Wall Street guys — with their overpriced suits and overpriced educations — aren't any smarter or any more “in-the-know” than you are.

In fact, when push comes to shove, most of these guys are completely clueless...

Especially when it comes to the world of modern and alternative energy.

This is why a lot of the same guys who trivialized my analyses back in 2004-2005 now regularly read these pages and invite me to speak at their conferences...

Next week I'll be at a private meeting in New York where I'll be discussing some of my predictions for 2013. Here's a preview...

Electric Cars Ride Steady

Electric cars will remain the target of naysayers and partisan slaves in 2013.

Sales will be light, but not nearly as dismal as many continue to suggest — particularly given the higher pricing that typically comes with any new, game-changing technology.

Early adopters will continue to move these things out of showrooms and onto highways at a pace that is actually faster than what we saw with the conventional hybrids back in the late 90s.

Every major carmaker will have electric and plug-in hybrid electric vehicles in production or on the road, but battery technology will not progress much next year outside of the lab. I don't expect to see much improvement on miles-per-charge as it relates to battery technology; most increases here will likely be the result of lighter-weight materials, body design, and software developments.

Either way, while these increases will be valuable, they won't tack on the additional 80 to 100 miles — nor will they provide the cost reductions necessary to facilitate the next wave in consumer interest, taking us away from early adopters and onto the early majority. I don't expect to see that unfold for at least another five to six years.

In the meantime, fleets will also steadily add electric vehicles to the mix, particularly in regions where gas and diesel prices are exceptionally high. Sales won't be so strong that it'll move the needle much, but it'll definitely help automakers move inventory and gain visibility in the marketplace...

On the political front, it won't matter who wins the next election. Although Romney will talk a good game when it comes to ending those very generous tax credits for electric vehicles, he won't have enough support in Congress or from the auto industry to make it happen.

Solar Stocks Struggle to Survive

Solar investors looking to hit it big this year will be disappointed.

Most solar companies (primarily panel and cell manufacturers) will continue to suffer another year of unpleasant margins.

China will continue to pump more money into its solar industry which will result in two things:

First, solar prices will continue to fall, albeit probably not as fast as we saw in 2012. This will benefit solar installers that are making a killing right now in the United States. Installation growth will remain strong, particularly with all these new solar leasing companies that are breaking records on both commercial and residential installations.

Worth noting is SolarCity, one of the largest and most successful solar leasing companies in the nation. It's set to go public this year, and will trade under the symbol SCTY.

Second, with so much cash being pumped into China's solar industry (just to keep it afloat), we're definitely seeing the stage being set for a massive implosion. China's solar industry ATM machine is working overtime, and it's doing so while the world is clearly starting to see visible cracks in China's economy.

China solar companies will continue to pump out cheap solar in 2013, but they'll be among the first casualties when the house of cards comes crashing down.

For investors, solar will remain tricky. The most lucrative opportunities in 2013 will continue to be in those small niche tech sectors and in installation. The latter could prove to really launch the SolarCity IPO, so definitely watch that one carefully.

Wind Energy Blues

In the absence of the wind energy production tax credit, the U.S. wind industry will absolutely stall in 2013.

In fact, you can pretty much kiss the domestic turbine industry goodbye next year... Layoffs will continue, and aside from GE (NYSE: GE) and Siemens (NYSE: SI), most shops will be mothballed until a new mechanism is introduced to jumpstart the industry again — or subsidies for oil, gas, and nuclear are phased out. And that's just not going to happen.

Of course, there's not much left for investors in this space now, any way. And publicly-traded wind development companies that are already operational, like Western Wind Energy (TSX-V: WND), will be fine, as they won't be affected by the loss of the production tax credit.

In fact, Western Wind is currently finishing up construction on a new project while its older projects are actively generating revenue via long-term power purchase agreements with the utilities. The company's also now selling off its assets, which we believe will get the stock up to at least $3.00 a share. The timing on this one is actually pretty spectacular.

It's Good to Be King

Natural gas will remain king in 2013. And while it will continue to be dirt cheap, prices will start inching back up next year.

Also worth noting is that going forward, we're definitely going to see more trucks and buses running on natural gas.

To a new way of life and a new generation of wealth...

 

Jeff Siegel is Editor of Energy and Capital, where this article was first published.

Posted by Jeff Siegel at 09:06 AM | Permalink | Comments (0)

Garvin Jabusch

Let's be clear: Justice is not an immutable law of nature. Neither math nor physics nor chemistry recognizes justice as one of the universe's governing principles. The strong, rich, and powerful have, since long before humans emerged, by and large taken what they wanted, when they wanted, and never counted the costs to those they took it from. Despite what Socrates may have said, justice has forever occurred, at best, in fleeting, ephemeral flashes. We yearn for a god capable of seeing and ultimately judging all rights and wrongs -- because we know we can't be counted on to do it ourselves. Small wonder that the legend of Robin Hood – the original 99 percenter -- still resonates after 800 years.

 

Image courtesy Zach Weinersmith and SMBC

We can say that humanity might change, but that's just another, kinder, more optimistic lie. We can't. Not as a whole, not within the time scales required to preserve ourselves. We are descended, on a time frame of 3.5 billion years, from organisms that succeeded because they were the best at gathering as much as they could in the shortest amount of time possible. This has been true throughout history. And prehistory. And primordial history. It's too deeply ingrained to switch off or even ignore. We just don't work that way, and it's time for us to accept that and start thinking about how to address our problems without relying on an ultimate goodness in our nature.

So, what, then? How can we approach our main challenges? How can we arrive at the sustainable, circular, next economy and learn to live within the various budgets that earth can provide?

In concept, it's simple: Align people's economic interests and sense of well-being with the best interests of Earth's ecological totality. Call it next-economy capitalism.

In practice, that's insanely difficult.

It's difficult, because, again, maximizing short-term profit while ignoring larger costs is humanity's prevailing worldview, and extracting fossil fuels (especially when subsidized) is a fantastic way to earn short-term profits. Consequently, the phalanx of opponents of renewable energy and electric transportation is impressive and daunting. It's the list of industries that stand to lose market share and profits as renewables advance: oil, coal, gas, traditional electric utilities, and makers of internal-combustion cars.

Given this opposition, rather than lament the slow adoption of renewables and electric vehicles, we should be proud and even amazed that we have made as much progress as we have. That's a testament, really, to two things: the tireless efforts of all those working for change and, more importantly, the fact that ultimately renewables just make better economic sense. No matter how much disinformation gets thrown at people, there's no escaping the fact that technologies with a zero cost of fuel will inevitably become cheaper than any extractive industry of the same or even somewhat larger scale, even, ultimately, natural gas.

But there's the rub, renewables are still such a tiny fraction of the size of fossil fuel industries that their true potential does not yet shine brightly in the popular imagination. And when we do see hints that this tide is turning, tactics are swiftly deployed to keep the status quo intact. Is it coincidence that large tariffs are being placed on the world's least-expensive solar modules just as those modules reach cost parity with coal on the U.S. electric grid (see "Why We Pay Double for Solar in America (But Won't Forever)")? Or that in North Carolina "sea level rise" is pilloried as a "liberal buzzword?" Facts of science are not buzzwords. Forbidding developers from planning for accelerated sea level rise will not protect low-lying communities from storms, nor force insurance companies to cover them. Placing authoritarianism ("because I said so" laws) above science and empiricism will simply not work. Folks who plan for sea level rise are outlaws now? Please.

Given the power of our fossil fuels oligarchs, it seems like change toward sustainability faces long odds. Who can doubt the power of the oil plutocrats when there are still huge subsidies for fossil fuels (the most profitable industry in history), while renewables (which are actually still in the "kick start" phase that subsidies are meant to support) get relative pennies. When the temporary denial of the KXL pipeline to cross the U.S.-Canada border quiets critics, while construction both north and south of the border legs continues unabated. (On this point let's not forget that the last major tar sands pipeline spill cleanup is still underway and costing $800 million.) When there are already over 680,000 deep-injection wells that have pushed more than 30 trillion gallons of toxic liquid into U.S. ground, and yet there is scarce examination from policy makers? When the U.S. supported the obviously nondemocratic coup in the Maldives against a popular, democratically elected president, Mohamed Nasheed, who happened to be a tireless worker to limit fossil fuels where possible. Nasheed, who was crusading to limit global warming to such an extent that he held a symbolic cabinet meeting underwater, was illegally removed from office with rhetorical support from U.S. officials.

I think it's naïve to blame this or that administration for our refusal to slow the growth of our carbon emissions, when it's clear that in certain areas, oil executives have as much or more influence as the executive and legislative branches combined. They're the richest organizations in all of human history, so that's simply where power resides.

And one assumes big oil will have seen the writing on the wall of the future by now, and be plotting ways to become the masters of the next great sources of energy. I hope that's the case, but other than Total buying a big piece of Sun Power, I've seen no major moves in that direction. In fact, as recently as October 2011, I heard an oil executive at a conference say something very like "yeah, we tried experimenting with solar in the '70s, but it was just way too expensive to make a decent value proposition," as though he thought the audience was credulous and uninformed enough not to know PV efficiency has improved more than 100 times per dollar's worth since then.

So leaving global warming, pollution, disease, resource scarcity, and war aside, the argument we can win is going to be economic: The best renewables are a better value proposition. At least on a level playing field. The race is, even after we've come all this way, to prove that we still have even small reasons for long-term optimism that we can credibly make this case. 

And, fortunately, we do. For as surely as humans are programmed to maximize short-term gains, we're also fantastic innovators, and we may have a greater capacity for adaptation than any other species. And this is where the most rational of empiricists, who only believe in what they can observe, can place some modicum of faith. Because when it comes down to adapt or fail, we will take a big swing at adapting. And, being much better at adaptation than some of earth's former dominant species, e.g. dinosaurs, we have a far better chance of success.

It's now clear that unrestrained burning of fossil fuels is backing us into an existential corner. Therefore, we will hopefully try to adapt by limiting fossil fuels' use where we reasonably can. (The struggle between short-term individual gain and larger picture group selection that ultimately benefits individuals as well was recently discussed in an editorial by E.O. Wilson, who argued that we're the products of both types of evolutionary pressures, and that we apply whichever is most appropriate to given circumstances. For what it's worth, I believe that the primary ideological divisions in this country are straightforward manifestations of Wilson's approach to this "multi-level natural selection," and that evolution proves that we need both.)

So to tie our remarkable capacities for innovation and adaptation to our economic and social well-being is clearly now, as it has always been, the way forward. Plus ca change… Most directly, we need to accelerate investments into the best, most profitable, most effective renewables, water solutions, agricultural solutions, and all other sustainable manifestations of technologies required to run an economy. And we need to invest in them until it becomes so obvious that they're the most efficient multipliers of human effort that all ideological considerations fall by the wayside, the way oil replaced coal, the way coal replaced water wheels. We know how to be better, more innovative, and smarter at accumulating profits and wealth. As computer science pioneer Alan Kay put it, "the best way to predict the future is to create it."

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green Alpha's Next Economy."

Posted by Garvin at 02:45 PM | Permalink | Comments (1)

Tom Konrad CFA

Goldman Sachs Tower photo via Bigstock

Goldman Sachs’ Investment in Green Tech

More than any other investment bank, Goldman Sachs (NYSE:GS) is famed for its skill at picking good investments.  Last week, the bank  announced it would invest another $40 billion in green technologies over the next 10 years (or an average of $4 billion a year.)   While this is a drop from the $4.8 billion invested in 2011, the last time Goldman Sachs made a commitment to green tech was 2005.  The $1 billion pledged then ended up as $4 billion in direct investments of Goldman’s own money, and another $24 billion of financing arranged by the bank.

What the Investment Means

We can draw several insights from Goldman’s announcement.

1. The announcement is public relations (PR)

Since the $4 billion per year pledged is less than what Goldman is already investing, this is not a new commitment, or a stretch goal.  Rather than using the public forum as a way to bind its own hands, the bank is “committing” itself to something it’s already doing.  Hence, the announcement is designed more to bring attention to Goldman’s greentech expertise, and get articles (such as this one) written about the bank.

2. The investments are more than PR

Since the investments are real, this is not greenwashing (trying to give something that’s not really green the appearance of green.) It’s not new, either.  Goldman simply wants to be known for their green tech investment expertise.

Fair enough.

3. Goldman thinks there are good investments to be made in greentech

Goldman’s track record of investing more than promised means that the investments are being made for non-PR reasons.  Since they are not greenwashing, Goldman must be investing for some other reason.  Goldman Sachs is known more for being hard-nosed than for dreaming of butterflies and unicorns, so it’s a safe bet that they’re investing because they expect to make good financial returns.  A few PR points scored along the way are icing on the cake.

The head of Goldman’s clean technology and renewables investment banking group, Stuart Bernstein, says green tech is a “quite large” emerging investment opportunity, and compared it to investing in the BRICs (Brazil, Russia, India, and China) over the last decade.

What it Doesn’t Mean

1. Goldman Isn’t Buying Everything Green

Goldman’s investments since 2005 have been successful, or the bank would be unlikely to be coming back for more.  Yet the leading clean energy ETF, the Powershares Wilderhill Clean Energy ETF (NYSE:PBW),  has fallen 70% over the same period.  Clearly, Goldman was not just passively investing in a basket of green stocks, as PBW does.

Going forward, Goldman will continue to choose green investments carefully, just as they choose their investments in the BRICs.  Not every investment in Russia or China has been a good one, and not every green investment will be a good one going forward.

2. This is not an Endorsement of Green Stocks

A few weeks before Goldman announced the new commitment, the investment bank downgraded First Solar (NASD:FSLR) stock to Neutral, and slashed its price target.  The $40 billion announcement was not some coded reversal.  Goldman was saying that while First Solar may not be a great investment right now, there are plenty of very profitable opportunities in green tech.  Many of those opportunities will be investments in renewable energy deployment: wind and solar farms, as opposed to wind and solar manufacturers.

Conclusion

It’s a mistake to assume that just because Goldman thinks there are many profitable opportunities in green tech, all opportunities in green tech will be profitable.  Right now, I think the most profitable investments are likely to be investments in renewable energy and energy efficiency deployment: wind and solar farms, and upgrades to facilities to make them more energy efficient.

Green stock investors are likely to be best served by buying the companies that are acting like little green tech investment banks, and are buying up distressed assets in the sector.  Companies like Alterra Power (TSX:AXY, OTC:MGMXF) and Western Wind Energy (TSXV:WND, OTC:WNDEF), which both announced deals to buy wind assets this month, or companies like Power REIT (AMEX:PW), which plans to use investment-bank style financial engineering to bridge the gap between REITs and renewable energy.

If we can’t invest like Goldman Sachs, we can at least invest in companies that can.

Disclosure: Long MGMXF, WNDEF, PW

This article was first published on the author's Forbes.com blog, Green Stocks.

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

Posted by Tom Konrad at 08:41 AM | Permalink | Comments (0)

David Gold

Katherine Connors, Miss Iowa USA 2010 throws the ceremonial first pitch.  Source: Cathy T, via Wikimedia Commons

You landed your first pitch at a venture capitalist’s (VC) office. You’ve practiced the pitch and have your laptop fired up to deliver. So, like a sprinter at the sound of the gunshot, you dive in hard and heavy to make sure you get through the deck. After all, you might only have one chance to excite them with your company’s story. Inevitably, with all the questions the VC throws at you, time expires before you even think about asking questions of your audience.

             Don’t let that happen to you.  The more you learn about your prospective investor and where you stand with them, the more productive your meeting will be.  Start off by asking questions. You may be very surprised at how many VCs are willing to spend time answering them. And be sure to watch the clock and leave time at the end to ask key closing questions. Presuming you’ve already asked the questions from my last post, Top Questions to Ask a Venture Capitalist in the First Five Minutes, here are some of the questions you should consider asking as part of the pitch session.

Question to ask before the pitch:

Tell me about yourself and how you got into venture capital?

             If you have done your homework, you should already know something about the attendees in your meeting. Check the firm’s website, LinkedIn page and other sources to learn more about them. If you already have the information, why ask this question? First, asking this question helps to create touch points with your audience. Maybe you went to the same university, had the same major, worked a similar job in the past or know someone who may have worked with them. You may have already identified the touch points from your research, so asking this question gives you the opportunity to talk about those connections. Second, the more you know about what motivates your audience, how they think and what makes them tick, the better you can tailor your story to include things that will resonate with them most.

On what percent of your investments were you the lead investor?

            The journey of raising venture capital has a required starting point: finding a lead investor. Some funds lead many investments, while others are designed to be followers. That doesn’t mean that the meeting is a waste of time if the fund usually follows. Followers can be valuable, but you are looking for different things out of them. An interested follower can be leveraged to help you find or close your lead investor. A lead investor can deliver you a term sheet.

How often do you co-invest with others and how many different funds have you syndicated with in the past?

             In forming your syndicate of potential investors, it is important to understand which investors may prefer to invest alone, and which would want co-investors. The number of funds that a firm has co-invested with is an indicator of how well connected they are in the venture capital world.  A well-connected firm is usually more helpful  in bringing in additional co-investors. This is usually true no matter if  they are a lead investor or a follower.

Questions to ask after the pitch:

If I call the CEOs of your portfolio companies, what will they tell me about your fund?

             Raising investment capital is like marriage without the option of divorce. It is critically important to understand what it would be like to work with your prospective investor.. Good investors respect entrepreneurs that are as concerned about that relationship as they are about the money coming into the bank.

Where do you see the strengths and weaknesses in our management team?

             In a venture investment, little is more important than discussions about the roles of the management team. Would you really want to take investment capital from a firm that has a starkly different view of your management team than you? The earlier you start to understand your alignment on this issue the better.

How high is your interest in our company compared to your other investment opportunities?

             Entrepreneurs often make the classic mistake of presuming that funding will follow once they convince the venture fund that their business, team, market, technology and plan are exciting. But venture capital is a relative sport. No firm can do unlimited investments during any given time frame. So, which companies get selected for investment is relative to the other deals in the fund’s pipeline. It is better to know in a first pitch that the venture’s interest is tepid than to falsely believe there is high interest. The key measuring stick of their interest is understanding how their attraction to your company compares to others.

What are the key things you need to be convinced of to commit to visiting us?

             One of the classic tenants of a good sales process is “always be closing.” Yet, so many entrepreneurs deliver their first pitch and leave the meeting with enormous ambiguity about whether there will be any next steps. You can be certain that no fund is going to get to a term sheet without visiting your company. So, this is a key milestone you need to focus on achieving after the first pitch. Venture capitalists can suck you dry with information requests. Understanding what hurdles you need to get through in order to get them to commit to such a visit provides focus for the next steps you need to take.

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 12:00 PM | Permalink | Comments (0)

Tom Konrad CFA

According to the just-released report "Who's Winning the Clean Energy Race?" from the Pew Charitable Trusts, the United States invested the most in Clean Energy of any country in 2011, retaking the lead from China, which had held the top sport for the last two years.  But the US's resurgence is more likely to be a blip than a trend.

The United States' investments in Clean Energy were up 42% in 2011 over 2010, reaching $48.1 Billion.  Meanwhile, Chinese investments were basically flat at $45.5 Billion.

The US maintains a firm lead in venture capital invested in Clean Energy, accounting for 70% of the total $8.6 billion invested, but while that is vital for Clean Energy technology to progress, it is not very significant in terms of total investments, or profits from those investments.

Venture capital investments typically fund technology development, while pubic market investments, asset finance, and debt finance fund manufacturing scale-up and infrastructure investment.  Later stages of investment are typically much larger, because they need to be large enough to fund the returns to early stage investors and still reap returns for themselves.  Similarly, while the returns to early stage investors can be spectacular in terms of percentage, what matters to a country's economy is the absolute size of returns, which require large investments, typically in Clean Energy Infrastructure, such as wind and solar farms.

Current Boom and Coming Collapse

While the US still dominates technology development and venture investment, our inconsistent and fading support for clean energy has allowed China to take the lead for the last two years.

Ironically, fading support for Clean Energy is also what allowed the US to re-take the lead in 2011.  Many developers rushed to get projects started before the end of 2011, when a number of Clean Energy incentives expired (see sidebar.) 

Because so many initiatives expired and may not be renewed, 2011 seems likely to be America's last hurrah in the the Clean Energy race.  Unless we re-initiate significant support for clean energy soon, Clean Energy investment and the industries and jobs it creates are likely to head for more hospitable political environments.

China's pause in Clean Energy investment growth was a re-consolidation, not a sign of a peak.  While the US was cutting incentives in 2011, China was adopting new ones.  Not only did China increase a national target for solar deployment to 50 GW in 2010, but they adopted their first national feed-in tariff.

It looks like America is winning the Clean Energy race, but 2011 was just our year to be the Hare to China's Tortoise.  Next year, look for the US to take a nap along the side of the Clean Energy racecourse, while China resumes its purposeful ramp-up of Clean Energy investment.

This article was first published on Forbes.com.

Posted by Tom Konrad at 03:29 PM | Permalink | Comments (0)

Tom Konrad CFA

The Pew Charitable Trusts just released the 2011 edition of their report, "Who's Winning the Clean Energy Race?"

This is the second year I've written about their findings, and I wonder what the question really means.  In particular,

• Who are the competitors?  (Pew looks at countries)
• How do we judge the winner? (Pew looks at total investment)

I write about Pew's winner (and why its lead won't last) here, but there are other winners, perhaps even more significant ones, depending on how we judge the race and who's running.

And the Winners Are...

#5 Largest Investment Sector: Solar

Solar manufacturing stocks were lousy investments in 2011.  That was mainly a consequence of rapidly falling solar module prices.  Those same falling prices led to a boom in solar deployments.  Solar attracted more than half of all Clean Energy investments in 2011, at $128 billion, up 44% from 2010.



Solar deployment was up 54%, to 29.7 GW in 2011.  This was particularly notable in Italy, where solar has hit grid parity.  Grid parity means that power from solar panels now costs the same as grid electricity, and is a consequence of Italy's high electricity prices and good solar resource.  Italy added almost 8GW of distributed photovoltaic capacity, more than half of all distributed capacity added in 2011.  8GW of solar is about the same capacity as six large nuclear reactors, and (due to lower capacity factors) produces almost as much energy as two such reactors.

Italy's rapid solar deployment in the midst of a financial crisis should finally prove that solar can scale as quickly as any traditional electricity generation technology.

Solar investments also surged in the United States (where developers rushed to take advantage of the expiring incentives, and Japan, in the wake of the Fukushima nuclear disaster.

#4 Most Rapid Transition Towards a Clean Energy Economy: Italy

The ultimate goal of the Clean Energy Race is to transition the world economy off its unhealthy and resource-constrained dependence on fossil fuels to a sustainable economy based on the efficient use of renewable resources.  To measure progress towards that goal, we need to evaluate not total investment, but rather how significant the investment is relative to a country's economy. 

By this measure, Italy is the clear winner.  Italy grew its investments in clean energy at a compound annual rate of 89% over the past five years, producing 24-fold growth over that period, and clean energy investment now accounts for 1.58% of the country's GDP.

For skeptics who worry that Italy is wasting money on clean energy at a time it can least afford to, it's important to note that solar, which accounts for virtually all Italian investments in Clean Energy, has reached grid parity in Italy.  In other words, Italian solar investments are profitable investments. 

Italian solar power also reduces future imports of natural gas to produce electricity, improving the long term balance of trade in a country with too much debt.

#3 Sector Finally Getting Some Respect: Efficiency

Energy Efficiency has long been the under-appreciated but hardworking sibling in the Clean Energy family.  Energy Efficiency is far more cost effective than renewable (or even conventional) energy generation, and has the capacity to meet at least half of our future energy needs. 

In addition, the arguments that Clean Energy creates jobs are the strongest (and the criticisms the weakest) for Energy Efficiency. Those who argue that Clean Energy will destroy jobs base their arguments on the relatively high costs of some clean technologies relative to conventional energy.  While these arguments are weakening as Solar and Wind deployment gets cheaper, they have never been true for Energy Efficiency, which has always been cheaper than coal.

Efficiency is getting respect in the sense that Venture Capital and Private Equity(VC/PE), are increasingly flowing to the sector.  In 2011, the energy efficiency and other low carbon technologies accounted for 40% ($3.6 Billion) of VC/PE investment.  With luck, other types of investment will follow (as they often do) where VC/PE investment leads.

#2 Economic Winner: Energy Consumers

The most notable change in Clean Energy during 2011 were the rapid price drops.  With Wind and especially Solar power cheaper, the big winners are Clean Energy consumers.  As discussed above, Italians are already saving money by investing in solar to displace electricity from the grid. 

World Clean Power capacity additions in 2011 were 83.5 GW, 59% more than in 2010, at a cost of $141 billion, up only 12% from 2010 levels.  In other words, we're getting a lot more energy by only spending a little more.  The $59 billion dollars extra that the same amount of capacity would have cost at 2010 prices is pure gain for consumers.

#1 Winner of the Clean Energy Race: Our Children

At some level, it's not important which country invests the most in Clean Energy, which sector comes out ahead, which country is moving most quickly towards sustainability, or even who benefits the most economically. 

What is important is that we make the transition as quickly as possible, so that fewer resources are wasted digging stuff out of the ground and burning it, scarring the landscape, polluting the air, and messing with our planet's delicate ecological balance. 

With investments in Clean Energy we get what we pay for.  The up-front cost has often been more (although that's rapidly changing), but that's typically the whole cost.  With fossil fuel investments, we've long been getting more than we paid for, but now the difference is coming back in the form of deferred, hidden costs.  Our children and our children's children will be paying these costs in the form of depleted resources and a less hospitable (if not downright hostile) environment for generations to come. 

We're even paying for our previous use of fossil fuels today.  This mild winter may seem like less of a cost than a benefit of Global Warming (unless you are a skier or a maple syrup producer), but any disruption of the natural cycle creates costs far beyond the immediate effects.  Allergy sufferers are already feeling the effects, and the mild winter was even more of a boon to insects than it was to us.

If the Clean Energy Race makes everyone run faster, we all win.  Except maybe the bugs.

Posted by Tom Konrad at 05:42 PM | Permalink | Comments (2)

David Gold

So, you’re at a networking event and you get an opportunity to talk with a Venture Capitalist (VC) for just a few minutes. After breaking the ice with quick introductory formalities, you present your elevator pitch, right? Wrong. How can you possibly capture that VC’s interest if you don’t know what excites them? Would you try to sell meat to a vegetarian or bricks to a carpenter? Not if you knew a little about their needs and interests! 

When you are raising money, you are selling yourself and your company to your prospective investor. A great sales person knows that learning the needs and desires of your prospect is much more important than telling them about what you’re selling.  Yet, all too often, entrepreneurs focus on conveying as much information as they can in the short time they have with a VC rather than asking questions to learn about the VC’s motivations.  What are some of the more important things you should desire to learn in the first five minutes?  Here are some of the top questions to ask a VC in that first short meeting.

Which specific sectors are of top interest to you?

If you’ve done any homework, hopefully you know whether the VC’s fund invests in the broad segment in which your company lies. But, just because the fund invests in cleantech doesn’t mean they invest in solar. And just because they have invested in solar doesn’t mean they are still interested in more solar investments. Even if they are into solar, they are likely more interested in some areas of technology or supply chain than others. You need to understand what current hot areas the VC is focused on—the areas that makes their ears perk up. Your goals for the first five minutes and your sales strategy should change dramatically based on whether you are a fit for their areas of interest.  If you are not a fit for their interests, look to engage them as a referral source as they may know funds that would be interested.  If you are a fit, then it’s time to move on to other questions…

How many new investments do you have remaining in your current fund?

How much energy would you put into selling something to a person if you found out they had no money? Venture funds don’t always have money to invest. Sometimes they are between funds. Even when VCs are in that situation, they still like to cultivate deal flow so they have a pipeline to turn to when they are ready to invest in the next fund. For funds in that situation, building a relationship for future financing can still be valuable. However, it’s important to know how to prioritize your time with them. If they are not currently active, it’s hard to justify placing them at the top of your priority list.

What size of initial investments do you typically make?

If a fund’s “bite size” is too large or too small for your round, you will likely approach them differently. For a large fund that needs to invest more than you had considered, you will have to contemplate what a larger round would look like and be prepared to pitch that to the VC. Or you need to look at that firm as a referral resource and potential prospect for any future larger rounds of investment.  For a small fund that can’t even invest 20 percent of your round, you first need to find out if they would be interested in such a large round. If they are, you need to assess if they are a fund that—despite being such a small investor—can rally other funds to the deal.

What is your geographic focus?

Some large funds are truly international.  But most at least limit themselves to a country or two.  Small to mid size funds may focus even more on a specific geographic region.  And even large funds that have a big geographic footprint will typically end up doing more deals within a several hour drive of their offices than any other single geography.  Understanding how well you fit with the VC’s geographic focus is an important element of knowing whether your location will be a showstopper, inhibitor or accelerator with that particular fund.

What stage of companies do you focus on?

“Early stage” means different things to different venture funds. For some it means two people with a business plan. For others it may mean a company with over $10M in revenue. You can’t change your stripes when it comes to your stage. That doesn’t mean there’s no value in conversing with a VC if you’re at a growth stage that doesn’t fit with his or her venture fund. If your stage is too early for them, keeping in touch and building a relationship over time can grease the wheels on their participation in the next financing round. If your stage is too late for them, here is the question to ask:

Do you know of funds that would be interested in a company that [insert elevator pitch] and is raising a $XM Series Y round?

Even if you discover that you are not a good fit for a VC’s focus areas or stage, that doesn’t mean there is no value in the discussion. VCs often advertise the areas most interesting to them to other investors specifically to encourage referrals from other types of companies. If a VC views you as credible, many find it valuable to make such referrals because they hope it will encourage other VCs to return the favor.

Would a company that [insert elevator pitch] and fits your stage and segment criteria be worth 45 minutes of your time for a deeper overview?

            Only after you have determined that your company is a good fit for a VC does your elevator pitch come in to play. If you start the pitch with an acknowledgement that your company fits their stage and segment focus, you will have a much more attentive listener. Remember that your goal is not to close on a term sheet—it is simply to get an opportunity for a longer meeting. I bet you can guess at this point that a key goal for you in that meeting should be to ask many more questions!

Watch for my next post on some of the best questions to ask in your first pitch session with a VC.

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 10:59 AM | Permalink | Comments (2)

Garvin Jabusch

The last couple of weeks have seen some remarkable next economy pronouncements from three of the world's smartest people, each representing a different realm of human endeavor: business, politics and academics. Warren Buffett, Bill Clinton, and Oxford University professor Nick Bostrom are among the world's highest achievers, and each has remarkable visibility in to the real, actual state of the world. As such, I couldn't help but notice their recent confluence of messaging.

In his most recent annual shareholder letter, release February 25th, 2012, Warren Buffett touted Berkshire Hathaway's significant, recent investments in renewable energies:

MidAmerican will have 3,316 megawatts of wind generation in operation by the end of 2012, far more than any other regulated electric utility in the country. The total amount that we have invested or committed to wind is a staggering $6 billion. We can make this sort of investment because MidAmerican retains all of its earnings, unlike other utilities that generally pay out most of what they earn. In addition, late last year we took on two solar projects – one 100%-owned in California and the other 49%-owned in Arizona – that will cost about $3 billion to construct. Many more wind and solar projects will almost certainly follow.

Nine billion dollars is a lot, even for a guy like Buffett. He clearly believes in the moneymaking power of the most efficient renewables, so much in fact, that Berkshire Hathaway's energy arm, MidAmerican, is America's leading wind utility. Smart competitors will need to race to catch up, but with "many more" projects in the pipeline, that may be difficult. Berkshire Hathaway is not currently a Green Alpha Advisors holding, but as their next economy plans continue to develop, that may change. We might say the same of GE, which is also going big into renewables, particularly solar, about which a spokesman has commented, "We've been successful, in fact more successful than we thought."

Buffett and one of MidAmerican’s turbines (public domain image)

Our next sage, America's 42nd president Bill Clinton, gave a keynote address to the 2012 ARPA-E Energy Innovation Summit, March 1st, 2012, which was exclusively about how we may benefit from actualizing the next economy:

We're the only major country in the world that has one political party where apparently it’s an ideological imperative to deny the reality of climate change…evidence that we now have that is abundant that investments in changing the way we produce and consume energy can launch an enormous economic boon for our country and for the world…We've had this incredible venture capital network in America that has continued to commit to this and that believe in this. Once people know the facts, nobody's against this, but there are still too few...Americans who understand what a huge impact this could have on their future, who understand that there are already more people working in clean energy than in traditional energy. There are still too few people who intensely believe that the consequences of climate change can be calamitous, and that there are wildly profitable ways to avoid climate change. This is a great time to be alive. We just have to make sure that more people understand it and that more people participate in it. [Italics added.]

Clinton's comments resonate with us, as they're (in a far more eloquent and positive way) communicating a message I've been trying to get across recently as well:

There are enormous risks emerging now…but crisis and risk also provide opportunity, notably to those who provide solutions. Next economy investing then can be defined as a way to provide capital to those solutions, and is also the clearest path to competitive investment returns as the world becomes ever riskier and more politically and environmentally complicated. It amazes me that how we decide to manage our economies over just the next few years will make the difference between a new dawn of innovation, freedom and security for mankind, or a dangerous, dirty world fighting for what's left.

And Clinton is right, it is a "great time to be alive." But, like every generation, we need to rise to confront our primary challenges. As Clinton inferred, a big part of that is messaging and creating popular awareness of the challenges and opportunities. 

The other part is defining and understanding our challenges so we can bring the best solutions, the theme sounded by my third sage.

Nick Bostrom, professor of philosophy and director of the Future of Humanity Institute at Oxford, in the course of discussing existential, extinction level threats to civilization, made some interesting remarks in an interview this week about understanding risk, even though he did not discuss climate change and resource scarcity:

I think there are vastly better ways of being than we humans can currently reach and experience. We have fundamental biological limitations, which limit the kinds of values that we can instantiate in our life -- our lifespans are limited, our cognitive abilities are limited, our emotional constitution is such that even under very good conditions we might not be completely happy. And even at the more mundane level, the world today contains a lot of avoidable misery and suffering and poverty and disease, and I think the world could be a lot better, both in the transhuman way, but also in this more economic way. The failure to ever realize those much better modes of being would count as an existential risk if it were permanent…But to me the most important thing to do is more analysis, specifically analysis to identify the biggest existential risks and the types of interventions that would be most likely to mitigate those risks.

Taken in reverse order then, our seers are saying, "identify and understand the risks, broadly communicate that there are big risks but also commensurate opportunities, then actualize the opportunities by investing in the very best ways to mitigate those risks and profit from them."

So, the capitalist, the policy expert and the academic futurist are all ringing very clear notes about the next economy.  The capitalist sees plainly that renewable energy works profitably, right now, with existing technology. The policymaker agrees, and sees a "wildly" profitable future in expanding the green economy, but worries that too few people understand that for America and maybe civilization to make rapid enough progress.  The professor, perhaps more than the others, sounds like us at Green Alpha in asserting that we must study and understand the most significant risks facing civilization, and that we must then invest big in the technologies and other approaches that address and mitigate those risks. 

On each of these three fronts, business, political and theoretical, it's clear that our best and brightest are echoing our own economic thesis: that the next economy must and likely will grow faster than the legacy, fossil-fuels based economy, because that's the best way to stimulate economic growth and simultaneously avoid some of our primary risks: win-win. Over time, we're confident that the necessity of these realities will lead our investments to provide above-average returns and to provide a conduit of capital into an economy that minimizes existential risks.  Failure to build the next economy is not an option.

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green Alpha's Next Economy."

Posted by Garvin at 06:11 PM | Permalink | Comments (0)

Garvin Jabusch

Americans, rightly, prefer specifics and plans, as opposed to rhetorical vision and platitudes, from their president in their State of the Union addresses. We couldn't agree more, so here are our thoughts about President Obama's 2012 address, with respect to our area, the next economy and investing therein. Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog “Green Alpha's Next Economy."

Posted by Garvin at 08:42 AM | Permalink | Comments (0)

Eamon Keane

With the focus on the size of the ECB's balance sheet and eurozone bond auctions, it can be difficult to see the big picture of where this is going. Concerns about oil and climate change have taken a backseat to the foreboding sense of doom. To see the implications for energy it requires a look at the direction of the financial system.

In recent times every 40 years or so there has been an upheaval in the monetary system, as Philip Coggan explains in his excellent new book Paper Promises. The gold standard broke up during WWI, an attempt was made to reinstall it in the inter-war period, and then in 1944 the Bretton Woods system was introduced. America, as principal creditor, designed the system (although Keynes had some input). Bretton Woods broke down in 1971 due to America's trade imbalance when Germany, France and Switzerland demanded to convert their money into gold. For the past 40 years money (debt) creation has exploded, with the initial result epic inflation, followed by a stupid stock market bubble and a ridiculous housing boom, with debt increasing all the time as shown below:



Sources: Housing prices, CAPE, Interest rates: Robert Shiller; US Credit Market Debt - Fed flow of funds L1.

The music stops when American long term interest rates return to some semblance of normality due to a buyer's strike by external creditors. China, as principal creditor this time round, will get to call the shots for the new monetary system. This is likely to include capital controls, fixed exchange rates, and limits on current account imbalances. This will do away with much of Wall St. and the City. Not before time, you might say, with the bankers still unrepentant. The staff at Irish banks, which have cost Ireland 50% of GNP (American equivalent $7.5 trillion), have still not taken a pay cut. Contingent banking liabilities which the state has assumed are a further 129% GNP. The following two graphs show just how out of control the finance industry has gotten:


Source: Thomas Philippon (2008)

Source: Thomas Philippon (2011); Historical Statistics of the United States p24; BEA (.xls)

In case you're wondering who we've bailed out, it's these:

http://www.youtube.com/watch?feature=player_embedded&v=La84mwsCH-A

Based on deleveraging of global debt coupled with malinvestment in ghost estates/cities from Ireland to America to China and very poor GDP weighted demographics (Germany, China, Japan, Korea, Italy etc.) a period of painful deflation may be in store. Global debt is now over three times GDP:


Source: Business Insider

With this backdrop, the outlook for the energy industry has to be bleak. UBS estimates the current wind turbine industry is only operating at a 60-65% factory utilization rate.  The solar industry is significantly oversupplied also:



G-Pap had designs for €35 bn of renewable energy investment in Greece, but the IMF looks set to put paid to that. Levelised cost of energy calcluations are very sensitive to the discount rate - when interest rates normalise, projects will become significantly more expensive. Getting to the title of the piece, with a great depression II no longer out of the question, the effect on energy demand is likely to be profound. The data from the first great depression are shown below:


Source: Historical Statistics of the United States p165; BP Statistical Review of World Energy 2011 (.xls)

The difference this time is that during the great depression 95% of America's oil was domestically produced, while in 2010 60% was imported (11.8 mb/d). This time round global oil industry costs are structurally much higher. A 40% drop in the oil price like in the 1930s, to $60/bbl, is possible but not sustainable given the oil production cost curve. 75% of currently produced oil was discovered before 1980, leaving the potential for declines from mature fields. Overall US energy demand dropped by 34% between 1929 and 1932. The beneficiaries in such a scenario are those energy solutions which have a low upfront and low running costs like bicycles, ebikes and small, efficient cars.

Posted by Eamon Keane at 08:52 AM | Permalink | Comments (0)

By Jeff Siegel

Domestic Oil to Reign in 2012

Last December, I made three predictions for 2011:

1. The mounting solar glut problem would be rectified by the end of the year;
2. Domestic oil and gas production would increase significantly, regardless of environmental concerns related to fracking and tar sands production; and
3. With the introduction of the Chevy Volt and the Nissan LEAF, domestic sales of electric cars would reach no less than 10,000 units.

Well, two out of three ain't bad!

A Sad Season for Solar

Toward the end of 2010, we saw the writing on the wall...

Inventories of solar modules and cells were piling up just as the world's strongest solar market, Germany, was chipping away at its very generous subsidy mechanisms.

The country's feed-in tariff did exactly what it was designed to do: accelerate investment into solar. It did that — and more.

The fact is Germany is responsible for launching the solar industry from niche player to multi-billion-dollar revenue generator.

And unlike some countries (this one in particular) where energy subsidies never seem get phased out, thereby putting a major burden on taxpayers and disallowing a free market to flourish, Germany stuck to its guns this year, told the lobbyists to stand in a corner, and began the process of phasing out those feed-in tariffs.

Of course at the start of the year, many analysts (including this one) believed that even with the phasing out of subsidies in Germany, the sector would continue to chug along.

You see, in an effort to move excess inventory out the door, solar manufacturers began to lower selling prices. The expected result was that this would allow for a pickup in demand.

That never happened.

Despite prices falling by as much as 50%, the hard truth is that it ain't easy selling cheaper solar panels to consumers when the entire global economy is going down the crapper.

This year, nearly every major solar stock has fallen by more than 60 percent. It was an absolutely horrible year for solar stocks.

Fortunately, most energy investors don't put all their eggs in one basket. And while I personally ate it on some solar stocks, my call on domestic oil and gas production more than makes up for it...

4.3 Billion Barrels

If you're a regular reader of these pages, you know I'm not a huge fan of the heavily-subsidized oil and gas industry.

The billion-dollar welfare check we hand the industry every year is a slap in the face to every real free market thinker.

No matter how the bureaucrats in Washington try to spin it, there is no justification for forcing hard-working taxpayers to foot the bill for a profitable and mature industry to do business.

That being said, I can't afford to buy a senator. I'm one guy without a K Street connection, and I don't expect many on the Hill to trade their campaign contributions for my vote. So while I would love nothing more than to see a real, honest free market in energy, I know it's not going to happen anytime soon...

And as a seeker of profits, I'll take my gains where I can get them.

Which is why we'll continue to play this angle in 2012.

Now we've been discussing domestic oil and gas production all year. We've covered the Bakken story dozens of times. And we'll continue to cover it. After all, we're talking about more than 4.3 billion barrels up for grabs.

That ain't chump change, my friend. And if you think for a second that every ounce of the oil won't be produced, you're out of your mind.

And don't forget, there's another 2 billion barrels sitting at the Three Forks location. Of the wealthiest investors I know, not a single one of them is ignoring this opportunity — and you shouldn't, either.

Not the Failure They Hoped For...

By Rudko [CC0], via Wikimedia Commons

Throughout the course of 2011, I felt like I had become a representative for the electric car market, defending it from an avalanche of unfair attacks.

It still amazes me that at a time when we're trying to displace as much foreign oil as we can, there are so many knuckle-draggers cheering for the failure of a vehicle that doesn't need a drop of gasoline or diesel to operate.

I'm not going to sit here today and defend the electric car from all the bogus arguments we hear time and time again from the media whores and partisan slaves. (Feel free to check out this article I wrote back in 2010, where I responded to some of the more common criticisms.)

But consider my prediction from last year: With the introduction of the Chevy Volt and the Nissan LEAF, domestic sales of just these two electric cars will reach no less than 10,000 units.

Not including December sales (which we won't see until January), 8,738 LEAFs and 6,142 Volts have been sold in the United States.

That's nearly 15,000 electric vehicles — roughly 5,000 above my initial estimate. And this is just domestic sales. Globally, more than 20,000 Nissan LEAFs have been sold.

Just to put this in perspective, consider this: When Toyota first launched the Prius Hybrid in 1997, the Japanese automaker sold 3,000 units.

In 2011, the first year Nissan starting selling the all-electric LEAF, more than 20,000 will have been sold. Not too shabby — especially considering the LEAF carries with it the burden of range anxiety, something Prius owners have never had to deal with.

(I didn't include the Volt in this comparison because there is no range anxiety with that vehicle. Once the initial charge is depleted after 30 to 40 miles, the engine kicks in, and you can go another 300 miles or so.)

Yes, the electric vehicle market's best days are still ahead. And that brings me to the first of my...

Predictions for 2012

It is clear that Nissan has taken the early lead in electric vehicle development, much in the same way Toyota took (and maintains) the lead in conventional hybrid vehicles.

In fact, the company announced a couple of months ago it has set a goal of selling 1.5 million electric vehicles by 2016. That's only four years away.

As for next year, the major automakers will continue to produce and roll out their new electric offerings.

In addition to the Chevy Volt and Nissan LEAF, we'll start to see Mitsubishi's electric car — the “i” — hit the highways in 2012. Ford's all-electric Focus is also expected to make its debut. That particular vehicle looks like it could be a real crowd-pleaser.

Of course, it will still carry with it a price premium. And that will likely limit early sales to early adopters...

But most analysts know that this early round of electric cars is really only intended to serve as the building blocks for future electric offerings.

Because like it or not, electric vehicles are going to be part of every major automakers' lineup going forward.

I'm not saying electric cars will overtake the conventional internal combustion engine anytime soon. But from a growth perspective, the opportunities for investors are undeniable.

A recent Pike Research study showed there will be more than one million plug-in electric cars on the roads in just three years. And by 2017, just about five years from now, that number will grow to 5.2 million.

By the end of this year, total plug-in sales will be around 21,000.

Considering the overall vehicle market is expected to grow 3.7 percent between 2011 and 2017, this is a massive growth story.

But as I said, the conventional internal combustion engine will still own most of the auto market for decades to come. And that means our reliance on oil is not going anywhere. As a result, expect to see a continued run on domestic oil and gas production.

Where Natural Gas is King

Moving onto utility-scale power generation, natural gas will continue to pick up where coal leaves off.

The fact is conventional coal has reached the end of its usefulness — at least here in the United States. It simply cannot compete with low-cost natural gas, and as older plants retire, don't count on utilities building many new ones that'll comply with new regulations. It simply doesn't make economic sense.

No, the preference for utilities will be natural gas. Although many will continue to develop their wind holdings, too...

Just last week, Duke Energy Corp (NYSE: DUK) and American Transmission bought a $3.5 billion power line project that will move wind power from Wyoming to California and the Southwest.

Most of the wind action next year will happen in the Midwest, Texas (now the leader in installed wind capacity), and Hawaii, which is desperate to transition away from having nearly 90 percent of its power generation come from diesel generators.

So to recap...

2012 will bring us:

• More domestic oil and gas production

• More installed wind capacity

• More electric car production and sales

Also worth noting:

• We'll start to see significant depletion of the world's solar glut by Q2 or Q3. Solar stocks will remain risky, but many are trading so low that if you can stomach the risk, it might be worth picking up a few of the more solid players in the early part of the year.

• Despite some obstacles, the Keystone XL pipeline is going to happen. Don't let these recent bumps in the road convince you otherwise. There's a market for Canada's dirtiest of oils, and it will be supplied.

• The move to pony up more nuclear power in the U.S. will continue, although I'm not convinced it'll get very far in 2012. Regardless of your take on nuclear, it is prohibitively expensive without massive government support. And there ain't much of that right now. That being said, I remain bullish on new nuclear fuel technologies that enable lower cost production and safer power generation.

Overall, I'm cautiously bullish on 2012.

I don't buy for a second that we're going to have some miraculous recovery next year...

But I also don't believe we're going to be pushing wheelbarrows full of dollars and trading gold coins for bread, at least not yet.

Either way, don't let it weigh on you. Because regardless of how things turn out in 2012 — there's always a bull market somewhere!

To a new way of life and a new generation of wealth...

 

Jeff Siegel is Editor of Energy and Capital, where this article was first published.

Posted by Jeff Siegel at 11:52 PM | Permalink | Comments (0)

By Jeff Siegel

This past Thursday, as we sat down to yet another Thanksgiving feast, the obligatory What are you thankful for? question surfaced.

To be honest, I've never been a fan of playing this game.

After all, if you're thankful for something, why do you have to wait until November 24th to talk about it?

Nonetheless, I played along that afternoon and decided I was thankful for all the great thinkers over the years that enabled progress and allowed us to enjoy the many comforts and conveniences we take for granted today.

As well, I'm thankful that many of these great thinkers succeeded in the face of intense criticism and scrutiny.

After all, change is sometimes hard for the masses to accept — even if those changes are in our best interests and can instigate economic growth.

Look at rail travel, for instance. Think about the impact the advent of rail has had on this country...

The transcontinental railroad united the nation and allowed for the increase of commerce between states.

Think about all the freight we ship on our rail system: the coal, the grain, the chemicals, the scrap iron, and the thousands of other things that keep this nation fed, clothed, and operational.

Every dollar invested in freight railroads yields $3 in economic output. For every $1 billion of rail investment, more than 17,000 jobs are created. Freight railroads generate almost $265 billion a year in economic activity.

Railroads are four times more fuel efficient than trucks, and last year, U.S. railroads moved a ton of freight an average of 484 miles per gallon of fuel.

The importance of freight rail to our nation's economic health is undeniable.

So it's a pretty good thing rail travel didn't die on the vine when it was first being created, especially since there were quite a few folks who disparaged it in its earliest stages of development.

In fact, it was Dr. Dionysus Lardner, the famous professor of natural philosophy and astronomy at University College in London, who once said: “Rail travel at high speed is not possible because passengers, unable to breath, would die of asphyxia.”

That, my friends, is just one example of the ridiculous and irrational things “new” technologies often have to contend with in their early days of development.

Hell, back in 1903, the president of the Michigan Savings Bank told Henry Ford's lawyer, Horace Rackham, that the horse was “here to stay” and the automobile was only a novelty, a fad.

Fortunately, Rackham didn't listen. He invested $5,000 in Ford stock, which he later sold for $12.5 million.

A Clean Energy Illusion

As a long-time modern energy advocate and investor, I've heard every excuse in the book as to why things like solar, wind, and electric cars will never pan out.

Even some colleagues whom I find to be quite smart and successful have sunk to a level of irrationality by referring to solar and wind as “scams,” pushing the illusion that cleaner energy alternatives are inefficient and costly.

Of course, I hold no grudges. We all have an axe to grind. I'm just not a big fan of trashing something you don't fully understand in an effort to push something you do.

In other words, while I fully enjoy being a part of (and profiting from) the earliest developments in clean power generation and electrified transportation, you'll never find me cheering pipeline delays or second-guessing the role oil plays in the global economy.

Because as any right-minded objective capitalist will tell you, that pipeline's a done deal.

As well, the further production of domestic oil is lock.

But just as we will produce unconventional liquids in Canada and the United States, we will also continue to integrate more cleaner energy.

Irrelevant Perceptions Won't Help You Profit

While some like to subtly mock wind power by referring to wind turbines as “windmills,” it is very likely that by 2030, 20 percent of our power generation will come from wind.

The 20 percent by 2030 has actually been an industry goal since former president George Bush signed off on a DOE report detailing how the U.S. could achieve that kind of wind penetration, and do so without any major technology breakthroughs.

The cost: about 0.06 cents per kilowatt-hour of total generation by 2030, or roughly $0.50 per month, per household.

But again, that's based on no technology breakthroughs, of which there have been many over the past few years — including a few that have enabled increased efficiencies and lower production costs.

Even Bloomberg's New Energy Finance recently released a report indicating the best wind farms in the world already produce power as economically as coal, gas and nuclear generation, and the average wind farm will be fully competitive by 2016.

Here's what lead analyst Justin Wu had to say:

The public perception of wind power tends to be that it is environmentally-friendly, but expensive and intermittent. That is out-of-date – in the best locations, where generation is already cost-competitive with fossil fuel electricity, and that will be the case for the majority of new onshore turbines installed worldwide by 2016.

Wu also went on to say:

The press is reacting to the recent price drops in solar equipment as though they are the result of temporary oversupply or of a trade war. This masks what is really going on: a long-term, consistent drop in clean energy technology costs, resulting from decades of hard work by tens of thousands of researchers, engineers, technicians and people in operations and procurement. And it is not going to stop: In the next few years the mainstream world is going to wake up to wind cheaper than gas, and rooftop solar power cheaper than daytime electricity. Add in the same sort of deep long-term price drops for power storage, demand management, LED lighting and so on — and we are clearly talking about a whole new game.

A Bigger Piece of the Pie

Look, I get it. Some folks like to mock environmentalists.

They think all that “let's make sure our air and water is clean” rhetoric is just a recipe for economic disaster and socialist agendas... or they just need a villain to help them sell their wares.

Whatever it is, rest assured the integration of clean, modern energy technologies is not being facilitated by Greenpeace or a secret society of tree huggers worshiping at the altar of Al Gore...

It's being facilitated by nothing more than the quest for wealth and security.

The future of energy will not be one completely dictated by fossil fuels. Rather, it will be one that utilizes a variety of resources.

In 20 years, we will still be very much reliant on fossil fuels.

But don't kid yourself.

Because while natural gas will likely be our main source of power generation for decades to come, wind, solar, and geothermal will also be getting a bigger piece of that pie.

And while we'll suck every last ounce of oil from anywhere we can economically produce it, we are actively developing alternative modes of transportation right now that will either require less oil or no oil at all.

From natural gas trucks and buses to more efficient internal combustion engines to electric cars, this is happening right now.

And this is our opportunity to make a choice...

Either embrace it and profit from it, or miscalculate the enormity of the change that is about to take place — much in the way the former Michigan Savings Bank president did when he insisted the automobile was nothing more than a novelty.

When it comes to energy in the 21st century, the only novelty or fad is the outdated and delusional mentality that the world is not transitioning its energy economy to one that will rely less and less on finite resources.

To a new way of life and a new generation of wealth...

 

Jeff Siegel is Editor of Energy and Capital, where this article was first published.

P.S. For the sake of clarification, windmills are machines designed to mill grain or pump water. The word windmill is also used to describe a cardio exercise that requires you to swing your arms around in a circular motion. Wind turbines, on the other hand, convert wind energy to mechanical energy that is used to produce power. Just something an energy investor might want to know in case you encounter the incorrect usage of the word “windmill” in any past or future analysis you may read.

Posted by Jeff Siegel at 07:37 AM | Permalink | Comments (0)

David Gold

There are so many easy reasons to be a pessimist today:  the world financial crisis, the discord and dysfunction in Washington, and the almost certain doom that many scientists claim we are facing from global warming. With the first high profile cleantech company failures, the euphoria of the cleantech bubble has burst creating pessimism about the future of cleantech as a whole. 

I say, hogwash!  History says we have many reasons to be optimistic.  Just because things look bad today doesn’t mean the world is coming to an end!  We humans have a hard time stepping back and getting a perspective on things that span long periods of time and it’s easy to get lost in the fear and distress of the day.  But as a cleantech venture capitalist, I am almost required to be optimistic.  How else could I make high-risk investments in early stage companies?

With renewable energy representing only 8% of consumption in the U.S., no doubt there is work to do.  But I prefer to look at the cup as 8% full.  Consumption of renewable energy has been growing rapidly in the U.S. -- at an average rate of 7% the past several years.  At that pace, renewable energy consumption would double less than every 11 years.

Pessimists will point to forecasts such as those from the Energy Information Administration that project significantly slower growth.  The most recent of those very projections just three short years ago forecast consumption for 2010 that now, by EIA’s own numbers, are known to be about 17% low!  The problem with forecasts of these types is that they systematically fail to account for future disruptive technologies or significant changes to market conditions.

In 2001 it seemed like the days of the dot com were gone as the markets crashed and company after company went out of business.  Yet, the greatest value creation on the Web occurred after the dot bomb.  I don't believe we are doomed; I believe that technology innovation will enable disruptive changes in our energy production and consumption and I believe the greatest value creation for cleantech companies lies ahead.

So, to cheer you up, here are just a handful of examples in which past forecasts of doom were way off and whose combined legacy says, " Don't underestimate the power of human innovation and spirit!"...

We Never Had to Import Liquefied Natural Gas

Just a bit over six years ago our nation was facing an extraordinary natural gas crisis.  As utilities had shifted to gas-fired plants in the ‘90s to reduce consumption of coal, consumption of natural gas boomed.   As the cleanest and lowest CO2 burning fossil fuel, natural gas was (and is) being used as a critical bridge from coal and oil to renewable energy sources.  Yet natural gas production was on the wane because proven reserves couldn’t keep up.

 
In 2003, Alan Greenspan sounded the alarm to Congress about the potential impact on natural gas prices (which were already on the rise) if significant action to increase imports wasn’t taken.  The problem, though, was that natural gas can only be transported by pipeline or by container and only in a liquid form, but  the reserves were mostly overseas.  So, in 2005 there were plans for as many as 55 Liquefied Natural Gas (LNG)-importing facilities.  Only six were built, and most sit idle today.  Disruptive horizontal drilling and fracking technology opened up enormous reserves of previously unreachable natural gas in shale. Production skyrocketed and prices dropped by over 60%.  Current estimates place U.S. reserves at 100 years or more…without additional technology.

Disruptive Lighting

In the 1960s, Light Emitting Diodes began to come to market for niche applications.  The concept that they would someday disrupt the world of lighting seemed far-fetched.  They were dim, extremely expensive and incapable of generating pleasing white light. My, how the world has changed in just a few decades!  The brightness of LEDs has increased more than five orders of magnitude while, at the same time, their cost per lumen (a measure of brightness) has dropped by about four orders of magnitude.  And, to boot, pleasing warm and bright white light is now the norm.  What seemed impossible just a short time ago is now more than possible – it is changing the way the world thinks about lighting, and the exponential improvement in LEDs shows no sign of slowing down.   

The Population Bomb Didn’t Explode

In the 1960s predictions of world starvation by the 1980s were rampant in books like the best-selling The Population Bomb by Paul R. Ehrlich or theorists like Thomas Malthus.  After all, back then world population was going to double every 30 years or so, meaning we should have had over 11 billion people in the world today! Yet, world population just reached 7 billion. 

World population growth rates are now less than half what they were in the early ‘60s and continuing to decline.  Based on today’s population growth rate and the continued forecasted decline, it will take about 100 years for human population to double again.

OK, you say, but that still means having 14 billion people on the planet in a hundred years!  True, but in the 1960s another reason population doom was the rage was an assumption that agricultural production couldn’t keep up with the exponential growth.  Yet, dramatic agricultural technology innovation that improved crop, soil, water, nutrient, and pest management has enabled the amount of food production per capita to increase by over 30% during that timeframe in spite of a more than doubling in population!  Hunger still haunts parts of the world, but the pessimistic doom predicted in the ‘60s was far from today’s reality, in which the amount of food per capita has increased.  One can only imagine where our technology will be in another century.

200 Countries, 200 Years…

Pessimists will surely find reasons to pan this article… for example, concerns about fracking fluids or the disparity in food distribution around the world.  A pessimist sees these as reasons to stay pessimistic.  An optimist sees them as new areas where we as humans will work to improve because there is rarely a penance for a problem.  So, if you are still feeling depressed and pessimistic, I will leave you with one of the more profound and optimistic views on world progress that I have seen.  Hans Rosling is a professor of International Health at Karolinska Institute in Stockhom and his video 200 Countries, 200 Years is a sure cure for any pessimistic day. 

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

Posted by David Gold at 05:51 PM | Permalink | Comments (1)

by Clean Energy Intel

It is becoming increasingly clear that the international community fully recognizes the need to ensure that the global economy does not become engulfed by another financial crisis at this critical juncture. Developments with regard to the referendum question in Greece and the fate of MF Global make this issue particularly pressing. There is therefore significant rationale for some kind of coordinated G20 action out of the coming Cannes Summit on November 3-4th.

In an article in early October, I argued that it was clearly in the interests of countries like China to aid the work-out process in Europe:

'....At that point, any discussion of negotiations on a potential deal on European debt at the G20 summit could help the market higher. There is certainly room for such a development and my read of the political tea leaves is that it may well involve a significant commitment from China. If that looks likely to be the case, it should again help the market towards a recovery...'

You can read the original article here and a more detailed assessment of the rationale and likely path forward here and here. That overall assessment looks generally to have been proven to be correct, with China’s willingness to support the EFSF mechanism in some manner now more or less clear (though any significantly negative political developments in Greece could obviously put that support on hold).

Interestingly, another reading of the political tea leaves suggests that the G20 may well decide to announce a further coordinated program – to convince the markets that they can act to sustain global growth. This could involve:

• An overall stimulus commitment from a number of member countries  - and particularly those currently running current account surpluses

• In particular, a deal on investment in clean energy (expect a lot from Germany, China and Japan on this) 

How to judge the market’s likely response is difficult in the midst of its confused reaction to both the MF Global and Greek referendum issues. However, four points seem reasonable:

• If the price action continues to be negative on the S&P and the Euro going into the G20 an announcement of something like the agreement discussed above (or initial talk about it) could produce a decent dead cat bounce of significant proportions at least. Both the SPY and FXE ETFS could bounce sharply.

• We should also be getting further confirmation of the commitment of China and other BRICs to the EFSF story. 

• In clean energy, wind and solar and the like would get a decent leg up. Solar has been destroyed in the last few months and a basket of solar players could do very well on an announcement such as that discussed above. First Solar (FSLR), SunPower (SPWRA), Suntech Power (STP) and Yingli Green Energy (YGE) for example together look interesting as an announcement play at current prices. Alternatively, purchasing a solar ETF such as TAN also makes sense. In wind, exposure to market bellwether Vestas (VWDRY.PK) or simply FAN, the best wind ETF probably makes most sense. 

The bottom line is that the G20 member countries know that both the global economy and the markets are at a critical juncture. They are therefore likely to pull out all the stops in order to convince the markets that they can prevent a financial crisis of global proportions. And some stimulus from a push on clean energy is entirely possible.

Disclosure: I am long SPY. I intend to purchase a basket of clean energy stocks over the next 24 hours.

About the Author: Clean Energy Intel is a free investment advisory service (available at www.cleanenergyintel.com), produced by a retired hedge fund strategist who also manages his own money inside a clean energy investment fund.

Posted by cleanenergyintel at 10:26 AM | Permalink | Comments (0)

David Gold

After decades of venture capital investment, growth and exit, the traditional focus areas of venture capital (such as IT, web and software) have developed strong entrepreneurial ecosystems. A high percentage of start-ups in these traditional areas come to market with one or more experienced entrepreneurs or with a strong and active network of investors/advisors who have “been there, done that.”   They know what it takes to raise capital and to build a great fast-growing business.  Cleantech companies, however, are much more likely to be led by first-time entrepreneurs who often struggle to create an ecosystem of experience people around them.

As a venture capitalist, I review hundreds of business plans each year and physically meet with roughly a hundred entrepreneurs seeking capital.  I have the advantage of doing this through the eyes of someone who has been on the other side of the table, having raised venture capital for my own start-up before becoming a VC.  And while there are certainly numerous exceptions, there are themes I see across cleantech start-ups that are not specific to their technology or market but which nonetheless impede their ability to raise capital.  Here is the top five…

Technology is necessary, but not sufficient.

Many cleantech entrepreneurs are engineers or scientists.  Although not the result of a formal survey, my perception is that many more have PhDs than what you find in internet start-ups.  I don’t know if it’s a symptom of having achieved such a lofty degree, but many seem to believe that their phenomenal technology and their outstanding technical skills alone should justify an investment in their company.  It isn’t.  Weak entrepreneurs can take the most game changing technology in the world and drive it into the ground.  Conversely, outstanding ones can take a good, but not great, technology and make a world-class business out of it (anyone heard of Microsoft?).  So… in scientific terms, having compelling technology is a necessary but not sufficient condition for entrepreneurial success.  Human capital must always precede venture capital.

Your 50-page business plan is a waste of time.

Will someone please tell all the college business professors that the traditional business plan is a dinosaur!  No VC has time to read such a tome.   Nothing ever turns out completely as expected, so writing a long document as if it will prescribe the future is silly.  And by the time you finish investing the time to create such a detailed document it is most assuredly out of date.

Conversely, too little time is invested into building a robust spreadsheet financial model.  Not a static five-year P&L – that is almost useless.  Rather, what an early stage company needs is a financial model that can be used to run “what-if” scenarios, e.g. “What if our margins are less?”  “What if it takes us a year longer to get to market?”   A tool like this accepts that the future is uncertain and that entrepreneurship is about taking risk.  As an entrepreneur, which would you rather have, a 50-page wish or a model of your potential risks?

The thought process that goes into fleshing out the basic elements of a business plan (e.g, market, competitive advantage, go-to-market strategy, financial model, etc.) is what is paramount.  Entrepreneurs that recognize this look at their business strategy and financial model as planning tools more than as fund-raising tools.  And they realize that communicating the results of that thinking must be done concisely.

Eisenhower once said, “In preparing for battle I have always found that plans are useless, but planning is indispensable.” Start-up businesses are no different.

A real advisory board isn’t just a list of cool names.

Some cleantech entrepreneurs get advice along the way that they should form an advisory board:  Get some people with cool experience and ask them if you can slap their names in your business plan.   That’s not an advisory board – it’s just a list of cool names. 

 A real advisory board not only has relevant experience and business contacts but also is actively engaged in the business, albeit on a very limited basis.  They meet regularly with company leaders, have provided concrete material assistance to the company and they have a specific personal interest in the company.  Such personal interest can take many forms, such as a stock option, a direct investment, a future executive role, prior significant personal relationship with a founder or clear strategic interest for their current employer. 

 Volunteer advisors who have no economic, business or personal connection to the company are cute.  They are like the parsley on your breakfast plate – they make it look nice, but add little substance and… at least for this VC… leave a bad taste in my mouth!

25% gross margins and growth to $20M in seven years aren’t exciting

At the highest level, there are three types of start-up companies.  There are high-growth businesses with venture potential.  There are downright bad businesses.   And there are steady growth businesses, which are not “bad” businesses – they just aren’t great venture investments.  
Venture capital funds are mostly 10-year partnerships.  We need to target businesses that we believe can generate huge multiples (typically 10x or more) on our investment in less than that timeframe so we get both liquidity and sufficient returns to make up for those investments that aren’t as successful.  That means companies that can use our capital to drive extraordinary growth, unfair competitive advantages and healthy margins yielding an exit return far beyond a simple discounted cash flow analysis on the business.

My second cousins are billionaires.  They built one of the first mail-order office supply companies to a dominant leader in its industry over 40 years (you can read their story in this book).  They never raised a penny of equity capital.  It was a great steady growth business that made them extraordinarily wealthy. Steady growth businesses can lead to phenomenal personal wealth, but that doesn’t make them good venture capital investments.

Last, but by no means least…raising capital is a social sport.

Quick quiz:  What is the single most important element of raising venture capital?  Your pitch deck?  Your technology?  No, no… your management team’s experience, right?  Wrong… it’s your relationships with potential investors.  Who you know is often more important than what you know in business.

The classic fund-raising mode for most cleantech entrepreneurs is to send their business plan to lots of funds, pitch at various cleantech business plan events and then wait to see who pursues them.   They let the VCs drive the process.  Few look at this as the sales process that it is.  Don’t spam slews of potential investors.  Rather, identify the funds that should be your top targets based on the investment interest they describe on their website.  Pursue them like you should a prospective customer: qualify them, identify their hot buttons and always be closing on a time-bounded next step with them.  And, as all great sales people know, getting an introduction is infinitely better than a cold call.

So, does that mean that only entrepreneurs who already have VC relationships can get funded?  No, but that sure as heck helps a lot!  And in this day and age, if you can’t get an introduction to me or another VC, you then you aren’t a very good entrepreneur.  There are almost 500,000 people who know somebody who knows me on LinkedIn and can get you an introduction.  Many VCs are equally well-connected – it’s part of what we do.  So, which business summary do you think I take more seriously -- the one that comes in from our website without an introduction or the one referred to me by someone I know?


And with that, you now have as a perk for reading my blog, a free roadmap for increasing your odds of raising capital from me!

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 07:25 PM | Permalink | Comments (2)

Tom Konrad Ph.D. CFA

In my bio, I usually state

My study of chaos theory led to my conviction that knowing the limits of our ability to predict is much more important than the predictions themselves, a lesson I apply to both climate science and the financial markets.

Despite having written about financial markets and clean energy stocks regularly since 2006, I have never before explained in print what I meant by that.  This summer's heat wave and stock market turbulence illustrate how my intuition about chaos theory informs both my understanding of the climate and the stock market.

Chaotic Systems and Feedback

The definition of a chaotic system I use is any system in which a tiny change in initial conditions can lead to a large change in results.  Most chaotic systems are chaotic because they contain positive feedback.  Positive feedback tends to amplify trends over time, while negative feedback tends to reduce trends over time.  Complex systems such as climate and the financial markets have both positive and negative feedback. 

In the weather, we can see positive feedback when a series of hot, sunny days create a static high pressure system which keeps storms from moving in to cool things off.  When a storm does move in, you can get positive feedbacks cooling things off.  National Weather Service forecaster Daryl Williams said the following about a storm which broke the summer heat wave in Oklahoma: “It's kind of feeding on itself, cloud cover and rainfall cools the air and the ground.” (italics mine.)

In stock markets, financial bubbles grow with the help of several types of positive feedback.  One such is "The specious association of money with intelligence," as John Kenneth Galbraith described it in his short and very readable book on bubbles, A Short History of Financial Euphoria: Financial Genius is Before the Fall.  When we see others make money in a stock market rise, we tend to think they must have been smart to have known when to get in.  If we made money recently by buying stocks, we tend to think we are smart for having done so.  In both cases, we're more likely to think that buying stocks is a smart thing to do, even if the profits were just dumb luck.  Collectively, this leads to more buying, which further raises prices.  Even if those price rises are justified in the beginning, the positive feedback can carry them up far beyond any level justifiable by the value of the underlying companies.  Many other positive feedbacks such as the wealth effect, relative valuation methods, and the increased ability to borrow against inflated asset prices operate in financial bubbles and bull markets.  In contrast, fundamental and value investors produce negative feedbacks by buying when prices have fallen and selling when prices have risen.

As with weather, external shocks to the system can reverse even these self-reinforcing trends, as we recently saw when the US's political paralysis around the debt ceiling debate and Europe's inability to effectively deal with their debt crisis recently ended the two year bull market in July.
 
Strange Attractors and Regime Change

Highly complex systems which have both positive and negative feedbacks tend not to be chaotic all the time, but rather exhibit chaotic behavior only some of the time.  The system will behave quite predictably in a deceptively regular fashion for a while, but then shift with little warning into another mode of behavior that is also regular and predictable, but seems to follow a different set of rules.

Such behavior can be mapped with simple chaotic systems and often exhibits a pattern called a Strange Attractor, tow of which are pictured with this article.  As the system moves through such a strange attractor, it will often stay in one set of the rings curves shown for an extended period, before jumping to another set after an unpredictable period.

In the weather, we see this sort of behavior with extended heat waves, cold spells, or periods when it is hot in the morning followed by an afternoon thunderstorm.  Such patterns persist for days or weeks, but then quickly end to be replaced by a new pattern or a period of less predictable weather.

In the stock market, we have bull and bear markets.  In bull markets, good news is greeted with euphoria and strong stock buying, while bad news is discounted or ignored.  In bear markets, the opposite is true: good news is often ignored, while bad news leads to repeated bouts of selling.  In his excellent but somewhat inaccessible book, The Alchemy of Finance, George Soros describes how he tries to spot such tipping points or regime changes as they happen.  Much theoretical work has been done to understand and model such changes, but the lesson I draw from chaos theory is that recognizing such changes in hindsight may be simple, but predicting them in advance is and will continue to be extremely difficult.  That's probably why Soros did a much better job describing market regimes than explaining how to spot them. 

Nassim Taleb also addresses regime change in chaotic systems in his book The Black Swan.  His Black Swans are events which cannot be predicted solely by studying the past.  Such events occur, he says, because the rules we infer from the observation of events never contain the full range of possibilities.  He applies this lesson to societal events, personal experiences, and financial markets-- all of which are chaotic systems.  There are also climatic Black Swans.

Global Weirding

If you accept that the world's climate is a chaotic system characterized by a strange attractor and a large number of climate regimes such as ice ages and warm periods, you should also accept that the relatively small changes we are making to the atmosphere have the potential to shift the world's climate into a new regime where the weather patterns humanity is familiar with are replaced with a new set of patterns that we've never seen before in human history. 

We are already aware of a few positive feedback mechanisms with the potential to amplify the effects of climate change, such as the ability of a release of methane from arctic permafrost and clathrates to rapidly accelerate global warming, or the disruption of the North Atlantic current due to melting polar glaciers.  Such scenarios are chilling enough, but the knowledge that climate and weather are a chaotic system raises the possibility of yet unknown mechanisms that might create rapid climactic shifts.  In a chaotic system, the past is not always a reliable guide to the future.  Climactic past performance is no guarantee of future climactic results.

"Global Warming" can sound somewhat comforting.  "Climate Change" can sound clinical and distant.  A better description is "Global Weirding:" the climate is not becoming a warmer version of what we're used to, it's becoming an entirely new system, with a new set of patterns that will surprise anyone expecting a version of the old climate regime.

Conclusion

There is only one climate, while there are hundreds if not thousands of financial markets operating at any one time.  Financial markets also operate on a much more compressed time scale, with bubbles and busts compressed into a few short years or decades.  Ice Ages, on the other hand, last tens of millions of years. 

This difference financial markets and climate in number and scale means that we know much more about the chaos of financial markets than the chaos of climate.  We've probably already seen most possible financial market regimes in at least one of the thousands of financial markets, from tulip bulbs to CDOs, that have operated over the course of human history.  Although the rules of markets change with new technology and communication, the basic rules of human psychology which govern these regimes have not.  To paraphrase Mark Twain, financial history may not repeat itself, but it does rhyme. 

Climactic history may also rhyme, but we've not yet read a full line of the poem: We don't know what it will rhyme with.  Ice ages and warm periods often last tens of millions of years.  Given the infrequency of shifts between one climactic regime and another, it's quite likely that the new climactic regime we are heading into will be unlike anything that has prevailed during human history, and possibly unlike anything in the geologic record.

The benefit of the slow pace of climactic history is that we do have a few years or decades during which we will be able to influence the path of global weirding. 

In a chaotic system, a tiny change today can lead to a large change in future outcomes. 

What tiny change are you making?

Posted by Tom Konrad at 11:22 AM | Permalink | Comments (0)

Tom Konrad, CFA

Last week, I asked three green money managers if they thought cleantech stocks, especially solar and wind sectors were near a bottom.  While they did tell me about eight cleantech value stocks, they were not ready to call the bottom.

Commoditization in Clean Energy

In response to my questions, Rafael Coven, the manager of the Cleantech Index (^CTIUS), which is the index behind the Powershares Cleantech Portfolio ETF (PZD,) told me that he and his colleagues at the Cleantech Group

"are continually reminded how fast certain sectors have product commoditization, where intellectual property isn’t strong enough to differentiate products sufficiently, then prices have been collapsing  even faster than we had anticipated.  This is true for smart power meters, solar panels, wind turbines, and most lighting products – especially LEDs. ... Sector growth doesn’t necessarily mean that many companies will make economic profits in LED lighting or solar PV."

In other words, Coven sees the decline in solar PV stocks to be a consequence of changing market structures.  If he is right, there is no reason to expect investors in sectors which have experienced the rapid commoditization to ever recover their losses.  Just because these stocks look cheap based on historic earnings, they could easily continue to fall.

Spencer Hempleman, a partner and clean energy portfolio manager at Ardsley Partners in Stamford, CT thinks similarly.  He says,

"[S]olar and wind have underperformed the more broadly defined cleantech sectors because China is subsidizing the manufacturing ramp of those industries and creating overcapacity.  Commensurate with pricing pressure due to the supply and demand imbalances are raising commodity costs like steel, silver, copper etc which pressures margins for solar and wind manufacturers throughout the value chain."

Other Structural Problems

Commoditization is not the only potential structural problem in clean energy.  I also corresponded last week with Robert Wilder, the manager of the Wilderhill Clean Energy Index (ECO) and the Wilderhill Progressive Energy Index (WHPRO).   The largest clean energy ETF, PBW is based on ECO, while the Powershares Wilderhill Progressive Energy Portfolio (PUW) is based on WHPRO.  Wilder and I were discussing why broad-based ETFs such as PUW and Coven's PZD had outperformed narrower clean energy indexes like PBW recently.  Wilder says,

"Indexes capturing broader themes simply had been able to avoid the narrow, sharp drop. A wider Index for say, cleaner technology with lesser green energy weightings would in a sense do 'better' the past couple years, while Progressive energy emphasizing efficiency and the smart use of dominant energy would do even 'better' than that."

In addition to the quick commoditization arising from the rise of Chinese manufacturers, Wilder and Hempleman also see structural problems for solar PV and wind in the reduction of subsidies.  Wilder says that the paring back of subsidies has quickened recently as "several governments are suddenly fiscally flat on their back. ... One-off events like Japan's nuclear crisis, or sharp doubling in oil prices, spotlight moves to new energy in places like Germany, but that alone is not enough to offset these partly structural near term structural forces."  Hempleman adds that "this is a major structural issue as many of the companies that compete in these sectors are highly levered and the barriers to entry are fairly low."

The Cyclical Case

While Wilder and Hempleman see the recent decline as mostly structural, Wilder also sees some cyclical causes.  He sees an analogy to semiconductor makers, which go through boom and bust as wafer makers over-expand, and then are forced to contract, but he sees the forces driving down solar, wind, LEDs, and geothermal in recent times as much more powerful than those in the semiconductor industry.

Garvin Jabusch, manager of The Sierra Club Green Alpha Portfolio, emphasizes more cyclical causes.  He sees a big driver of the decline in the solar and wind stocks to be the political shift against pricing in fossil fuels' externalities, such as the effects of global warming, increased health care costs caused by pollution, and the costs of going to war for oil.  He says "These costs have not been accounted for in the economics of fossil fuels, but if the international political economy is ultimately rational, sooner or later (preferably sooner) they must be. ... [E]merging scale and accurate pricing of combustion’s externalities will inexorably reverse this trend."

Hence, if politics is cyclical (i.e. mean-reverting or "ultimately rational") then political drivers for renewable energy will be cyclical as well.  And right now he sees the political pendulum swinging to the extreme detriment of renewable energy due to disinformation.  "Polls show that (in the U.S. anyway), this [disinformation] is working. Except for a very recent rebound in belief in global warming, the last two years have seen a general decline in belief in warming science among Americans, particularly but not exclusively among conservatives.  It’s hard not to notice that this period of declining belief has approximately corresponded to the period of declining valuation, and increasing short interest (some solar companies have had short interest as high as 30-40% of total float), among renewables."

Jabusch also scoffs a bit at the commoditization argument.  He says that, as the price of solar declines to the point where it becomes competitive with fossil fuels such as coal, "some of the same analysts who derided renewables’ expense now deride their inexpensiveness as 'commoditization' and 'margin squeezing' that means solar companies can’t make much money going forward. To me these guys are missing the point that the rapid, large reductions in the price of solar, which by the way show every sign of continuing, mean that solar will now begin to supplant coal far faster than anyone could foresee even five years ago."  

Conclusion

I think it's fairly safe to conclude that both structural and cyclical factors have been at work in the recent declines of solar, wind, LED, and geothermal stocks.  For the investor, the question should be, "Have the structural factors and most of the cyclical factors been fully priced in?"  If so, these stocks will benefit as cyclical factors begin to reverse themselves.  If, however, the full effects of the structural problems in these industries have yet to be felt, then even a political and cultural shift back towards pricing in the full costs of fossil fuels may not be enough to make the current batch of solar and wind stocks profitable again.

For myself, I find the bears' structural arguments more convincing.  While I think Jabusch is right that the political pendulum will swing back in favor of the recognition of the very real harm done by the use of fossil fuels, the resurgence of the solar and wind industries in terms of volume may be a great boon to society yet still fail to return great profits to the current shareholders of solar and wind companies.  This is because a new, more clean-energy friendly political environment may draw in new competitors into these industries, further increasing pricing pressure, and preventing solar and wind companies from "more than mak[ing] up in volume what they’re losing in margins," as Jabusch predicts.

It is possible to do well by doing good.  As Rob Wilder points out, "an Index capturing global energy efficiency in transportation is well up" over the same period solar and wind have been down.  I think that's probably due to the fact that transportation efficiency competes with oil, and the price of oil is up 50% over the last two years. 
Solar, wind, geothermal, and electrical efficiency technologies such as demand response and LEDs compete with the marginal supplier of electricity, which in most of the developed world is natural gas, and the natural gas price has been very low since early 2009 compared to 2004-2008.  This is why many renewable developers are now focusing more on developing countries where it is possible to displace oil in electricity generation.

Fossil fuel prices are far from the only factor influencing clean energy stocks, but they seem significant.  If we want to know if the current price trends for renewable electricity and electricity efficiency technologies are structural or cyclical, we also need to know if the price trends for natural gas are structural or cyclical, which in turn depends on our assessment of the long term course of the shale gas boom.  If we want to know if the recent positive trends in transportation efficiency will continue, we need to decide if recent oil price trends are structural or cyclical.

Unfortunately, as with the trends in renewable energy, I think the recent trends in oil and natural gas have both structural and cyclical factors.  Which of those factors will dominate over the next two years is beyond this analyst's expertise to predict.  Over the long term, though, the trend for fossil fuel prices is likely to be up.

DISCLOSURE: No positions.

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

Posted by Tom Konrad at 07:34 PM | Permalink | Comments (2)

David L. Levy

Boston-based Zipcar (ZIP) raised $174 million from its Initial Public Offering in April 2011. It already has operates in 14 big cities and 230 college campuses around the United States, Canada and the UK, and is planning to use the new capital for market expansion. Zipcar is not a high tech business, and its success is not due to sophisticated technological innovation; rather, it’s an example of business model innovation. Zipcar reinvented the traditional car rental business by simplifying and reducing the costs for short-term rentals, and rebranding the service as green car sharing. They developed a distributed model of rental locations, an annual membership system, an all inclusive by-the-hour pricing structure, and online booking. Together these greatly reduce the cost and time needed to rent a car, while maximizing convenience. Indeed, most of the people I know who use Zipcar’s service are not ardent environmentalists, but enjoy the hassle-free approach and the easy parking.

While public policy and the media tend to focus on technological innovation as the key to addressing climate change and boosting clean energy, business model innovation (BMI) offers a path to rapid deployment of existing technologies. The concept was popularized and given its current acronym by Mark Johnson, Clayton Christensen, and Henning Kagermann in their Dec. 2008 Harvard Business Review article “Reinventing Your Business Model.” They point out that “Low-cost U.S. airlines grew from a blip on the radar screen to 55% of the market value of all carriers. Fully 11 of the 27 companies born in the last quarter century that grew their way into the Fortune 500 in the past 10 years did so through business model innovation.”

The potential for BMI in the development of the cleantech sector is only just beginning to be appreciated. Rob Day, a partner with Black Coral Capital in Boston, recently wrote about a new wave of startups that run lean and require less capital to scale up, so are less likely to founder in the infamous Valley of Death: “Some of this next wave of startups will be hardware, but many will be software and/or services…  Business model innovation will often be stressed over technological innovation.  They will sometimes marry energy-related market opportunities with Web2.0 and social media business models and platforms.”

A closer look reveals that BMI holds particular promise for unlocking the potential of clean energy and promoting economic competitiveness, investment and employment in high-cost regions. In addition to helping keep startups lean and capital efficient, BMI can develop systemic solutions that overcome some of the many market failures and institutional barriers to energy efficiency and clean energy. McKinsey’s famous Marginal Abatement Curve heralds the good news that about one-third of needed emissions reductions appear to have positive ROI with current technologies. The bad news is that about one-third of needed emissions reductions appear to have positive ROI – yet the necessary investments are not happening, due to these many hurdles. As with Zipcar, BMI provides ways to monetize the ancillary benefits of cutting emissions, and create business models that focus on features that people are willing to pay for.

BMI-based cleantech businesses are also more likely to keep jobs in high wage regions such as the US Northeast and California. Clean energy manufacturing jobs have been moving astonishingly quickly to China, even while there is still rapid technological evolution. Evergreen Solar (ESLR) and A123 Systems (AONE), both based here in Massachusetts, are cases in point. Business model innovation often focuses on software and services, developing strong relationships with customers and building on existing capabilities in the region, so jobs are more likely to stay local. These factors also help to create barriers to entry, protecting the business model. Zipcar’s network of parking spots, for example, negotiated over several years with hundreds of companies and local authorities, would not be easy to replicate.

Better Place is a powerful example of how BMI can overcome systemic barriers to technology deployment. The company is developing a national replaceable battery infrastructure for pure electric vehicles in Israel, Denmark, and elsewhere that transforms the business model for car ownership and fuel supply. Consumers buy a car without the expensive batteries, then contract with Better Place for battery replacement as a service, which is done in just a few minutes at a network of service stations. This model overcomes the physical limitations of batteries, in terms of range and charging time, and dramatically reduces the cost of new cars for consumers. As with Zipcar, governments are willing to subsidize the operation because it contributes toward reducing congestion and greenhouse gas emissions – again, monetizing ancillary benefits.

Energy efficiency and smart grid provide many opportunities for BMI. EnerNOC’s(ENOC) core business model, for example, is demand response and energy management, using sophisticated software and remote monitoring and control. Enernoc links the utilities, who are willing to pay for energy efficiency and for peak-period demand reduction, to a network of customers. Energy service companies like Ameresco (AMRC) are increasingly offering turnkey projects and performance contracts that reduce risks, capital requirements, and uncertainty for customers. Similarly, companies like Nexamp, Tioga Energy and Borrego offer renewable power purchase agreements based on DBOOM services – a complete package where the company designs, builds, owns, operates and manages the renewable energy installation, while the customer only pays for power.

Not surprisingly, then, these BMI-based companies are among the fastest growing businesses in the cleantech sector. Kevin Doyle, a Principal of Green Economy and Co-Chair of the New England Clean Energy Council’s Workforce Development Group, has pointed to the large number employment opportunities at a range of cleantech companies, a number of which are in energy services and software. As a result, they are not just looking for engineers, but also for a range of business and professional skills and expertise – which highlights the purpose of our new clean energy programs at the University of Massachusetts, Boston!

David L. Levy is Chair of the Department of Management and Marketing at the University of Massachusetts, Boston, where he teaches courses in international business, strategy, and business and climate change. He recently founded and is now Director of the Center for Sustainable Enterprise and Regional Competitiveness, which engages in research, education and outreach to promote a transition to a clean, sustainable, and prosperous economy. David’s research examines corporate strategic responses to climate change, the growth of the clean energy business sector, and the emergence of carbon disclosure as a form of governance. He was recently PI on a grant from the Massachusetts Clean  Energy Center to develop sustainability education programs. He edits the blog Climate Inc. on business and climate change.

Posted by Guest Contributor at 09:38 AM | Permalink | Comments (1)

by Kidela Capital Group

[ED Note: This ties in well with John Petersen's article last week about Lithium-ion battery recycling.  In both cases, it's about price, and China's actions are making Rare Earths expensive.]

Necessity is the mother of invention and Japanese industry is discovering just how true that old saying is. Last year, a diplomatic spat between Japan and China led the world’s largest supplier of Rare Earth Elements (REEs) to suspend exports of Rare Earth oxides and other critical metals to its largest single client.

Japan, like the rest of the world, is almost totally reliant on Chinese Rare Earth (RE) exports and the China’s action, which came as a shock to Japanese industry, is a sentient warning for the rest of the world.  But just as Japanese industry parlayed the oil shortages of the 1970s into the development of a new world leading, fuel efficient automobile industry, Japan hopes to use this supply disruption as a catalyst to take the global lead in Rare Earth recycling.

There is some suggestion that Japanese industry anticipated supply interruptions and stockpiled Rare Earths and other critical metals as an ameliorative measure. This has muted the immediate impact of the short term shortages. Over the long term, Japanese industry has partnered with RE miners around the world to ensure a more reliable supply. But in the medium term, Japan is looking to cover shortfalls through improved technology and recycling.

Recycling proves expensive but profitable

Recycling is, however, extremely expensive. But, the irony of Chinese export restrictions is that it has driven up world RE prices to such an extent that alternate mining sources and recycling have become  viable. To be feasible on a large scale, however, the price of REEs may have to rise even more than we have seen over the last year.

“It is very costly to collect and accumulate scrap for recycling. Merits of scale don’t work with these metals.”
The Japan Metal Economics Research Institute

The government of Japan has been instrumental in getting the recycling of REs underway and has both instituted subsidies and facilitated inter-industry cooperation. The Japanese Ministry of Trade has provided a third of a billion dollars in subsidies, which has been used as seed money for some 160 projects worth $1.34 billion. That number will increase as the Japanese government is offering another 8.9 billion yen in subsidies in the next fiscal year. The Japanese have set a goal of reducing the amount of REs imported by its domestic industry by one third.¹

Japan is also investing heavily in research. Scientists at the University of Tokyo recently succeeded in separating REEs from neodymium magnets through a new, much cheaper recycling process. And a joint project by Morishita Jintan Company and Osaka Prefecture University has created a recycling process using microbes to recover rare metals such as palladium and indium. There is some hope it can be used for REs as well.²

Rare Earths from old air conditioners to computers

A number of noted Japanese companies have taken on different challenges in the recycling of REEs. Shin-Etsu Chemical is working on new systems to recycle these elements from old air-conditioners. The company is also negotiating contracts with electronic appliance suppliers to set up ways of recovering used and old appliances.³

Hitachi is recycling RE magnets from hard disk drive motors, air conditioners and compressors. Typically, recycling REEs was performed manually using acids and other chemicals, which created its own set of environmental issues. But Hitachi has recently announced a new “dry” process, which relies on a new extraction material with a high affinity for Rare Earths.  Hitachi hopes to commence full recycling operations by 2013.⁴

Tokyo-based Showa Denko KK recently opened a plant in Vietnam to begin recycling dysprosium and didymium. The company, the world’s biggest producer of some components used in hard disk drives, makes 8,000 tons of Rare Earth alloys a year and has plans to output 800 tons at the recycling factory.⁵

Other companies have formed cooperative arrangements to take on the recycling test. Mitsubishi Materials has initiated recycling ventures with Panasonic Corp. and Sharp Corp., to examine the extraction of neodymium and dysprosium from washing machines and air conditioners.⁶

A revitalizing new industry

Dowa Holdings, one of Japan’s oldest mining companies, recently built a large recycling plant in Kosaka in order to extract REs and other critical and valuable metals from melted down electronics components. The company has been successful in reclaiming gold, indium and antimony and is hoping to soon have processes in place to capture neodymium and dysprosium.

Dowa is more open than many other few companies about its REE recycling processes. And its disclosures give some insight into the challenges facing recycling. Every day, Dowa’s plant at Kosaka takes 300 tonnes of recyclable materials that it sources from all over the world — computer chips, cell phone speakers and other vital parts from electronics – crushes them, and then incinerates them in a furnace. From that, only 150 grams of Rare Earths are recovered. Despite this meager recovery rate, Dowa claims it still makes a profit.⁷

Right now, this recycling plant is also providing jobs for Kosaka, a town that has seen its metal processing business dry up in recent years. From a wider perspective, both industry and government see recycling as valuable new industry, one that Japan can exploit and one in which it can become a world leader.

“It’s about time Japan started paying more attention to recycling Rare Earths. If we can become a leader in this field, perhaps China will be the one coming to us to buy our technology.”
Utaro Sekiya, Manager, Dowa RE Recycling Plant

—–

¹ Japan seeks to cut rare earth usage by a third
² Japan, Germany seek rare earth recycling as hedge
^{3, 6} New Push to Recycle Rare Earth Minerals
⁴ Hitachi Leads Rare Earth Recycling Efforts as China Cuts Access to Supply
⁵ New Push to Recycle Rare Earth Minerals
⁷ Japan Recycles Minerals from Used Electronics

Posted by Guest Contributor at 11:40 AM | Permalink | Comments (0)

David Gold

As soon as gas prices rise, our nation becomes focused on energy.  When they drop again, it falls off most consumers’ radar.  Yet the importance of energy goes way beyond the cost of filling up your gas tank or paying your electric bill.  In often-extraordinary ways, energy is interwoven into absolutely everything that we need to live or that we love to do.  One of the most useful tricks I learned in engineering school is that to put any problem in perspective, it helps to ask what if things were at zero or infinity.  So, to put things in perspective, let’s ask the question…

 “What if energy were free and unlimited?”

·      People would be able to travel at bargain-basement rates.
Yes, the cost of land vehicle transportation, which is so much of the focus in the press, would drop by 25%-35%^[i].  But, in addition, airline costs would plummet as much as 50%.  With this would come increased commerce and maybe even greater worldly understanding, as more people are able to travel.

·      The world’s growing shortage of fresh water would largely disappear.
A huge amount of energy is expended on the conveyance, pre-treatment, distribution and wastewater treatment.   Energy represents 30% or more of a typical municipal water facility’s expenses.^[ii]  With free energy, water could affordably be produced in abundance through the highly energy-intensive processes of desalination, wastewater purification or even direct extraction of water out of the air.

·      Few in the world would go hungry.
Today, energy represents roughly 30-45%^[iii] of the cost of the food we put in our mouths.  Farming, transporting, processing, packaging and retailing all consume tremendous amounts of energy.   The price of food would drop and the availability of food would skyrocket.  With free and unlimited energy, food could be grown affordably just about anywhere, given that water would be readily available and, where necessary, climate-controlled growing facilities would become inexpensive to operate.

·      Economic prosperity would reign.
The correlation between energy consumption and standard of living is strong.^[iv]  Everything that we use consumes energy to be produced and transported.  For example, energy represents roughly 50% of ocean shipping cost and 40% of aluminum production cost. Impoverished people would have more food to eat and cleaner water, their homes would become more comfortable, and the price of almost everything they buy would go down instantly, boosting their quality of life.  


So, the next time you hear complaints about high gas prices for our cars, remember that energy affects much more than just the cost of your ride to work or trip to the beach.  With this perspective in mind, it doesn’t take much to figure out what things would look like in the opposite scenario, where energy becomes extremely expensive and scarce as fossil fuels diminish.  It isn’t a matter of whether we will move away from fossil fuel consumption; it’s a matter of over what time period and with how much economic, national security and environmental pain along the way.
The free market will most assuredly create more alternatives as energy prices rise.  If we could be confident that future increases in energy prices would be gradual over a long period of time and that global warming was not a concern, there would be little reason to take any particular action.  But history has already shown us that changes in fuel prices are unlikely to be gradual.  And the growing industrialization of major portions of the world such as China and India mean that world energy consumption is likely to grow roughly 50% over the next 20 years.
 This leaves little doubt about the direction of energy prices in a world dependent mostly on fossil fuels. From a venture capital perspective, it is this type of disruption that makes cleantech a compelling area for investment.  From a policy perspective, if we are faced with high energy prices for an extended period of time or if global warming creates environmental chaos, the negative impacts could be extraordinary and would impact virtually every part of our lives.   But, on the positive side, an expensive gas tank fill up would soon be the least of our concerns!

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.

[i] Transportation:
o    Fuel costs alone are roughly 45% of airline operating expenses and that doesn’t include energy costs incurred for ground support vehicles or buildings used by airlines.
o    Driving a car would cost 25%-35% less per mile. (@ $3.50/gallon gas cost).
[ii] Water:
·       3% of all energy consumption used to move, treat water.  30% of municipal water agency expenses are energy.
[iii] Food:
·       17% of all energy consumption goes to creating and getting food to the grocery story. http://www.p2pays.org/ref/08/07686.pdf
·       As a result, roughly $240B per year is spent in the U.S. on energy costs related to food.
·       This equates to roughly $2,000 per family unit per year http://www.bls.gov/news.release/cesan.nr0.htm
·       Those same family units spend roughly $6,400 per year on food.
·       Thus, if energy were free, food could cost roughly 31% less.  Then there is the energy cost of getting the food home, preparing it, clean dishes and disposing of waste.
[iv] World Prosperity
·       Correlation to standard of living.
·       Shipping costs.
·       Aluminum costs.

Posted by David Gold at 07:34 PM | Permalink | Comments (1)

by Kidela Capital Group

“There is a reason why the Rare Earths are called rare. They’re not called rare because they’re truly rare. They’re called rare because it’s very difficult to isolate these elements individually and it takes a lot of skill to do that.”
Constantine Karayannopoulos, chief executive of Neo Material Technologies¹

Rare Earth Elements have become an indispensable part of modern life, found in everyday items like computers, camera lenses and high efficiency light bulbs to complex, emerging technologies in the optics, medical and defence spheres. But before these elements end up in your smartphone, they need to be transformed into highly processed, high-purity compounds, oxides and metals.  This is an expensive, time-consuming, and arduous process.  One of the consequences of having one country – China – holding a near monopoly on Rare Earth production over the past two decades is that around the world there is a general lack of processing expertise or knowledge on how to do this.

Here is a brief overview on what is involved in converting the raw material that comes out of the ground, into usable Rare Earth (RE) products.

Step 1: Mining the Ore

The first step is to mine the ore. These ores contain RE bearing minerals like bastneasite and monazite, but generally contain very low concentrations of the Rare Earth Elements (REEs) themselves.

Even a relatively high grade ore only contains about two percent Rare Earth Oxides (REOs),² which at this stage are undifferentiated groupings of REs combined with oxygen. Depending on the grade, it can take anywhere from 6 to 86 tons of ore to produce a single ton of RE mineral product.³

Step 2: Producing RE Concentrates

The next step is to mill the ore, a process otherwise known as beneficiation or mineral dressing. Here, the ore is ground up to form fine particles (usually less than 1 mm or even less than 0.1 mm) using crushers and rotating grinding mills.⁴ The valuable minerals are then concentrated using such separation techniques as froth flotation, magnetic separation, and gravity or electrostatic concentration.⁵

The milling process produces a concentrate of RE minerals, which usually contains five or more times the original RE concentration in the mined ore.  The milling equipment – the crushers, grinding mills, flotation devices, and magnetic, gravity, and electrostatic separators – all have to be configured in a way that suits the type of RE ore being mined. No two ores respond the same way, which means every RE milling plant is different.⁶ And because transporting large volumes of RE concentrate is so expensive, the mineral dressing plant is almost always located very close to the mine where the ore is mined.⁷

Step 3: Producing RE Compounds

At this stage, the RE concentrate contains Rare Earths at a higher grade than the raw ore (up to five times as much), but it is still in the form if the original natural minerals.⁸ These minerals have to undergo chemical treatment to allow further separation and upgrading of the REEs.  This process – called cracking – includes techniques like roasting, salt or caustic fusion, high temperature sulphation, and acid leaching which allow the REEs within a concentrate to be dissolved.⁹

Because REEs are so similar to one other, what’s often produced initially is an undifferentiated REO product with large amounts of Light Rare Earths like cerium and lanthanum, and smaller amounts of the others according to their proportions in the ore mineral.

Processing techniques such as selective precipitation, ion exchange, and solvent extraction technologies are now required to remove most of the impurities and produce the desired combinations of RE compounds.

Once produced, these mixed RE compounds can be used on their own, for applications where any one of the REEs has the desired effect – for example, in the production of steel alloys, in catalysts, or as an abrasive for glass polishing.¹⁰ Alternately, they continue on to the next stage in the RE processing chain, as a higher grade, intermediate chemical compound that is now ready for additional refining. The nature of the final product of the chemical upgrading process depends on the exact composition of the mineral concentrate, market demands, and the size of the operation.¹¹

The equipment used here – sophisticated analytical devices, furnaces, filters, and the vast array of collection, evaporation and clarification tanks required in ion exchange and multi-stage solvent extraction technology – are usually configured in a way that best suits a particular RE concentrate.¹² Because each concentrate has a different combination of minerals, each RE workflow –– and a result each chemical upgrading plant – is typically unique.¹³

The chemical upgrading process generally eliminates most impurities and produces one or more kinds of mixed RE concentrate. If it contains a generally high amount of REOs (say, 50%), this product can transported fairly long distances without adding a great deal of cost to the commodity.¹⁴

Step 4: Producing RE Oxides

The major value-add relative to RE processing lies in the production of high purity RE oxides and metals.  But creating the 99.9% purity (or even higher) REs¹⁵ required to make phosphors, lamps, magnets, batteries, and other products that need REs to function efficiently, is not simple – far from it. Separating the REEs into their individual oxides may take 50 chemical tanks to separate Light Rare Earth Elements (LREEs), and up to 1,000 tanks of sequential solvent extraction to properly separate Heavy Rare Earth Elements (HREEs).¹⁶

The typical RE refinery uses ion exchange and/or multi-stage solvent extraction technology to separate and purify the REEs. These processes break the mixed RE compounds down through the exploitation of the subtle differences between the REEs.  It`s done by atomic weight­ – cerium, the first of lanthanides on the periodic table and the most abundant of the Rare Earths, is separated first. To get the more valuable HREEs like dysprosium, terbium and yttrium other REEs on the periodic table must be separated out beforehand.¹⁷

The refinery plant can be combined with the chemical upgrading plant described earlier, or it can be a stand-alone facility. As in the case of the other plants, the RE refineries are sized and configured to suit the unique composition of the feed material.¹⁸ For this reason, a plant designed to purify LREE compounds would normally have difficulty handling an increased proportion of HREEs.¹⁹

High purity Rare Earth Oxides are one product of the refining process. The composition of these REOs can vary greatly, since they are generally designed to meet the specifications laid out by end product manufacturers.²⁰ A REO that suits one customers needs may not suit another.

Step 5: Producing RE Metals

The rapid advance of science and technology has led to some RE applications that require very high purities of individual REEs – as much as 99.99999 percent.²¹ For these applications,  multi-stage solvent extraction is generally used to refine the REOs into their essential metal form.  These Rare Earth Metals (REMs) can used on their own in end products, or combined with other elements to form alloys for advanced technology applications. Techniques such as optical or mass spectrometry are commonly used to help assess the purity of RE products.²²

Upgrading Rare Earth ores to high-purity metals adds orders of magnitude to their value. For this reason, prices for mixed RE concentrates are generally much less expensive than for high purity Rare Earth metals.²³

RE metals, or earlier stage products like an REO concentrate or mixed element compound, are now ready for use in the end product, be it a hybrid car, a BlackBerry, or the permanent magnet of Magnetic Resonance Imaging machine. It’s important to remember that it’s by no means a simple path from Rare Earth ore to any of the growing number of Rare Earth applications that we’ve come to depend on in this green, information age.

—

^{1, 3, 17} From mine to wind turbine: the rare earth cycle
^{2, 4, 5, 6, 7, 8, 9, 11, 12, 13, 14, 15, 19, 21} Extracting & Refining Rare Earths… Can some processes be centralized
^{10, 18, 22} Rare earths from supernova to superconductor
¹⁶ Critical Times for Critical Metals
²⁰ From mine to wind turbine: the rare earth cycle
²³ Rare Earth Processing in Malaysia: Case Study of ARE and MAREC Plants

Posted by Guest Contributor at 07:55 PM | Permalink | Comments (0)

Tom Konrad CFA

The Richard Branson-backed nonprofit, the Carbon War Room is a group that thinks big in the battle against catastrophic climate change.  They're only interested in attacking problems with the potential to reduce carbon emissions on the gigaton scale, that is reducing emissions by a trillion tons a year. 

No one nonprofit or even one multinational company can deploy the necessary capital to seize a fraction of the opportunities on this scale.  An annual gigaton of carbon emission reductions requires between $300 billion (Energy Efficiency) and $2 trillion (Solar PV) in up-front investment, according to Jigar Shah, the Carbon War Room's CEO and a solar business model innovator in his own right.

Instead, the Carbon War Room looks for overlooked opportunities to effect market transformation which will allow green entrepreneurs to thrive and rapidly scale profitable business models that also have the effect of reducing carbon emissions at the gigaton scale.  As these new opportunities grow and prove themselves, large companies and capital providers can step in to take advantage of the new profit opportunities, displacing less forward thinking incumbents as they go.

One such example of the Carbon War Room's efforts at shaking up old industries is their ShippingEfficiency.org initiative.  This site gives businesses shipping goods an idea of how efficient various ships are, so they can make their decision of which ship to use based not only on price, but on emissions.  Even though the ratings currently available are not perfect, with big shippers like WalMart (WMT) taking an increasing interest in the environmental impact of their supply chains, the greater transparency can only help the shipping industry to clean up its act. 

The Carbon War Room chose to work on catalyzing improvements in shipping in part because the sector had so far received very little attention, there is a suite of mature technologies for improving ships' efficiency with quick paybacks, and those solutions can potentially be deployed quickly to reduce carbon on a gigaton scale.

The Investing Angle

The Carbon War Room's criteria to choosing projects also make a lot of sense for a stock market investor trying to pick stocks.  Looking at sectors that other investors are ignoring is a good way to find undervalued stocks.  Focusing on technologies that are deployable today is a good way to avoid stocks about to head into the Valley of Death.  And quickly deployable technologies mean there is a large potential for profit growth.

I just returned from the Carbon War Room's Creating Climate Wealth conference in DC.  It was a working conference, where the attendees collaborate across disciplines to find new ways to catalyze profitable carbon reduction, and I've come back with a few ideas about how to create a little carbon wealth in the stock market.  I plan to share them with readers in future articles.

But first, a note about what to avoid.

Radical Incrementalism

I sat down for an interview with Jigar Shah on the second day of the conference.  One thing he told me should be taken to heart by all investors hoping to make a difference on climate change: "Radical incrementalism will fail."

What does he mean by the oxymoronic phrase "radical incrementalism"? Doing the same thing we've been doing all along, but in a slightly more efficient manner.  This simply does not produce the climate gains we need. 

In transport, the highly flawed CAFE standards are the best tool we have to increase vehicle efficiency, but more efficient vehicles (even if we ignore Jevons' Paradox) may reduce emissions per mile, but they don't get us anywhere as long as miles driven are rising.  The greatest potential lies in alternative transport: bike sharing, car sharing, and transit.

In agriculture, it has been extremely difficult to make even the smallest changes in how monoculture farms are run.  The greatest potential lies in containerized farming, which can produce fresh vegetables on the roof of the very same supermarket in which they will be sold, while lowering cost, reducing food-miles, and increasing freshness.

Trying to fit new technologies into old ways of doing things seldom works as well as we would hope.  The strongest force holding back a new, low carbon economy is our attachment to legacy business processes, not any lack of technology.  By catalyzing changes in business processes, low carbon technologies can be unleashed, creating wealth for the companies who embrace them while reducing greenhouse gas emissions.

You can't create great climate wealth without breaking a few paradigms.

Posted by Tom Konrad at 10:25 AM | Permalink | Comments (0)

Tom Konrad CFA

Highlights from a report on Clean Energy investments from the Pew Charitable Trusts.

The Pew Charitable Trusts just released their report on Clean Energy, finance, and investment in the Group of Twenty (G20) economies in 2010 [pdf].

I had the opportunity to review a pre-release version of the report. Some 2010 trends they discovered were encouraging or exciting, some were disappointing. I also had the chance to speak to the director of Pew's Clean energy Program, Phyllis Cuttino, about the report. Here are the highlights from the report and our discussion.

Clean Energy Sectors

• Total Clean Energy investment in 2010 was $243 billion.

  • Up 30% over 2009

• Solar Photovoltaic (PV) installations grew 53% over 2009

  • 17 GW of solar was installed in 2010

  • Distributed solar (defined as installations smaller than 1 MW) doubled to $56 billion, accounting for 26% of MW installed

  • PV hit grid parity in southern Italy due to high electricity prices and good insolation.

• Wind grew 34%

  • 40 GW added in 2010

• Biofuels slumped

  • Lowest investment since 2005

  • Some markets are oversupplied with conventional biofuels

  • Next generation biofuels are not ready

• Solar thermal was not tracked by the report.

  • Concentration Solar Power (CSP) and direct use solar thermal (for water, space, and process heating) were not included

  • I mention this because these are much more significant sectors than marine power, which was included in the report, and given the Pew center's goal of providing information to policymakers to help them make better informed decisions, I'm hoping they will take the hint and include these important sectors in their next report update.

• Energy Efficiency and Transportation spending did get some mention in the report, but the numbers were incomplete

  • Energy efficiency is hard to track because it's difficult to determine what is efficiency spending, and what would have been done in the normal course of business.

  • The report only covered Transportation stimulus spending, not private sector investment.

• Geothermal Power was also not tracked. Again, I hope they correct this oversight in next year's report. What is not measured is often ignored.

Country Rankings

• China took the lead in clean energy investment in 2010, displacing Germany.

  • China led in public financing (stock market) of clean energy companies.

  • Accounted for 50% of all manufacturing of solar modules and wind turbines.

• Germany retained second place, mostly due to strong performance in installations of distributed solar.

• The United States fell to third in total investment.

  • Investment in wind power dropped 50% from 2009 levels

  • Retains lead in venture capital and private equity investment, accounting for 73% of the G20 total

  • Accounted for 2/3 of all identifiable investment in Energy Efficiency, but this number is not particularly meaningful due to the difficulty of tracking energy efficiency spending. According to Cuttino, this is probably in large part due to the US playing catch-up. I think it is also due to the differences in how energy efficiency is implemented around the world, with the US putting more emphasis on incentives while other countries rely on regulation and higher energy prices to drive investment. The US model results in a higher level of identifiable investment, but has been less effective at driving overall efficiency.

• Italy was in fourth place, because of a large rise in distributed solar projects

  • I expect PV growth in Italy should be expected to remain robust because they have hit grid parity, as mentioned above

• Japan was much farther down the list in 11^th place, almost entirely based on PV installations. As the Japanese understandably question their dependence on nuclear, they will want to accelerate their adoption of clean energy, in order to produce as much domestic energy as possible without the risks of nuclear power.

  • Over the last 5 years, clean energy capacity in Japan has grown at a 45% annual compound rate.

  • Small distributed installations grew at a 69% annual rate.

  • A 25% annual growth rate in investment was all that was needed to achieve 45% annual capacity growth because of falling prices.

  • Solar PV dominated Japanese clean energy investment in 2010.

    • Cuttino was not able tell me why she thinks that is. This is an important question because if clean energy is to replace the lost nuclear generating capacity in Japan, wind will need to play an important role. If past investment in wind has been small because of NIMBYism, then this opposition may be more likely to relax because of the recent demonstration of how nuclear power can be much worse. If the low historical investment in wind is mostly due to a lack of wind potential, wind will have a harder time contributing to Japan's clean energy supply.

  • Japan has ambitious targets to source 28 GW of solar and 5 GW from wind by 2020. I expect them to adopt even more ambitious targets as a result of the nuclear crisis.

  • With 3.5GW of installed solar, it would take 3 years for Japanese solar installations to grow enough to produce as much energy as the 2.8 GW of damaged nuclear reactors at Fukushima Daiichi at current growth rates, even after assuming an 18% capacity factor for solar.

  • If all clean energy continues to grow at the current 45% compound rate, Japan will add 11.7 GW of capacity in 2011. Much of this will likely be biomass and wind, so the average capacity factor will be considerably higher than for clean energy just from solar, meaning that this new clean energy generation should be enough to replace the electricity from damaged reactors more than twice over in just one year. Those who think clean energy cannot replace nuclear power should reconsider.

What I Hope For in the 2011 Report

• Tracking Solar Thermal and Geothermal investment.

• More complete tracking of investment in alternative and efficient transportation

• Some measure of the effectiveness of clean energy investment

• A better methodology for tracking energy efficiency, perhaps by tracking how quickly a country's energy intensity falls.

I also asked if they were looking into what makes an effective clean energy policy in more detail, and Cuttino told me they are working on a report on the non-financial barriers to clean energy investment. I'm very much looking forward to that.

Lessons Learned

• Feed-in Tariffs are one of the most effective methods of both encouraging Clean Energy installations and developing a clean energy industry.

• If a country wants to develop clean energy manufacturing, it should first develop a domestic market.

• Germany, China, and India have all successfully followed this model.

• The United States is failing badly largely because of inconsistent government support for clean energy.

• Research and development follow manufacturing. There has been an increasing stream of clean energy engineers migrating to the opportunities in China.

• Transportation investment has largely been ignored in the past, but Cuttino believes that the current administration understands the importance of this critical sector.

  • Cuttino had recently attended CERA Week, and told me that even oil executives who would not utter the phrase "Peak Oil" were calling for increased vehicle efficiency and incentives to reduce oil consumption. John Hess of Hess Corp. (HES) was calling for a $1 per gallon gas tax and a $10 per ton carbon tax.

Clear and consistent policy support for clean energy have long been lacking in the United States. Until we make a firm commitment to the energy of the future, we will continue to be trapped by our addition to the energy of the past. Our dynamic Venture Capital helps incubate world-beating technology, which US companies would have the opportunity to commercialize, building new, world-beating industries if they had a reliable domestic market to sell into. As it is, the United States is simply the source of the great ideas behind the products that the rest of the world will be selling to us for decades to come.

This article was first published on Tom Konrad's Green Stocks blog.

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

Posted by Tom Konrad at 08:04 PM | Permalink | Comments (0)

Garvin Jabusch

In search of a sucessor to the Global Industry Classification Standard

The Global Industry Classification Standard (GICS) is the framework within which finance types organize companies and their stocks into industries and sectors. You've heard the names for these groups many times: energy, transportation, materials, commercial services, etc. These divisions have been useful in attempting "to enhance the investment research and asset management process for financial professionals worldwide" (mscibarra.com, 3/2010). And, for a while, GICS did a decent job of keeping portfolio managers, investment advisors and their clients reasonably well organized in their thinking about diversification and risk.

But that was then.

GICS was created by S&P and MSCI Barra to reflect their indices (such as the S&P 500), but, since these indices are largely comprised of companies created during the late 19th- and 20th-century economies, GICS, perhaps understandably, defines energy essentially as "burning something to get power." There are other legacy issues with GICS as well but, for now, I'll focus on energy.

Here at Green Alpha ® Advisors, in addition to managing the Sierra Club Green Alpha Portfolio, we manage a Next Economy (green) index of public equities we call the Green Alpha Next Economy Index or GANEX. Take a look at our old GICS based sector weights in this table:

Green Alpha Advisors ® Next Economy Index, GICS based sectors, 12/31/10

GICS Sector		Average Weight
CONSUMER DISCRETIONARY		15.97
CONSUMER STAPLES		9.97
ENERGY		--
FINANCIALS		--
HEALTH CARE		0.91
INDUSTRIALS		28.75
INFORMATION TECHNOLOGY		30.39
MATERIALS		11.62
TELECOMMUNICATION SERVICES		0.09
UTILITIES		2.29

These are important because the way GICS forces us to classify our holdings is pure 19th century. Notice there's nothing in our energy sector. Our published top 25 holdings as of 12/31/2010 included such names as First Solar, Inc. (FSLR), and Vestas Wind Systems (VWDRY.PK). And the unpublished part of the portfolio contains many more companies in solar, wind, wave, turbine, and geothermal power. Yet, according to GICS, we have no exposure to the energy sector at all. None. All our power-related holdings fall under either "industrials" or "information technology." Really? I get how some of these could be manufacturing but, come on, these days there's so much more to power than burning fossilized hydrocarbons. (In addition, this skewing of reality means the "industrials" and "information technology" sectors in our index now appear more weighted than they really are.)

So, for a next-economy index, using GICS sectors actually misrepresents portfolio characteristics, completely contrary to the stated goals of the GICS. Some portfolio managers have addressed this problem by artificially classifying their renewable energy holdings under "Oil and Gas." This approach makes it clear that there is energy representation in a portfolio, but it's clearly a temporary fix for a deeper, structural problem.  

We launched the Green Alpha Next Economy Index (GANEX) largely because there was no economy-wide, cross-sector, cross-industry, all cap index that reflected the true state of what we call the "next," or eco-efficient economy. There was no way to accurately measure the alpha (outperformance) of a green portfolio, because there was no systemic beta (recognized representation of the green economy as a whole). Before we founded Green Alpha Advisors, during the years we ran the Sierra Club Stock Fund (a large cap green portfolio), we had to benchmark ourselves against the S&P 500. And for most of our tenure there, we did outperform that index. But the question was put to us again and again by institutional prospects: "Okay, you're beating the S&P 500, but what about other green portfolios? What about performance versus a benchmark that isn't overrun with hydrocarbons and legacy manufacturing?" It's a good question and it ultimately led to the genesis of our firm and the GANEX. The GANEX, in turn, can and does serve as an indicator of the performance and progress of the next economy.

So, when it came time to present a sector breakdown for our portfolios, we found ourselves in the familiar place of having no way to accurately compare our portfolio to the world at large. We were stuck using legacy tools in a new world. Put simply, GICS regards "energy" as the combustion of oil, coal, and natural gas, and subsequently its schema lacks accuracy and depth. So, in addition to attempting to define the next economy with our index, we now find ourselves needing to define new sectors by which the new economy (and energy in particular) can be better evaluated.

It's time to move on, so, presented herewith: our first shot, back-of-the-bar-napkin attempt at a new paradigm: New sectors, next-economy classification.

CATEGORY	DESCRIPTION	EXAMPLES
Energy	Renewable energy Energy storage	Solar thermal, wind Generators, turbines Batteries, PVs and UPS
Legacy Energy	Hydrocarbon-based fuels for electricity and transport Oil, coal
Resources	Raw, sustainably harvested materials Recycled and otherwise repurposed materials Raw data Recycled wood, steel, paper, waste water Food Livestock feed Satellite data feeds
Materials	Man-made materials Technology, R&D Pharmaceuticals	Nanotechnology Smart Glass Building materials
Infrastructure	Networks Telecom Distribution Transportation	Smart grid Data transmission and management Mail delivery
Objects	Components Equipment Machinery Hardware	Meters, sensors, controls LEDs and light systems Electric motors, cars Consumer electronics
Services	Systems Education Finance Retail Software	REITs Hospitals Media

Clearly this has to be developed further, notably with a lot of subgroups. But we think it's a good first step toward reflecting the next economy as it is and as it will become. We also like to think it's a little closer to plain English than the current system and can therefore help demystify finance and close the gap between advisor and client.

Garvin Jabusch is the cofounder of Green Alpha Advisors, LLC and manages The Sierra Club Green Alpha Portfolio -- a unique blend of Green Alpha Advisors' Next Economy universe and the Sierra Club's proprietary green-investment guidelines.

Posted by Garvin at 08:40 PM | Permalink | Comments (1)

by Eamon Keane

 “Before the world’s fossil fuels are finally exhausted, it is likely that their extraction will require an unimaginable amount of water”

Gérard Velter, general manager of Veolia Water for Africa, Middle East and India

 

“When measured in calories, the energy market is twenty times the food market. So if governments would replace only 10% of global energy consumption with first-generation biofuels, they in the same stroke would double agricultural water withdrawals”

Peter Braebeck-Letmathe, Chairman, Nestle Group

 

“The share of biofuels in total use of coarse grains is projected to increase until 2015, reaching 13%”

UN FAO Agricultural Outlook 2010-2019

 

“The area currently under cultivation is 1.5 billion hectares, so if all that extra land could be used it would represent an increase of one-third. In fact a lot of it either should be left alone for environmental reasons or would be too expensive to farm.”

The Economist special report on feeding the world

Given the above quotes, it is a wonder that most energy outlooks pay only cursory attention to the interrelationship between water, food, energy and climate.  Signs of stress in the water-food-energy complex are visible in the record high food prices, dropping water tables and the need for cooling in power plants is on vivid display in northern Japan. Do you know how/if it will affect your investments? Maplecroft's water security index shows nearly the entire Middle East and North Africa, the origin of much of the world's oil, as under extreme risk of water scarcity. There’s a nice graphic in the World Economic Forum’s Global Risks 2011 which highlights some of the water-food-energy interactions in Figure 1.  I’ll try to concisely address them in this series.

Energy-Water Nexus

Figure 2 shows the water required to extract and refine energy, while Figure 3 shows the energy required to make different forms of electricity. The water needed in primary extraction of oil, gas and coal is not that significant, however it depends on local availability. For instance in China’s Shaanxi Province, the coal reserves cannot be tapped due to lack of water. The plan is to desalinate sea water and pump it uphill for 600 km: “We need water, and the sea can provide it”. 

The oil industry uses some 220 mb/d of water for enhanced oil recovery, for an average of about 3 mb/d water per mb/d oil. This is about 0.3% of global water use (4,500 bn m³/year or 77,500 mb/d). In some cases this will be the reinjection of the water cut, however where steam injection is used, the quality is required to be higher. For fossil fuel extraction, the issue is not the absolute volume of water but the environmental pollution that inadequate environmental care can cause. An estimated 12,000 miles of waterways are adversely affected by abandoned coal mines in the US. Shale gas uses relatively low volumes of water, but a few cowboy fraccers could lead to the contamination of rivers or groundwater and so close regulation is required.

The elephant in the energy-water nexus is biofuels, with irrigated corn requiring up to 100,000 litres per GJ. Converted to oil, this is an impressive waste of 3687 mb/d water per mb/d of oil equivalent, or 4.8% of the world’s water consumption. This is the number one reason why first generation biofuels are doa once governments recognise water constraints.

Power generation uses significant quantities of water. Due to the massive volumes of water used in open loop cooling in old designs of nuclear and some fossil fuel power plants, in 2005 41% of American water abstraction (withdrawal from a water source) was used to cool power plants. The operation of open loop nuclear plants requires this steady flow of water, or else they must shut down. Only 3% of US water is actually consumed by power plants, the rest returned to rivers slightly warmer. Hydro plants evaporate large quantities of water/MWh. New power plant designs can significantly reduce power generation water consumption through a range of technologies, such as hybrid cooling systems. This has significantly reduced the water requirement of the 100 MW Tonopah solar tower plant in Nevada that recently got the go-ahead, with water consumption a key constraint.

Part 2 will look at the food-water nexus.

Posted by Eamon Keane at 05:50 PM | Permalink | Comments (0)

Dana Blankenhorn

Some reporters are calling the latest PwC Renewables Report a sign of a “renewables frenzy,” in that the number of merger deals in the space climbed to 530 last year, from just 319 in 2009.

But is it?

The total value of all deals in the space, according to the same report, actually fell sharply, to $33.4 billion from $48.8 billion. Major indexes like the Wilderhill New Energy Index and the PowerShares Global Clean Energy ETF (PBD) both fell in value last year, even while the average stock was rising in value.

There are many reasons for doing a deal. Growth is one, scale is one, fear of failure another. And lumping co-generation, biomass, wind, solar, and hydro deals into one pot called “renewables” is a big mistake, in my view, because each of these sectors faces its own challenges and has its own outlook.

The market for wood pellets from Confluence Energy, just acquired by Viridis Energy (VRD.V) in Canada, is very different from the markets served by the coming Alterra Corp. (MGMXF.PK), a merger I covered early this month.

Similarly, the environment faced by a solar energy acquisition outfit like Principal Solar (KPCG.PK), which just went public through a pink sheets merger, is nothing like that faced by Next-Alternative, a maker of carbon-nanotube batteries, controllers, and a fuel emulsifier which just trumpeted an offer of $100 million (which it rejected).

Fact is, renewable energy is a whole collection of sectors, each with its own dynamic, each at a different stage of its market development. Wind turbines, for instance, are clearly understood, not highly subject to disruptive entrants (someone who can double the wind's output), and so fairly mature. Solar energy is much less so. There are a whole related set of industries – materials and tools and sales channels – that is each unique unto itself.

The PwC report, and the way it was released (sent via email to clients with no press release posted on the company Web site as of this morning), seems designed to feed the hype. “Deals up 66%,” “confidence returns” and “strong year” are the words I'm reading in the headlines.

But is that the reality? Personally, I don't see this as an M&A business right now. I see a lot of opportunity for financing, I see a lot of new investments in untried technology, I see a lot of contracts connecting projects to the grid, most of them based on some sort of guarantee.

What do you think? Does the industry really need a hot M&A pipeline to make money? Or do the investment bankers need us more than we need them?

Dana Blankenhorn first covered the energy industries in 1978 with the Houston Business Journal. He returned after a short 29 year hiatus because it's the best business story of our time. In between he covered PCs, the Internet, e-commerce, open source, the Internet of Things and Moore's Law. It's the application of the last to harvesting the energy all around us he's most excited about. He lives in Atlanta.

Posted by Dana Blankenhorn at 08:39 PM | Permalink | Comments (0)

Tom Konrad, CFA

If the Japanese use less nuclear power, what will take its place?

I'm astounded by the resilience and discipline of the Japanese people in response to the three-pronged earthquake, tsunami, and nuclear disaster, perhaps in large part by my cultural roots in the egocentric United States, where we seem to have forgotten the virtue of self-sacrifice for the greater good. 

Yet while Japanese society has shown itself to be particularly resilient, the Japanese electric grid is much less resilient.  According to International Energy Agency statistics, Japan produced 258 TWh of electricity from nuclear in 2008, or 24% of total production. 

The situation seems to be mostly stabilized at the Fukushima Daiichi reactor complex, but according to the March 23rd update on the reactor status at Fukushima from the Japan Atomic Industrial Forum, Reactors 1, 2, 3, and 4 have all suffered damage, had their fuel rods exposed for some period, and/or had seawater pumped in for cooling.  It seems unlikely that any of these reactors, with a 2.8GW total generation capacity will ever be returned to service.  Assuming that these reactors normally operate at a 90% capacity factor, these four reactors would have accounted for an annual electricity production of approximately 22 TWh, or 2.5% of total production. 

At the very least, these 22 annual TWh will need to be replaced with other sources or by improved energy efficiency, and the disaster will likely shift Japan (and much of the rest of the world) slowly away from nuclear power, with fewer new plants built, and fewer old ones being granted extensions in their permits to operate.

Outside Japan, regulators are likely to require additional safeguards on new nuclear generators, as well as be more strict when considering the extension of operating permits for existing older plants.  This will increase the already high cost of nuclear power, and further slow the construction of new plants. 

Energy efficiency, conservation, and other forms of energy generation will have to fill the gap.  Which will benefit most?

The Conversation So Far

Over the last few weeks, I have read innumerable prognostications about how Japan and the rest of the world will fill the energy gap.  I asked several clean energy money managers for their top post-Fukushima stock picks, which are published on my Green Stocks blog at Forbes.  I also posted a quick poll to see what sectors readers thought would benefit (see chart.)

Opinion is strongly divided, especially among my poll respondents, perhaps in part because I allowed respondents to vote for as many as three sectors, since I'm fairly confident that more than one sector will benefit.

Perhaps the most vocal contingent is the group that is arguing that solar will benefit.  Two of the green money managers I asked for stock picks chose solar stocks (MEMC Electronic  Materials [WFR] and LDK Solar [LDK].)  Among the pundits, AltEnergyStocks' solar expert Joe McCabe was quick to see benefit for solar.

Yet even our own bloggers can't agree.  A few days after McCabe's post, our battery expert John Peterson wrote,


John thinks oil, natural gas, and coal are the only energy technologies able to take up the slack. 

John Segrich, manager of the Gabelli SRI Green Growth Fund (SRIGX) also told me "The big beneficiary in the aftermath of the Japan nuclear crisis will be natural gas related companies."  (His stock pick is Capstone Turbine (CPST), because the company's microturbines can provide immediate, clean, and efficient distributed generation.

Market Reaction

The market seems to think solar, natural gas, and wind will all benefit.   While the natural gas exchange traded notes (ETNs) are based on baskets of commodity futures, while the solar and wind exchange traded funds (ETFs) are baskets of stocks, the gains in all three over the 10 days following the crisis are surprisingly similar (see chart.)


Can the solar bulls and the natural gas bulls both be right?  Yes.  As John Petersen pointed out, the amount of nuclear power going offline is large compared to the current installations of renewable energy.  Hence, if renewable energy were to fill only part of this gap, it would still amount to significant industry growth, while leaving a lot of room for growth in fossil fuels.

Linear vs. Geometric Growth

However, I fell John is far too dismissive of the growth potential of renewable energy, while he completely neglects the potential of energy efficiency to fill part of the gap. 

First, he compares the nuclear generating capacity going off-line to current installations of renewable energy, noting that it is half of current installed capacity.  If renewable energy were on a linear growth curve, such a comparison would be valid.  However, renewable energy installation has often grown exponentially in the past, and can still do so.  While it takes ten years or more to permit and build a nuclear reactor, utility scale wind and solar farms are typically built in three to 18 months. 

Between 2004 and 2009, grid connected PV capacity increased at an average annual rate of 60%.  Over the same period, wind installations grew at the relatively leisurely but still impressive compound annual rate of 26% (see chart.)


If we assume that combined wind and solar capacity continue to grow at a (slower) annual 25% rate, then replacing 43% of the world's current renewable output will take all of 19 months.  Replacing that capacity with nuclear or coal would take much longer, because nuclear and coal plants take so long to construct.

Variability

While Petersen's critique of renewable energy installation rates are not supported by the facts, his later points regarding wind and solar variability are salient.  He points out that energy storage is currently well suited to smoothing minute-to-minute variation, an important function because it greatly reduced the strain on the rest of the electric grid.  He is also correct that batteries cannot cost-effectively provide the tens of hours of storage that a wind or solar facility would need to mimic a baseload or dispatchable resource.

Geographic Dispersion

Perhaps because Petersen is a battery expert, he missed non-storage solutions to the variable output from wind and solar farms.  The most important of these is geographic dispersion.  Geographic dispersion in solar and wind is akin to diversification in a financial portfolio, but much more effective because of much lower correlation in electricity generation, and because correlation falls with distance.

First, wind and solar power tend to be negatively correlated simply because, in most locations, wind tends to be strongest when the sun is weak (early morning, late evening, during storms, and at night.)   In finance, there are very few negatively correlated asset classes, and those assets that are negatively correlated with the market tend to produce minuscule or negative returns, which would be the equivalent of an electrical load in the grid analogy.

Hence, there are great benefits in diversification, and long distance transmission is the key to supplying these benefits.  This idea is backed up by numerous studies demonstrating the benefits of geographic diversification, and also widely acknowledged by experts in the field, as I discussed in a recent article on ABB Ltd. (ABB).

While geographic dispersion cannot produce baseload power, baseload power was always an artificial construct in the first place.  An ideal power source would produce power that corresponds to demand: Electricity production would fall at night and peak on hot sunny afternoons (as it does from geographically dispersed solar arrays), not stay at a constant rate.

The Japanese Grid

For such a small country, the Japanese grid is not well interconnected.  The Northeast and West of the country operate at different frequencies, and are connected only by two relatively low capacity frequency converter facilities.  This is a large part of the reason that Tokyo (in the Northeast, as are Sendai and Fukushima) is suffered rolling blackouts after the quake: the relatively unaffected West was unable to supply the Northeast with significant electricity through these two weak links.

In order to benefit from the geographic dispersion which makes high wind and solar penetrations practical, Japan will need a more robust electric grid.  It would be an incredibly daunting task to build significant new transmission in densely populated Japan, if it were not for a state of the art technology ideally suited to both transmitting large amounts of electricity over long distances with low line losses, and for running those links underwater.  This technology is High Voltage DC (HVDC) transmission.

Japan currently has two underwater DC links, and the two frequency conversion stations using similar technology.  These facilities were built in the late 1900s, with technology provided by Japanese companies such as Mitsubishi.  The leading providers of modern HVDC are ABB Ltd. (ABB) and Siemens (SI), two companies that might stand to benefit if the Japanese decide to learn the lessons of the Sendai/Fukushima tragedy and build a more resilient grid based on strong links and safe, diversified electricity generation.

The First Fuel

Wind, solar, natural gas, and new grid links will take at least a year or three to replace the lost generation at Fukushima, and in the meantime, there is only one energy resource that can take up the slack.  That is energy efficiency and conservation, often called the first fuel because it is the least expensive resource available. 

Japan is already a leader in energy efficiency, but the discipline with which they are handling the disaster convinces me that they are ready to "renew their commitment to energy efficiency," as Nobel Prize winning economist Joesph Stiglitz said in a March 19th interview with Barrons.  Deployment and grid stability of energy efficiency and conservation can be enhanced with the use of smart grid technology.  Smart grid technology (such as demand response) can also aid in the integration of variable resources such as wind.

Filling the Gap

Much depends on how Japan decides to rebuild, but whatever they do their priorities will probably be:

1. Quick to deploy
2. Low cost
   
3. Improve grid safety and stability
4. Not greatly increase reliance on foreign imports

Energy Efficiency meets all four goals.  Many energy efficiency stocks are local operations, but suppliers of highly energy efficient components, such as Power Integrations (POWI) should be well placed to benefit.  Investors' focus should be on companies with industry-leading technology that the Japanese will not be able to source locally.

Wind is quick to deploy and inexpensive when compared to natural gas generation based on expensive liquified natural gas (LNG), but there will be a limited number of sites available in densely populated Japan.  Most likely, we will see an acceleration of Japanese plans for offshore wind power.  This should help wind companies with offshore turbines, and possibly integrate nicely with a build-out of a Japanese underwater HVDC grid, similar to the proposed Atlantic Wind Connection for the US.

An underwater HVDC grid makes sense, and if Japan sees this sense, ABB and Siemens are the most logical beneficiaries.

Solar power is not cheap, although it is much less expensive and faster to deploy than new nuclear power, and the high prices of imported LNG should not make it cost prohibitive as a solution.  Global suppliers of PV should all benefit, as the increase in demand allows them to charge somewhat higher margins than they would otherwise.

Grid Based Energy Storage will need to increase along with wind and solar to help accommodate local fluctuations in power output, but it is easy to overestimate the market for this.  It's typically not low cost, but grid based storage (at least when it takes the form of batteries) is quick to deploy, improves grid safety and stability, and does not greatly increase the reliance on foreign imports. Petersen just published a good overview of grid based storage applications here, including the US-listed stocks he thinks are well positioned for this opportunity.  One Japanese company he does not mention is NGK Insulators Ltd. (NGKIF.PK), a vendor of the Sodium sulfur batteries, the technology which currently has the greatest installed capacity for battery-based grid storage.  This was my top pick for a stock to benefit from the rebuilding of the Japanese grid.

It might make sense to build some grid based storage at the sites of existing Japanese nuclear reactors.  When the grid and back-up generation gave out at Fukushima, the battery backup kept the plants safe for 8 hours.  Grid based storage systems cycle their state of charge over time, so if a future disaster knocked out both grid power and backup generators at a nuclear plant co-located with grid based battery storage, most of the time the grid based storage would be able to supply some extra power to the nuclear plant, and keep the cooling systems operating longer than it could with dedicated battery backup alone.

Natural gas will also see a boost, especially in the short term, now that Japan must run existing gas fired generation harder to make up for the loss of the nuclear plants.  In the longer term, suppliers of gas turbines will probably see some increase in demand.  Given the high price of LNG, there will be an emphasis on particularly efficient means of converting natural gas into electricity.  Segrich's Capstone Turbine (CPST) is one, especially when used in combined heat and power operations.  For even more efficient conversion of natural gas to electricity, the Japanese may turn to solid-oxide fuel cells, such as those sold by FuelCell Energy (FCEL). Both these companies' products can be used in natural gas powered buses, and so may benefit if bus buyers shift away from diesel in favor of natural gas.

Geothermal Power has, as usual, received some lip service as a possible beneficiary.  Japan is on the ring of fire, with good geothermal potential.  The country already had 547MW of installed geothermal generation in 2000.  Geothermal also has the advantage of being baseload, often operating with capacity factors of 95%, even higher than nuclear.

However, geothermal plants take four to six years to construct, which means that new geothermal (unless it involved installing upgraded turbines or bottoming cycles at existing plants) will only make a small contribution to fill the gap left by lost nuclear generation in the near term.  Companies that might possibly benefit in the short term are vendors of binary cycle turbines (i.e. Ormat (ORA) and United Technologies (UTX)) to be used as bottoming cycles at existing plants.

DISCLOSURE: None.

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

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

Tom Konrad CFA

Income investors can also invest in clean energy.

Over the past four years, changes in Canadian tax law have led the renewable energy income trusts I introduced investors to in March 2007 to either be bought out like the Boralex Power Income Fund (bought by manager Boralex [BLX.TO, BRLXF.PK]) or convert to corporations like Algonquin Power and Utilities [AQN.TO, AQUNF.PK].

Those that converted to corporations are still out there, and still paying good dividends.  And while a few are gone because of mergers, there are also a few new ones that I did not mention in my 2007 article.  They are a great place to start for investors who want a green portfolio, but need income or can't handle the stomach-turning gyrations of the solar or wind stocks.

I've listed the funds I know of in the table below, along with their current dividends and the sectors they invest in.

Company (Canadian ticker, US Ticker)	Price	Yield	Mkt Cap	Sectors
Algonquin Power and Utilities (AQN.TO, AQUNF.PK)	C$4.95	4.8%	C$471M	Elec, Nat Gas,&Water distrib, cogen, biomass, hydro
Brookfield Renewable Power Fund (BRPFF.PK,BRC-UN.TO)	C$21.41	6.2%	C$2.2B	Conventional and run-of-river hydropower
Innergex Renewable Energy Inc. (INGXF.PK,INE.TO)	C$9.74	6.0%	C$580M	Run-of-river hydro and wind
Macquarie Power & Infrastructure Corp. (MCQPF.PK,MPT.TO)	C$8.43	7.8%	C$480M	Cogen, Wind, Hydro, Biomass, Solar, District heating
Northland Power Inc. (NPIFF.PK,NPI.TO)	C$15.81	6.8%	C$1.2B	Nat Gas, Wind, Biomass

As you can see, although these companies have become corporations, the yields will appeal to income investors. 

DISCLOSURE:  Long AQUNF, NPIFF.

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 12:42 PM | Permalink | Comments (0)

By Greg Pfahl

Renewable IPOs in 2010

2010 proved to be a much better year for the initial public offering and renewable energy companies, perhaps surprisingly, saw their share of activity. In 2010 there were more than double the number of initial public offerings than in 2009, and we also saw a significant increase in secondary offerings as well.

Worldwide public investment in renewable energy increased 21 percent last year, with China representing 20 percent of the 2010 market, according to VB/Research of London. The REW 40 Index is up 15 percent over the past year at this writing. While it’s hard to predict if 2011 will be a frothy IPO market for renewable companies, it is clear the public’s appetite for risk in renewables is growing. Despite what you may hear about the effect of lower natural gas prices on renewables, we believe that it is public market performance and availability of willing investors, not commodity prices, that drives the IPO market.

The renewable IPO field saw a series of fits and starts. There were some fits: Solyndra, PetroAlgae (PALG.OB), Trony Solar and Gevo (GEVO) withdrew or reduced their IPOs. But there were some starts as well. Even though Codexis (CDXS) didn’t raise the $100 million it had hoped for last April, it still pocketed $78 million from public investors with its IPO. And Amyris is trading at the $30 level, nearly double the IPO of $17.20.

Codexis and Amyris (AMRS) both succeeded on their IPOs because despite the fact they are money-losing early stage companies, they have proven technology and real revenues and contracts, with potential high-revenue products in the pipeline. Codexis, which develops custom enzymes and catalysts for industrial chemical production, has a project going with Shell, a major investor, to speed up production of biofuels from nonfood sources. Codexis had revenues of $101.5 million last year.

Amyris had revenues of $68.5 million for its synthetic biofuels technology. The company has been well-funded by venture capital investors as it tries to show it can be "the leading provider of renewable specialty chemicals and transportation fuels worldwide." The company’s Biofene yeast-based chemical takes Brazilian sugarcane and ferments it into a petroleum replacement into several different applications, including diesel and jet fuel. Amyris has benefited from consistently telling its story in a convincing way to investors and the public.

California-based photovoltaic maker Solyndra withdrew its IPO in late June citing “ongoing uncertainties in the public markets,” opting for a $175 million private placement and a $535 million loan guarantee from the federal government instead. The Solyndra withdrawal was described by some observers as “muddying the waters” for other solar panel makers to hit the markets, but considering the company had private and government options, it was only prudent for management to pull the $300 million public offer until a better time.

PetroAlgae, on the other hand, is an example of what not to do. The VentureBeat website cited PetroAgae as one of its worst clean tech investments of 2010. The site said most analysts said the company "jumped the gun" because it has burned through $58 million the past three years and has no revenues. Worse, it has a complex corporate structure and has already restated its financial statements. Companies need their investors to understand their story in order to buy into it, including the management, technology, corporate structure and business and financial plan. Complex is bad; simple is good.

How to Plan an IPO

The decision to go public is complex, situational and a big step for any company. Not all IPOs are huge. According to Keating Capital/Capital IQ, 85 percent of NASDAQ companies have market caps less than $1 billion and 40 percent of listed companies are unprofitable. About 10 percent had revenues less than $10 million. If your company determines that an IPO is the correct decision, companies should know what to expect and how to prepare for an IPO, because it isn’t all about the money.

Start early

This is not a fast process. If you are operating on a shoestring budget and have three months worth of cash, the IPO is not for you because an IPO will not get done in three months. Going public can take six months but more likely will take a year. So if funds are dear, consider government grants or loan guarantees, selling tax credits, selling to private institutional investors,  bank financing if you have assets that can be used as collateral, licensing your technology or other fundraising activities.

Still interested? Here are some issues that could trip you up on your way to watching the closing hit the bank if not accomplished at least six months prior:  

Solid financials - You might expect an auditor and CPA to say you need quality financial reporting, but you’ll hear the same thing from underwriters, securities attorneys and investors. The smarter clients considering either an IPO or even a private sale get us involved several years before the deal. Renewable companies are in their early stages. Investors understand that there will be losses until a profit is made, but audited financials by a reputable firm give you better leverage. Generally, when filing your initial registration statement with the SEC, you will need to include the most recent two years’ balances sheets and the most recent three years’ income statements, statements of equity and cash flows, all audited by an independent audit firm registered with the PCAOB. In addition, if the age of the audited financial statements is more than 129 days old, then you will need to file stub period financial statements which are required to be reviewed by your independent audit firm.

Management – A year in advance, evaluate your existing management team and assemble the best team you can, preferably one with transactional or public company experience.

Board of directors – You should begin assembling a strong, independent board and a complete set of corporate minutes and any governance records. Most private companies operate with a board of directors consisting primarily of management and friends or family members. However, most stock exchanges require that the majority of the board of directors of a company traded on their exchange be independent. In addition, the SEC requires an independent audit committee.  

Compensation Disclosure and Analysis – Compensation disclosures have been one of the SEC’s hot buttons over the past several years and as a public company you will need to provide extensive disclosures in your periodic filings. So get the policies and contracts in place prior to going public.

Document material agreements – As part of their due diligence process, the underwriter and their team will be requesting and reviewing all of your material agreements. In addition, you will be required to file as exhibits with the initial registration statement all material contracts outside of the ordinary course of your business. This is where your legal counsel fits in.

Protect your intellectual property – Investors these days need to know what it is you truly own and can defend in court if necessary from patent infringement.

Play defense – This includes anti-takeover provisions and poison-pill takeover measures.
       
Do a risk assessment – Identify any issues that could affect your company and prepare measures to deal with them. This could vary from legal, market, commodity and political risk to workplace issues.

Prepare for periodic filing requirements – As a public company you will need to file quarterly and annual reports with the SEC within the required timeframes. Prior to going public, ensure that you have systems in place to accommodate these requirements.

You will also need to disclose and report on your internal controls over financial reporting. The requirement to provide an independent auditor’s report on internal controls over financial reporting (commonly referred to as 404b) was removed by the Dodd Frank Act for smaller reporting companies as defined by the SEC, but even for smaller reporting companies, management will have to provide their report on the effectiveness of their internal control over financial reporting. The initial documentation of internal controls and ongoing testing required for this report can be quite time-intensive. Some companies are handling this all internally and others are outsourcing but the process can and should be started before going public and not afterward.

Selection of an Underwriter – About six months prior to the IPO, management needs to select an underwriter, who will ultimately market the transaction. Some important considerations in making this selection are as follows:

• Industry expertise
• Size of firm, bigger is not always better
• Their perceived commitment to your company both before and after the offering
• Their backlog of deals, are you going to be number one on the list or number one hundred?

The underwriter will have its own SEC counsel who will work closely with your own. At this point, the registration statement will begin to be drafted. Once filed, the SEC will review the document and provide comments, generally within thirty days. Within a week to two weeks you will then respond to the SEC’s comments and file an amended registration statement. The SEC will review the amendment typically within about a week and potentially provide additional comments. Because of these iterations of comments and responses, the SEC review process can potentially slow down the transaction’s closing. It is not uncommon during this process to establish direct contact with the SEC to clarify their concerns and to help expedite the process, normally handled by outside counsel and auditors with SEC experience.  

The Road Show – One of the last activities for management prior to closing is the road show, where you make presentations to syndicate members, potential institutional investors and retail brokerages. Management’s job in these presentations is to respond to questions and present the company, not hype the deal. While you can get into projections, you should stick to facts as much as possible.

About the author
Greg Pfahl, CPA, is an audit partner in the Denver office of Hein & Associates LLP, a full-service public accounting and advisory firm with additional offices in Houston, Dallas and Southern California. He also serves as a local leader for the alternative energy practice area. Pfahl can be reached at gpfahl@heincpa.com or 303.298.9600.
 

Posted by Guest Contributor at 04:10 PM | Permalink | Comments (0)

Eamon Keene

The Department of Energy (DOE) released a report Wednesday which undertook a strategic review of the use of critical metals in the emerging clean energy space. "Critical Materials Strategy" is a 170 page report which provides a useful overview of the possible metal bottlenecks - and hence investment opportunities - in clean technologies.

The investment thesis which can best benefit from shortages is called "Strategic Positioning". Developed by Patrick Wong, former CIO of Dacha Capital, this thesis "basically looks at parts/processes in the building of any product and looks for ones that are a small % of the overall value yet are critical and cannot be substituted easily." One prominent example is the 50-100g of dysprosium used in hybrid and electric vehicles' motors to allow reliable operation at the 180-200C temperatures reached during driving. 50g dysprosium oxide will set you back $15, a trifling 2,000th of the retail price of a $30k hybrid.

Demand is thus highly inelastic, which bodes well for price in the event of a shortage. Another example is the 4-20kg of gallium and 16.5-110kg of indium required per megawatt of Copper-Indium-Gallium-diSelenide (CIGS) thin film solar. At current prices, these elements make up less than 2% of the installed cost of this flavour of solar thin film. Other examples are the use of terbium in high efficiency linear fluorescent lamps (LFL) and compact fluorescent lamps (CFL) or the use of indium in indium tin oxide (ITO) coatings on LCD screens.

The DOE has helpfully constructed a clean energy criticality matrix to reflect the supply demand balance in the medium term:



Trying to place large bets on these elements is difficult, because so little is produced annually - only around 200 tonnes of gallium, 250 tonnes of terbium, 480 tonnes of indium and 1,300 tonnes dysprosium. There are no futures markets. Hence Dacha Capital's strategy to store them physically. Dacha currently holds some 200 tonnes of the elements in red in the above chart.

Due to their often small proportion of end product cost, it's not pricing but long term security of supply which is of great concern to OEMs. If security of supply can't be guaranteed, then demand may not materialise. Another important point to bear in mind is that to a large degree, these elements are not indispensible. You can listen to Steve Duclos, Chief Scientist for Materials Sustainability, General Electric Global Research, at the DOE report launch here (45 mins in). He sounds quite sanguine: "How does an OEM address this issue? The good news is there are a lot of solutions....often times there's more than one way to serve a customer's needs, and some of those may use rare earths while others may not".

There are technologies coming down the pipeline, such as Organic Light Emitting Diodes (OLEDs), or dysprosium-free permanent magnets, which require no rare earths. Additionally much of the demand growth will be in clean tech, which is subject to substantial regulatory risk. Solar and wind have encountered something of a perfect storm the past year or two - lower electricity demand, lower natural gas prices, and higher cost of capital. As a result they are likely to require government incentives for the forseeable future. The renewable industry was lucky to have secured a year's extension on tax breaks this week. Next year it might not be so fortunate.

From the current perspective investing in critical metals appears a no brainer, but there are many moving parts.

Posted by Eamon Keane at 08:52 PM | Permalink | Comments (0)

by Kidela Capital Group

A rare earth element is like air. It only seems to become important when you are running out.

With China suddenly cutting back on exports while controlling 95 percent of the world’s production of rare earth elements, the United States and other countries suddenly finds themselves vulnerable. This vulnerability has to do with the stability of the supply of these strategic commodities. Countries from around the world have suddenly woken up to the realization that the future of their high technology industries could be in the hands of one supplier – China.

In the USA, this realization comes at a time when the Obama administration has committed the United States to replacing more than a million gasoline powered cars with hybrid and electric cars by 2015. These cars – referred to as “green” vehicles – use A LOT of rare earth elements in their power trains. Reducing the US’s reliance on foreign oil is one motivation for moving to green cars. However, given the current situation, and unless alternative supply sources are found – soon – it appears that the US might be replacing a dependence on one commodity (oil) for reliance on a much more difficult to find and more expensive one (Rare Earth Elements – REEs). And these REEs are almost exclusively available from its main trade rival. Somewhat belatedly the USA has discovered the looming crisis in rare earth availability and has only recently begun to look at securing domestic supplies and rebuilding its supply chain.

“If we don’t think this through, we could be trading a troubling dependence on Middle
Eastern oil for a troubling dependence on Chinese neodymium.”
Irving Mintzer, Senior Adviser, Potomac Energy Fund

American rare earth dominance ends only recently

And yet, it didn’t have to be this way. Given China’s near monopoly in rare earths production it might come as a surprise to learn that the United States was the world’s leading producer of rare earths as recently as 1995.

Until 1948, most of the world’s rare earths were mined in India and Brazil. In the 1950s, South Africa assumed the status of world’s leading rare earth source, but a single mine in the United States eventually overtook South Africa’s production output. From the late 1950s, into the mid-1980s the Mountain Pass rare earth mine in California was the world’s leading producer of REEs.

The deposits at Mountain Pass were discovered in 1950 by two prospectors who found a radioactive outcrop and assumed they had located a source of uranium. The prospectors were disappointed to learn that their claim did not contain uranium but rather flouro-carbonate bastnaesite. This mineral was completely worthless to them but was very interesting to the US Geological Survey. The Geological Survey undertook further surveys and discovered non-radioactive deposit of bastnaesite. One of the two original prospectors who found the deposit worked for MolyCorp (MCP) and he persuaded the company to claim the land although it didn’t exactly know what to do with its rare earth ore. MolyCorp spent the next two decades developing a market for the rare earth elements found in its mine: Cerium, lanthanum, samarium, gadolinium, neodymium, praseodymium and europium.

Throughout the 1970s and 1980s, the Mountain Pass mine produced more than 70 percent of the world’s supply of these valuable minerals. At the peak of its operations, the mine produced 20,000 tonnes of rare earth oxides a year.

However, during the mid-90’s commodity prices bottomed out and the mine found it increasingly difficult to compete with cheaper Chinese imported rare earths. In 1998, after hundreds of thousands of gallons of water carrying radioactive waste spilled into and around Ivanpah Dry Lake, the chemical processing at the mine was stopped and the mine shut its doors. After the California mined closed, China assumed the mantle of world leader in rare earth extraction.

Whether focusing on REEs was a deliberate and clever trade strategy or a happy accident, China now had firm control of the world supply of REEs. And while demand remained stable and China exported its REEs at low price points, the US became complacent. Remaining REE stockpiles around the country were sold off and the US as a whole let the REE market completely get away from them.

Scrambling to catch up

Fast forward to 2010, and we find that the demand for rare earths has risen considerably given all of the recent discoveries of additional technological uses for the minerals. Just as REE demand has started to ramp up, China began to restrict exports. The US, like other nations, is scrambling to react and get back in the game. However, ramping up a dormant industry is costly and requires a great deal of time. Obtaining a mining license and the associated environmental permits can be described as a regulatory equivalent of a very long cross country steeple chase.

“When you stop mining in this country, as investment goes down, expertise
on cutting-edge technologies is exported as well.”
Carol Raulston, National Mining Association.

Restarting a mine is no easy task. Environmental regulations in 2010 are considerably more stringent than they were back in the 1970s, costs are multiples of what they were and there is also the challenge to find the expertise needed to mine and process these elements.

While there may be a number of prospective rare earth element sites around the world, the challenge mining companies have is that they have to pay for and put the infrastructure and processes into place necessary to mine and process them.

Until that time, relying solely on Chinese exports does not seem to be an option for the US any longer. The supply chain for a number of commercial and defense related industries has already begun to break down. A Government Accountability Office (GAO) report from April 2010 identified four rare earth element shortages that have already caused some kind of weapon system production delay.

The US government is examining its options. Some of these include: stockpiling REEs supplies, securing other suppliers from around the world and allocating and redirecting REE purchases for defense and national security purposes.

US mining industry lobbies for domestic support

Given its past dominance, it is argued the US has the reserves and capacity to more than meet its domestic needs. Similar efforts have been undertaken in Canada and Australia and both countries are in the early stages of rebuilding the necessary infrastructure.

According to the U.S. Geological Survey, there are 13 million tons of extractable rare earths in the United States, 5.4 million in Australia, and 19 million in Russia and neighboring countries. In 2009, China had 36 million tons.

The US mining industry is acutely aware of the challenges in restarting the US rare earth industry including securing large amounts of investment capital in this rough economic climate. Other challenges include the need to develop and implement advanced mining techniques, and the need to meet stringent environmental impact stipulations. There is also a pressing need for greater domestic research and development efforts related to refining techniques. The process will be a long one and it is has been expected that the return of the US REE industry to former levels will take a decade or more.

“I would say conservatively the earliest that we could open a mine has to be six to seven years.”
Edward Cowle, President and CEO U.S. Rare Earths

Not your grandfather’s rare earth mine

MolyCorp’s rare-earth separation plant at Mountain Pass, resumed operations in 2007. This year, MolyCorp began using stockpiled rock that was mined under a previous permit and employed new separation technologies. The company expects to sell 3,000 tons of rare earths in 2011 and by 2012. MolyCorp expects to eventually produce 20,000 tons a year, and produce rare-earth products at half the cost of the Chinese. However, the company cannot use the processes used in the mine’s heyday: processes that are both economically and environmentally unsustainable. According to the company, their new techniques are both more environmentally sound and save money, techniques such as eliminating the production of waste saltwater. MolyCorp will use a closed-loop system, converting the waste back into the acids and bases required for separation and eliminating the need to buy and transport dangerous chemicals. The company will also install a natural-gas power co-generation facility on site to cut energy costs.

“We want to be environmentally superior, not just compliant.
We want to be sustainable and be here for a long time.”
Mark Smith, CEO MolyCorp

MolyCorp is upbeat, but there are still challenges in getting the mine up and running. Memories of the poor environmental record are long and environmentalists state that they and the regulators will be looking long and hard at their start up plans. There is also the key problem that processing the raw product is a costly time consuming exercise. MolyCorp claims it spends only about 10 percent of its budget on actual mining. The big cost is in the process to chemically separate the rare earths from the minerals that carry them. Rock is milled first into gravel, then sand, and then must be separated by repetitive mixing with solvents sometimes tens of thousands of times. Rare earth oxides are useful in some industries, but items like magnets require pure metals which requires even more processing and which can produce even more environmentally hazardous by-products.

To help fund its quest to reestablish a rare earth mining industry in the US, MolyCorp went public this year and has also appealed to the US government for loan guarantees, and financial assistance for research and development.

MolyCorp expects to reach its peak production capacity by producing 20,000 metric tons of cerium, lanthanum, praseodymium, and neodymium. The mine will also produce small amounts of other critical rare earths – samarium, europium, gadolinium, terbium, dysprosium, and erbium. This production output may be enough to sustain many of the domestic needs of the U.S. MolyCorp is also planning to re-establish domestic supply chains by partnering with domestic magnet producers.

The US mining industry is poised to ramp up its domestic rare earth production but the question remains; can the US wait for the 10 to 15 years it will take to bring the rest of the REE industry fully online in the US? Even with support from US lawmakers, will the broader industry be able to be internationally competitive? The costs might be too high for some in this industry. For example, Molycorp has to pay some $2.4 million a year on environmental monitoring and compliance, costs. Until monitoring and regulations to curb their negative environmental impacts take effect in China, Chinese companies do not have these same cost burdens.

Much is riding on how the US weathers the next couple of years. Get it wrong and it could prove to be very rough going. Get it right, and the vast majority of people will never know they almost ran out of vital commodities that are at the very heart of the technology that keeps the world humming and their homeland safe. As we type this, there are many dedicated and talented people who are taking great strides to rebuild their country’s REE infrastructure and knowledge base in hopes of once again becoming a world leader in REE production.

Disclosure: No Positions.

Kidela Capital Group Inc. is a diversified research, consulting, communications and investor relations firm. We are dedicated to assisting early to mid-stage companies achieve their goals by delivering a range of innovative and effective value added services.

Related articles:

Will Rare Earths Cripple the Green Economy? Part 1 and Part 2 (Eamon Keane, September 2010)
Rarer Rare Earths Are Not Going To Sink The Wind Power Sector (Charles Morand, Aug 2009)

Posted by Guest Contributor at 02:38 PM | Permalink | Comments (0)

Tom Konrad CFA

Can We Afford Alternative Energy?

Most serious critiques of alternative energy boils down to, "it costs too much."

True, detractors of wind power sometimes point to the number of birds and bats killed, and some people worry that electric vehicles (EVs) are so quiet that they pose a danger to blind pedestrians. 

While such critiques are legitimate in that they are real problems, they can also be alleviated.  Avian fatalities can be greatly reduced by more sensitive siting of wind turbines, and even painting turbines purple.  Nissan has installed an electric noisemaker in the Leaf to warn pedestrians of its approach.  More to the point, such problems do not come close to outweighing the benefits of the technologies.  Bird and pedestrian deaths from collisions with wind turbines and EVs are likely to be much lower than pollution-related illness and death that both technologies reduce by replacing pollution sources. 

Such arguments are more relevant to the question of how we should be pursuing alternative energy, rather than the much more important question of should we be pursuing alternative energy at all?

"Does Alternative energy Cost too Much?" is a much more relevant question.  If an alternative energy technology really costs "too much," then we should probably be spending our money on other methods of reducing pollution, such as research into more affordable alternatives, or ways to clean up the mess that "cheap" conventional energy leaves behind, such as Carbon Capture and Sequestration.

The problem with the cost question is that not only does the answer depend on a large number of assumptions (interest rates, where and when the power is delivered, and the changing costs of fuel, feedstock, and operating and maintenance costs.)  We also need to decide what "too much" means. 

What Do We Want Energy For?

Before we try to answer the cost question, we need to take a step back, and ask if it's really the right question.  What do we need energy for?  A modern economy runs on energy, but it's the services that energy provides that are important, not the form of energy itself. 

Take a new home as an example.  We can heat it with natural gas, wood pellets, fuel oil, electricity, solar thermal panels, or even passive solar design.  When we decide between this multitude of options, we're not interested in the cost per Btu, but rather how much it will cost us to keep our home comfortable for the year.  We may also be interested in the potential variation from year to year: an average heating cost of $1,500 per year may be desirable, but not if the cost is low most of the time, and it occasionally costs $15,000 in a single year because of volatile fuel prices or unreliable equipment.

Which fuel can keep the home warm at a dependably low cost depends as much on the design and construction of the house as it does on the fuel needed to heat it.  Generally, electric heat is the most expensive way to heat a home, but a well-designed passive solar house needs so little added heat to remain comfortable that a pellet stove may end up being a more expensive option because the heat loss through the flue even when the stove is not in use may cost much more than the little bit of electric heat that will be needed on the coldest of winter nights.

The example of a home shows that the design of a house is at least as important as the choice of heating fuel in determining the overall cost of maintaining comfortable winter temperatures. 

It Costs Too Much for What?

When we assess the true cost of alternative energy, we also need to assess system design. 


Consider electric vehicles.  As the chart above shows, the fuel cost for an electric vehicle (Battery EV) is much lower than the other alternatives.  Yet any serious look at the life cycle costs of electric cars shows them to be uneconomic under any reasonable assumptions of daily commutes and gasoline prices.  Each mile of range for a battery electric vehicle durable enough to last ten years will cost between $150 in the most optimistic case, and $300 to $400 under more realistic assumptions.  If the car is charged at most once per day (at night), that mile of range will be used for at most 300 miles of driving per year.  If gasoline is $5 per gallon, and electricity is 10¢ per kWh, that will produce 10¢ fuel savings per mile (over a standard hybrid), or at most $30 of annual fuel savings.  If we assume the batteries last for ten years under these very strenuous driving conditions, we can come up with a decent 20% Internal Rate of Return (IRR), but under more realistic assumptions we'll get our money back (0% IRR) over ten years, or even end up losing money.

While we can conclude that electricity is too expensive a way to power a car, electricity can make sense in other transportation systems.  The number of times the battery is charged per day (battery cycles) is crucial.  While multiple charges per day are impractical for most commuters, multiple charges may be practical for fleet vehicles with regular routes.  Electric trains and trolley buses can bypass the expense of batteries all together by drawing their power from lines along their routes.  A Battery-electric bus with this capability would be able to drive on ordinary roads for part of its route, recharging while still on its route when external power from overhead lines was available.



In other words, the electric car paradigm is the problem.  Electric transportation, with the right paradigm, can make a great deal of sense despite the high cost of batteries.

Wind and the Grid

The dominant paradigm for electric power holds that electric consumption, or demand cannot be influenced by the utility, so electric utilities should manage their generation assets to meet that demand.  Furthermore, electric transmission is built to bring power from generation (which can be placed nearly anywhere there is water for cooling and the neighbors are unlikely to protest.) 

Wind and Solar power do not fit well into this paradigm, because generation from solar and wind depend on the weather and cannot be controlled by the utility.  These problems are exacerbated by the lack of robust long distance transmission, which would reduce the variability of wind and solar by diversifying away local variations in weather.

Therefore wind and solar are square pegs that do not fit in the paradigm's round holes.  For those who accept the paradigm, solar and wind are "unreliable," and require massive investments in dispatchable generation that can replace their output at any time.  Some opponents even claim that wind power does not lead to any decrease in pollution, because wind forces natural gas and coal plants to cycle more often in order to compensate for the increased variability of wind.  Coal power plants are particularly bad for backing up wind because they operate best a constant power, and a coal-only system will have higher emissions when wind is added.

Such critiques of wind power's variability implicitly assume that nothing can be done to make the electric system more accommodating to wind, when in fact there is much that can be done.  One widely quoted study (paid for by the natural gas industry) showed an increase in pollution per MWh of generated electricity in Colorado.  But Colorado is currently in the process of decommissioning or converting to natural gas most of the coal plants that caused the extra pollution.  With this change to the system, the pollution reducing benefits of wind will be much more strongly felt. 

Even without replacing coal plants, the grid can change to better accommodate wind power.  A May 2010 report from the National Renewable Energy Laboratory, the Western Wind and Solar Integration Study (WWSIS), looked at the system improvements needed to allow 35% wind and solar integration in the Western grid.  Many of these require changing the current paradigm of meeting local demand with local resources. 

While the WWSIS does call for increasing the flexibility of dispatchable reserves, most of the recommendations take the form of changing the paradigm. 

• The areas over which power supply is aggregated to meet demand, called balancing areas, should be expanded.
  
• The expansion of balancing areas should be supported by more robust transmission.
  
• The use of more accurate weather forecasting will not reduce the variability of wind or solar, but it can make them seem more reliable, since they will be available when expected.
  
• New and existing demand response programs should be used to accommodate demand to the increased variability.  In other words, electricity supply cannot solely change to match demand, demand must also change to accommodate supply.

With these changes to the paradigm, the integration of wind and solar are not costless, but the cost is much lower than it would appear from the perspective of someone operating only within the old paradigm.

Implications for Investors

Why should investors care? 

First, any change in the prevailing paradigms to incorporate alternative energy will reduce the future cost of alternative energy.  If most investors do not yet see beyond the current paradigm, the market is probably underestimating the potential for alternative energy.

Second, stocks involved in the transformations necessary to shift paradigms are likely to be unanticipated winners.  In the case of transport, alternative transportation stocks are likely to greatly outperform efficient vehicle stocks as our transportation paradigm shifts away from the car to other forms of transportation that can better leverage the advantages of electric drive.  In the case of the electric grid, smart grid stocks and electricity transmission stocks may also reap unanticipated windfalls as solar and wind increase their share of electric generation.

DISCLOSURE: None.

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

Posted by Tom Konrad at 01:40 AM | Permalink | Comments (13)

David Gold

The stimulus bill along with the $31B cleantech element focused on grants and loan guarantees through the Department of Energy was passed into law over 18 months ago.  About a year ago I wrote about how the cleantech stimulus was not very stimulating to our economy. I suggested at that time that the goals of stimulus and of long-term investment are largely incompatible, and the evidence is bearing that out.  At the time, I felt like a bit of an outcast for having such a critical view and yet being an ardent supporter of clean technologies and the need to wean our nation off fossil fuels. On the anniversary of my first post on this topic it seems appropriate to take a fresh look at where things stand.

While stimulus supporters and the press love to focus on the selection of award winners for grants and loans, funds appropriated but sitting in the U.S. Treasury have zero potential to stimulate the economy irrespective of whether a winner has been selected.  As of September 10, 2010 and about 19 months after the stimulus became law, according to the Obama Administration’s Recovery Act web site, recovery.gov, the Department of Energy had paid out just over 23% of the $31B of funds appropriated to the department for various cleantech activities under the stimulus bill.  At that rate it will take roughly six years for all funds to be dispersed. According to DOE’s more detailed numbers, in the past 12 months, the department has awarded (i.e. selected winners) for about $14B in grants.  Less than 10% of that amount has actually been disbursed to date.  In addition, there are over 730 awards representing $1.2B that were made in 2009 for which no funds have been paid out at all.  Many of these likely still are trying to get their contracts in place, an often-arduous process that can take many months.

In the Smart Grid segment of stimulus, where stimulus actually slowed spending because utilities stopped work to wait and see whether they would win a grant, less than 8% of the over $4B appropriated has been paid out.   People in the utility industry who have received grants have told me about calls from DOE staff “virtually begging them” (in the words of one source) to spend money against the grants that have been awarded more quickly.  In other words, the government seems more concerned about optics of getting the money spent than having it spent wisely.

As stated on recovery.gov, the goal of the Recovery Act was to “… jumpstart our economy, save and create millions of jobs, and put a down payment on addressing long-neglected challenges so that our country can thrive in the 21st century.”  It’s amusing that the recently released Administration Report on the Recovery Act emphasized that its focus would be only on “the ‘Reinvestment’ part of the Recovery Act” and completely avoids any comment on the stimulus’ impact on the economy or jobs.  Seems like quite a testament to failure of the recovery spending to provide stimulus in any meaningful way.  

If the focus of the cleantech “stimulus” was really on reinvestment, then the government would be careful and diligent about naming grant/loan winners rather than rushing to make awards as fast as possible (which is motivated by stimulus).  Yet, while money has been slow to flow from DOE, award winners have been selected for virtually all of the $31B from the recovery program.  As I said earlier this year in a Cleantech Forum debate with DOE Renewable Energy Grants Advisor Sanjay Wagle, the government is simply incapable of both getting grant/loan money out the door quickly and spending it wisely.  I still maintain that programs like Cash for Clunkers and energy efficiency tax credits (whether you agree with the specific policy or not) have a rapid positive impact on the economy.  The evidence on the government’s own recovery site seems to bear that out:  by comparison, 77% of all tax-related stimulus benefits (only some of this cleantech-related) have been paid out to recipients in the form of reduced tax obligations.   While one can debate the degree of impact those funds may have, funds awarded but not transferred from the federal treasury have no chance of stimulating the economy. 

Much of the press focus on the cleantech stimulus has been on the Advanced Research Projects Agency – Energy (ARPA-E) funding into early stage cleantech technologies with “game changing” potential.  The government has long played a role in funding early stage research and such a program has worthy goals.  Yet, ARPA-E represents only about 1.3% of DOE’s stimulus funding with most other funding going to much less disruptive grant/loan programs in which the government is trying to play business person and has a notoriously bad track record of doing so.  And ARPA-E’s appropriation for 2011 is likely to be less than 2010 with the House number passed at a 50% reduction.   

The unfortunate reality is that by using the stimulus bill as a vehicle for pushing funds through the slow and ineffectual government bureaucracy rather than focusing on stimulative policies that would have had greater impact on the economy, the Administration may very well have lost the opportunity to enact macro-economic policies affecting the cost structure for energy that could have had much more far-reaching and long-term positive impacts on the goal of reducing our consumption of fossil fuels. I believe time will bear out that many of the grant/loan awards made in such a hurry will turn out to be a waste of money.

Conversely, the macroeconomics of energy are certain to change as finite fossil fuels continue to be consumed… it is only a question of over what time period. It is that reality which is driving the private sector investments that must be the backbone of any sustainable change in our energy economy.  Careful federal policy around carbon-based fuels could have provided greater visibility into the time frame and degree of increase in the market cost of fossil fuels even if there was a very slow phase in of such a policy to avoid collapsing the economy.  The result would have been greater clarity of when (and shorter time horizons for when) clean technologies could become cost competitive.  This would have resulted in a corresponding increase in investment by the private sector in building those businesses to profit from the impending change.  And that would have been extremely stimulative to our economy without needing to borrow a penny to fund it. 

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 11:41 PM | Permalink | Comments (0)

Eamon Keane

This is Part Three of a three part series based on a rare earth elements (REE) review which is available for download at slideshare, where references can be viewed.
Part 1 is an introduction to REEs. Part 2 analyzes REE consumption and refining and Part 3 looks at how REEs might affect the green economy.

There have been several forecasts made for future demand. Approximate data was derived from Byron Capital Market’s own estimate [18] and the data contained in Oakdene Hollins’ May 2010 report “Lanthanide Resources and Alternatives” for others [34]. Figure 15 displays these demand forecasts in the context of historic demand, using global mine production as a proxy.

Figure 15: Forecast Global REE Demand 2010-2014


From Figure 15 it can be observed that while the range of projections is 160-200kt/year, if demand follows its historic pattern, it would only reach 140kt/year. Faster demand growth is expected principally due to the requirements of the “green economy”.

Based on their respective assumptions about which mines became operational, and those mines’ constituents, Figure 16 shows the respective surpluses and deficits forecast.

Figure 16: Surpluses and Deficits by Element in 2014

Terbium and dysprosium are displayed on their own in Figure 17 for clarity.

Figure 17: Surplus and Deficit for Dysprosium and Terbium in 2014


From Figure 16, it can be seen that one element about which hands need not be wrung is cerium. This is good news for, from Figure 9, glass additives, automotive catalysts and polishing powder. In all but Lynas’ conjecture, lanthanum will be fine also. This is reassuring for NiMH batteries, mischmetal for flint and ceramics.

But what about those pesky elements terbium and dysprosium? GWMG, for example, forecasts a deficit of 800 tonnes for dysprosium, or half what is consumed currently. IMCOA projects a deficit of 200 tonnes of terbium, or 67% of 2010 demand. Will they strangle the green economy in its crib?

6.     Will the shortfall strangle the green economy?
6.1.          Dysprosium
Dysprosium is essential to give neodymium magnets resistance to demagnetisation at high (120-180°C) service temperatures. The seminal 1984 paper announcing neo magnets was recently republished [40]. Figure 18 shows the demagnetisation curve contained in [40]. The effect of dysprosium is to weaken the magnet slightly (y axis), but to increase its intrinsic coercivity significantly (x axis). In enclosed spaces where it is difficult to cool – such as motors in cars – this is very important. However there is still uncertainty as to the mechanism by which dysprosium imparts this higher intrinsic coercivity [48], and a greater understanding may allow for reduced use of dysprosium.

Figure 18: Demagnetisation Curve With and Without Dysprosium

6.2.          Rare Earths and Wind
Vestas, which had a 36% market share of the European 2010 H1 offshore installations [49], is stated by the New York Times to use dysprosium in its upcoming direct drive model [50]. However this is likely a design oversight, because in an excellent article at renewable energy world [51], it is stated of wind generators:“operating temperatures inside the generator rotor must be limited to a maximum of 80°C in order to retain magnetic properties”. Dysprosium will boost this range to 120-180°C, and thus the article implies that other operators do not require dysprosium, indicating that Vestas can adapt.

Direct drive generators increase the reliability of turbines as they reduce the number of parts by up to 50% [52]. This is very useful for offshore turbines where maintenance is costly and there are narrow weather windows for servicing. Whether Permanent Magnet Generators (PMGs) increase power efficiency is debatable. Adolfo Robello of Indgar’s study comparing traditional DFIGs with the permanent magnet variety concluded [51]: “The study was performed for a client and results clearly indicated that the DFIG combination showed superior total efficiency performance over the entire speed range.” Nevertheless, PMGs as an engineering solution are very elegant and more compact than their counterparts. The Chief Technology Officer of Siemens thinks they are “the future” [52]. However wind companies are all fully aware of supply issues, and are reluctant to move to China as they would be forced to partner with a Chinese company.

There are many figures quoted regarding how much neodymium a wind turbine contains. I am going to go with what renewable energy world [51] says:

“Industry sources quote, for instance, that the 60 kW fast speed electric motor fitted in a Toyota Prius hybrid vehicle contains at least 0.5 kg of NdFeB magnet material. For a PM-type generator fitted in a 5 MW direct drive wind turbine, these same sources quote a figure of up to 200 kg of NdFeB per MW power rating, around one tonne per machine. This is a much higher quantity compared to the relatively light and compact fast speed systems.”

Two-hundred kg NdFeB per MW translates into approximately 70kg Nd2O3/MW, or 70 tonnes per GW. Up until now, very few turbines have used permanent magnets, with demand of only 3 or 4 tonnes [17], suggesting present demand of less than 100MW per year. Figure 19 shows the historical and projected wind turbine additions [53, 54]. In 2014, if half the wind turbines were PMG, a requirement of 2.1kt/yr of neodymium oxide would be required (70*30). From Figure 9, this is 10% of current neodymium production capacity. Wind turbine demand for neodymium is highly unlikely to have a 50% market share by 2014, as it takes time to build factories and road test the technology. 20% may be a realistic figure, which only entails a requirement of about 1kt/yr. Furthermore, there is always a backstop technology – the traditional DFIG – which can, and I argue will, step in should any shortfall in neodymium appear.

Figure 19: Annual Wind Additions


6.3.          Rare Earths and Hybrid/Electric Cars
From the quote above [51], electric vehicles require “at least 0.5kg NdFeB” for a 60kW motor. Using 0.6kg NdFeB for a 60kW motor, this translates to a requirement of 10g NdFeB/kW, or 3.5gNd2O3/kW. The limiting material here will be dysprosium, which is added at about 5% by weight [55]. Hence this translates to a requirement of 0.5g Dy2O3 /kW (600*0.05/60). 2009 production capacity of 1.6kt dysprosium would hence allow for approximately 3.2billion kW of motor (1.6*1000*1000*1000/0.5). A million cars, at an average 70kW motor, require 0.07bn kW, or 2% of dysprosium supply. Figure 20 shows the historical sales of hybrid electric vehicles [56]. In 2014, electric sales of 3.5m vehicles may require 7% of dysprosium production capacity.

Figure 20: Historical and Projected Electric Drivetrain Sales

Furthermore, Hitachi, on September 10th 2010, announced they have developed an alternative motor with ferrite which “works at almost the same performance level - but with power consumption running at 10 percent lower” [57].  It still has to be scaled up to the 50kW size, but in time it will. Additionally, there is the same technology that was used in the EV-1 and is used in the Tesla Roadster [58] -  the humble AC motor.

6.4.          Rare Earths and Energy Efficient Lighting
In fluorescent light bulbs, the red, green and blue phosphors contain rare earths. The red phosphor is almost entirely yttrium and europium. The green phosphor contains approximately 10% terbium, while the blue phosphor contains less than 5% europium [6]. The DOE has introduced a standard for fluorescent lightbulbs. Its analysis shows that at most 11% of global terbium, europium and yttrium supply would be required to meet the standard in the United States in 2012 [6].

This is a significant amount, in the region of 30 tonnes terbium and 30 tonnes europium, which will clearly be in short supply if Figure 17 is correct. A more detailed analysis of what sector has the greatest utility for a short supply is required. From Figure 9, it can be seen that fluorescent lamps account for half of phosphor REE demand, with the rest being screens. It thus seems very likely that energy efficient lighting will have to curtail its projected rapid growth, at least until a mine with high enough terbium and europium is found. Neo Materials’ CEO suggests they have found just such a mine, with “very high concentrates of terbium and dysprosium” [59].

7. Conclusion
A brief survey of the rare earth landscape was undertaken. Following this it is shown that concern over rare earths limiting the development of wind and electric vehicles is overdone because there are clear alternatives to neodymium magnets. A shortfall of terbium and europium, however, may slow adoption of energy efficient lighting.

Comments and corrections are welcome. 
References are available here.

Posted by Eamon Keane at 09:16 AM | Permalink | Comments (0)

Eamon Keane

This is Part Two of a three part series based on a rare earth elements (REE) review which is available for download at slideshare, where references can be viewed.  Part 1 is an introduction to REEs. Part 2 analyzes REE consumption and refining and Part 3 looks at how REEs might affect the green economy. 

So where do all those REEs go? Figure 8 shows the estimated flows for 2008 [15]. Although Chinese consumption is shown as 60%, this is only for the raw elements. Some of the downstream products will still be exported to the west. Japanese industry is a large consumer of REEs, and so they are almost beside themselves over the REE situation [41].

Figure 8: 2008 Estimated Rare Earth Flows

Figure 9 presents a chart I made showing the estimated 2010 global production capacity for each element (from Byron Capital Market’s John Hykawy [18]), together with the rare earth usage demand sectors projected by Lynas for 2010 [15]. You'll have to click to enlarge, a direct link to the photobucket version is here. Christian Hocquard, an economist at BRGM, put together an excellent and comprehensive presentation on rare earths in May 2010 [15]. The breakdown by application for magnets and phosphors comes from that presentation.

Figure 9: Indicative rare earth flows for 2010

Figure 10 shows the data in brackets on the right hand side of Figure 9 in a more readable fashion [15].

Figure 10: REE Composition by End Use


Figure 11 shows the breakdown of ores for most elements for currently producing mines and the assays for mines which are mostly still fishing for capital [18, 39].

Figure 11: Approximate Percentage Content of Current and Prospective Ores

You may have to squint a bit to see the components of dysprosium, terbium and europium. They are shown more clearly in Figure 12.

Figure 12: Europium, Terbium & Dysprosium Content of Current and Prospective Ores


Looking at Figures 9-12, a couple of observations are evident:

·         If the demand for magnets were to double, from the current 31.9kt to 63.8kt, and a 5% dysprosium content is assumed, additional dysprosium demand of 1.6kt would be required. The ore with the highest dysprosium content is Dubbo, at 2%. Therefore, in order to satisfy demand, the other 98% must be mined also. In the case of Dubbo, this would release onto the market: 16kt lanthanum, 30kt cerium and 11kt neodymium. Hence a market for an additional 50% of cerium would have to be found. Based on the prices in Figure 9, while dysprosium provides 13% of the mine’s revenue, cerium provides 31%. So, for the mine to be viable, either growth in the use of cerium is required or else the price of dysprosium must appreciate. For example, if the price of dysprosium triples to $900/kg, then the share of dysprosium in overall revenue increases to 31%.
 
·         If the demand for phosphors doubles, from the current 8.1kt to 16.2kt, and a 4.6% terbium content is assumed, additional terbium demand of 373 tonnes would be required. The only mine with any appreciable amounts of terbium is Nechalacho, at 1.8%. Nechalacho only plans to produce 5kt [18]. Hence this would provide 90 tonnes of terbium per year (5,000*0.018). The breakdown of revenue is better for the specific ore at Nechalacho. This is shown in Figure 13. That still leaves 283 tonnes of terbium required (373-90). The next highest terbium mine content is Dubbo, at 0.3%. For Dubbo to output 0.283kt of terbium, a market for a stonking 94kt of other rare earths is required, or about 75% of 2009 demand.

Figure 13: Nechalacho Revenue Breakdown at September 2010 Prices


4.     Refining
Bertram Boltwood, 1905 [45]:

“In point of respectability your radium family will be a Sunday school compared with the rare earth elements, whose chemical behaviour is simply outrageous. It is absolutely demoralizing to have anything to do with them”

Refining (or reduction in mining lingo) is very important. Figure 11 shows the composition for 14 different ore compositions. Each one requires an individual, detailed flow sheet, their own reagents and refining processes. An investor could do well to read the book “Extractive Metallurgy of the Rare Earths” [11]. This is not your father’s extractive metallurgy. Whereas with gold, for example, you might just add a bit of borax and soda and out it comes, rare earths are much more troublesome. I won’t bore you with the details. Figure 14 shows an example flow sheet. It is dirty, requires lots of water, heaps of chemicals and is very capital intensive. Capital intensive processes can be prone to cost overruns and delays, which should be borne in mind for any companies with mine-to-market strategies.

Figure 14: Kvanefjeld Flow Sheet [20]


Continued in Part III. References are available here.

Posted by Eamon Keane at 04:47 PM | Permalink | Comments (0)

Eamon Keane

This is Part One of a three part series based on a rare earth elements (REE) review which is available for download at slideshare, where references can be viewed. Part 1 is an introduction to REEs. Part 2 analyzes REE consumption and refining and Part 3 looks at how REEs might affect the green economy. 

Rare earths captured the popular imagination a year or two ago. Since then a bonfire of reports, presentations and analyses have been published, with many generating more consulting fees than light [1-45]. Figure 1 shows the uptrend in google entries for “rare earth elements”, and obviously if it doesn’t exist on google, it is irrelevant.

Figure 1: Google results for “rare earth elements”


The rare earth story is compelling. By near unanimous consent, the narrative is that REEs are “essential” [38], “indispensible” [30], or “crucial” [37] to every aspect of the green economy from wind turbines to electric vehicles to energy efficient lighting. Further spice is added by those who see REEs as the “New Great Game” [2]. Many military components require REEs from the M1A2 Abrams tank’s samarium cobalt magnet for navigation to the DDG-51 Hybrid Electric Drive Ship Program’s reliance on neodymium magnets for electric assist propulsion [10]. And China controls the supply. This leads to much hand-wringing, some based on mercantilist sentiment, others geo-strategic, and yet more on envy of China’s autocratic regime.

Figure 2: Top 6 Rare Earth Elements [46]    Figure 3: Game Over for Whom? [47]


2.     Rare Earth Backrgound
A proviso is required for any figures shown here. Rare earth statistics are always “estimated”, the data is sketchy (not least because some comes from China), and so most data comes with a +-15% band. Figure 4 shows the regions where supply currently comes from [31, 33].

Figure 4: Currently Producing Regions of the World (i.e. Not America)

Figure 5 shows a picture from Google Earth of the mine at Baiyun-Obo [9]. The surrounding area has become poisoned, as the ever reliable Daily Mail reports [5]:

“I was the first Western journalist to set foot inside the mine….. the new-found wealth has come at an appalling environmental price, turning the town and the surrounding areas into a poisoned, arid wasteland littered with unregulated refineries where the rare-earths are extracted from rocks…The land is scarred with toxic runoffs from the refining process and pock-marked with craters and trenches left by the huge trucks that transport the rocks across ice and mud. Rusting machinery lies scattered along the valley floor, giving it the appearance of a war zone.”

China has used this environmental damage as a pretext for stricter export quotas. Production quotas for environmental reasons might be entertained by the WTO, however export quotas are not. In previous years, as a result of the cheaper costs of Chinese REE production, and due to China flooding the market, other REE operators shut down. This is shown in Figure 6 (two data sets were fused: 1986-2002 from [11] and 2002-2009 from [44]).

Figure 7 shows Chinese production along with the declining export quotas. A figure for 2010 expected demand from the west is also shown [39, 42]. It is important to stress that the Chinese export quota is just for the upstream metals. Downstream, processed materials such as Neodymium-Iron-Boron magnets can still be exported. This is part of an effort to encourage foreign manufacturers to locate in China. As Figure 7 shows, however, this year there may be a shortfall in demand for raw REEs in the West. This will be met, at least in part, by drawing down stockpiles [12]. Additionally, some enterprising Chinese may smuggle some out of the country.

Figure 5: Baiyun-Obo, the Black Heart of the Green Economy?


Figure 6: Global REE Production 1986-2009


Figure 7: Rest of World Demand for RE Salts, Oxides & Metals


Continued in Part II..  References are available here.

Posted by Eamon Keane at 08:38 PM | Permalink | Comments (0)

Tom Konrad CFA

Not many self-proclaimed Greentech experts know what they're talking about, and fewer can effectively make the case of Greentech investing.

When I attended the MoneyShow last week to moderate a panel, I also stayed around to see what people who held themselves out as Greentech or Cleantech experts were saying.  Since MoneyShow attendees do not pay to get in, all the revenue comes from presenters.  I was asked to moderate my panel because I made it a condition of helping them advertise the show, but many of the presenters I saw were on stage simply because they had something to sell, often a newsletter.  A few had been asked there to flesh out the program, although it was not always clear which was which.  My best guesses as to whether the speakers paid to present are listed below.

In my decision about which sections to attend, I simply tried to attend as many sessions in the show's Cleantech/Greentech track as possible.  All of these presenters chose to represent their presentations as belonging in the Cleantech/Greentech track, although for some it was a real reach.  Here they are, in the order I attended their presentations:

Expert: Susan Preston
Affiliation: CalCEF Clean Energy Angel Fund
Position: Manager and General Partner
Paid Appearance: Probably Not
Cleantech Expertise: Good
Selling: Her book: Angel Financing for Entrepreneurs: Early-Stage Funding for Long-Term Success
Notes: Ms Preston did a general presentation during the opening ceremonies making the case that we should not only invest in Cleantech, but that we needed to pressure government to provide more support for the sector.  She made a strong case that Cleantech was the right thing to do, but did not do as well making the case that Cleantech is a good investment.  I thought her message about needing government support undermined her case for making Cleantech investments.  After all, why would we invest in a sector that needs more government support than it is already getting?

Expert: Jackie Ann Patterson
Affiliation: Back-Testing Report
Position: Trader
Paid Appearance: Probably
Cleantech Expertise: Clueless
Selling: Reports about technical trading strategies.
Notes: I attended Ms. Patterson's session because it was titled "What's Driving CTIUS?" which is the market index underlying the Powershares Cleantech Portfolio ETF (PZD).  I was hoping for a discussion of the relative performance of Cleantech sectors, but instead she did some superficial technical analysis on the stocks in the index.  She also did not think Cree (CREE) the LED lighting leader, had anything to do with Cleantech, which is why I label her Clueless when it comes to the sector.

Expert: Elliot Gue
Affiliation: Personal Finance and The Energy Strategist
Position: Editor
Paid Appearance: Probably
Cleantech Expertise: Weak
Selling: Newsletters.
Notes: This presentation was about oil, and had no reason to be listed as Cleantech/Greentech.  Although Mr. Gue claims to "cover" Alternative Energy, he did not show much sign of knowing much about it, and seemed to conflate Alternative Energy with Solar, a common novice's mistake.  He talks a good line about oil companies, so I decided to look into the one oil stock he recommended shorting - Diamond Offshore (DO).  The reason he gave was that the company had most of its platforms in the Gulf and would soon have to cut its dividend, sending income investors to one of his favorite picks, SeaDrill (SDRL).  That sounded reasonable to me, until I took a look at DO and found out they had already cut their dividend significantly on Apr 22 and July 22.  It's pretty easy to predict a dividend cut when the cut has already happened.

Expert: Paul Dravis
Affiliation: Dravis Group LLC
Position: Consultant
Paid Appearance: No
Cleantech Expertise: Good
Selling: Nothing.
Notes: Mr. Dravis's approach to Cleantech is a good one: look for supporting industries that have less technological risk than the high profile start-ups.  He currently likes Cosan (CZZ), SQM (SQM), General Cable (BGC), and Power-One (PWER) almost all of which I've had good things to say about in the past, for similar reasons (see here, here, and here).  The only one I have not talked about is SQM, which is not green enough for my taste (admittedly a fairly high bar.)  That said, I was more impressed by his feel for market timing than his industry knowledge, so much so that I asked him to send me his weekly newsletter, the Dravis Wealth Advisor, which he does not charge for.  If you're interested in giving his newsletter a try, send him an email at p a u l at d r a v i s dot n e t.  Like me, he's currently quite bearish, so don't rush out to buy his picks unless you're also prepared to hedge them.

Expert: Neil George
Affiliation: Stocks That Pay You
Paid Appearance: Probably
Cleantech Expertise: None
Selling: Newsletters
Notes: Neil brought out the old saw about Alternative Energy (which he also conflates with the highest-profile subsector, solar) being a bad investment because he does not like energy generation that's "heavily subsidized."  Then, in the very next breath, he recommended Nuclear Energy.  In the US, Federal nuclear subsidies account for about 21% of the cost of Nuclear Energy, while Federal Solar subsidies account for about 12% (2006 data.)  State subsidies are probably higher for Solar, but vary by state.  In any case, one thing Nuclear energy clearly isn't is unsubsidized.   One thing Neil George clearly isn't is logically consistent.

Expert: Jeffrey Cianci
Affiliation: Green Science Partners
Position: Cheif Investment Officer
Paid Appearance: Unknown
Cleantech Expertise: Very Good
Selling: His Fund - Green Science Partners (but only to accredited investors)
Notes: Jeff bases his investment decisions on a combination of deep analysis of both the technology and technical analysis of the stocks in question.  He looked at a large number of stocks in his presentation, but his high-velocity trading strategy is such that I don't know if any of the stocks he liked will still be among his favorites a week from now.  In many ways, his investment strategy is the exact opposite of mine: he tries to figure out what the best technology is in any sector, and times his buying and selling using technical indicators in combination with earnings projections.  In contrast, I try to find picks that have solid earnings based on tried-and true technology, and can be bought solely on the basis of fundamentals.  Despite our contrasting approaches, he gave me the impression of someone who knows the sector at a deep level.

Expert: Peter Cox
Affiliation: Greentech Opportunities
Position: Analyst
Paid Appearance: Probably
Cleantech Expertise: Good
Selling: Newsletter
Notes: Peter made the best, most concise case for investing in Cleantech that I heard at the entire show.  He also had a couple of interesting wind picks: Western Wind Energy (WNDEF.PK, WND.V) and Catch the Wind (CTW.V), a pair of Toronto Venture listed firms.  I have a small position in Western Wind, but until his talk, I did not know that Catch the Wind was public, but I'd heard of it and was already enthusiastic about their technology.  Of all the paid newsletters being sold at the show, Greentech Opportunities is the only one I'd sign up for if they were all free.

DISCLOSURE: Long BGC,WND

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 10:09 AM | Permalink | Comments (1)

John Petersen

    "A man's got to know his limitations ..."
                Inspector Harry Callahan
                    Magnum Force, 1973

Last Thursday the Department of Energy kicked-off a new effort "to develop its first-ever strategic plan for addressing the role of rare earth and other materials in energy technologies and processes" by issuing a Request for Information on resource availability and supply chain security. The information categories covered include short- and long-term:

• Demand forecasts for energy applications and competing issues;
  
• Supply issues including investment trends, processing requirements and future research;
  
• Technology applications, required quantities and purities, processes and innovation;
  
• Costs, availability and impact on energy application costs;
  
• Substitutes for constrained materials;
  
• Recycling opportunities, capacities and challenges;
  
• Intellectual property constraints; and
• Additional information.
  

While it's unsettling to learn that the DOE has adopted major policy initiatives in the past without truly understanding the raw material supply chains needed to support them (think corn ethanol), even a belated recognition that resource constraints matter is better than blind adherence to the presumption of plenty – the blind faith that all life's necessities and most of its luxuries will be available in quantities that are limited only by borrowing power.

A recurring theme in my writing is that six billion people are working very hard to earn a small piece of the lifestyle that 600 million of us have and often take for granted, and that the greatest challenge of this century will be finding relevant scale solutions to persistent shortages of water, food, energy and every imaginable commodity. The challenge is even greater in alternative energy because so many green technologies are voracious users of scarce raw materials.

At a recent conference in Shanghai my friend and colleague Jack Lifton presented a table that summarized global mineral production over the last five years. The following is an abbreviated version that focuses on key minerals for alternative energy, shows annual production for the last five years in thousands of metric tons, and calculates our per capita share of mineral production in 2009 based on a global population of 6.8 billion people.

MINERAL	2005	2006	2007	2008	2009	Per Capita
Crude Oil	4,208,310.0	4,206,900.0	4,201,300.0	4,249,550.0	4,189,210.0	616 kg
Raw Steel	1,130,000.0	1,170,000.0	1,340,000.0	1,330.000.0	1,100,000.0	162 kg
Aluminum	31,900.0	33,100.0	38,000.0	39,000.0	36,900.0	5.4 kg
Copper	15,000.0	15,100.0	15,400.0	15,400.0	15,800.0	2.3 kg
Lead	3,520.0	3,650.0	3,770.0	3,840.0	3,900.0	1.6 kg
Nickel	1,460.0	1,560.0	1,660.0	1,570.0	1,430.0	570 g
Cobalt	58.6	63.4	65.5	75.9	62.0	201 g
Uranium	41.5	39.3	40.7	42.7		6 g
Lanthanum	32.5	32.9	32.9	32.9	32.9	5 g
Silver	20.8	20.4	21.1	21.3	21.4	3 g
Neodymium	18.9	19.1	19.1	19.1	19.1	3 g
Cadmium	20.1	19.9	19.4	19.6	18.8	3 g
Lithium	21.5	24.4	25.8	25.4	18.0	3 g

I have a hard time reviewing global mineral production statistics and accepting the proposition that it will ever make sense to use a 170 kg lithium-ion battery pack in a GM Volt or a 200 kg battery pack in a Nissan Leaf. The bulk of the weight may be relatively plentiful steel, copper and aluminum, but even eight to twelve kg of lithium is massive for a non-recyleable product in a world that only produces three grams of lithium per person. While companies like FMC Corporation (FMC) and Chemical & Mining Co. of Chile (SQM) can significantly increase their production if enough money and time are spent developing new mines, there is no meaningful chance that electric vehicles will ever reach "relevant scale" using current technology. Under the circumstances, I have to wonder whether a lithium-ion business model that depends on substantial short-term cost reductions isn't at least a little optimistic. The bottom line seems to be that we've forged an energy policy without questioning our assumptions and are destined for disaster when the engine of gee-whiz technical feasibility hits the brick wall of natural resource constraints.

The battery industry has known for years that NiMH chemistry was seriously constrained by the availability of the rare earth metal Lanthanum. Over the next couple years we will have to come to grips with the fact that even more daunting constraints are looming for the rare earth metal Neodymium, which is essential for the permanent magnets used in both wind turbines and electric motors. Similar issues exist for a host of other scarce raw materials. At some point in the not too distant future we're going to have to identify the highest and best uses of these scarce raw materials and make hard decisions based on economic reality rather than technical feasibility. The RFI is a good first step.

For as long as I've been practicing securities law a risk factor on raw materials availability has been standard disclosure that all companies included in their SEC filings and most investors dismissed as legal boilerplate. I'm the first to admit that the disclosures were overkill when I was younger. Today the risks are grave and investors who gloss over raw material and supply chain issues do so at their peril.

In recent articles I've shown how plug-in vehicles are unconscionable waste masquerading as conservation and the less glamorous solution of Prius class HEVs is six times more efficient at using batteries to reduce fuel consumption and CO2 emissions. I've also shown why cheaper and simpler efficiency technologies based on readily available materials strike me as a better investment from both a timing and market acceptance perspective.

Over the next few weeks I'll be working closely with Jack Lifton and Gareth Hatch to analyze some of the critical resource constraints in greater depth and provide more specific guidance to investors. It looks like we're entering an era where the environmentalists may have to make peace with the miners. It should be interesting.

Disclosure: Author has no interest in the companies mentioned.

Posted by John Petersen at 03:15 AM | Permalink | Comments (2)

David Gold

As a “gearhead” (engineer) I must admit I truly enjoy looking at all the cool technologies being developed by cleantech companies.  The promise of cleantech hinges, in part, on these innovations.  So it is not surprising that so much focus in the blogosphere and the press is given to the funding and development of these new technologies.  Much like the dot-com buzz in the mid-90s, today we celebrate the amazing innovations that are taking seed.
But for cleantech to avoid the fate of synfuels of the ‘70s or that of many of the early dot-coms, we must create real companies that generate revenue, margins and profit.   

In a tough economic climate some cleantech companies are showing such success.  Demand energy management companies EnerNoc (ENOC) and Comverge (COMV) had exceptional growth in 2009, and EnerNoc turned the corner to positive net income (see data below).  Both are early venture funded cleantech success stories. LED manufacturer Cree (CREE) continued its exciting revenue and profit growth.  And while finances of the much more numerous privately held cleantech companies are typically held close to the vest, I can say that our own LED lighting portfolio company, TerraLux, not only had exceptional revenue growth but also showed its first period of positive cash flow.  

2010 has the potential to be a breakout year for certain categories of cleantech.  The IPO market is heating up and this could be the year where we see our first significant wave of cleantech IPOs.  A123 blazed a trail with its successful IPO during the tough 2009 market.  In 2010 we could see the IPOs of Tesla Motors (electric vehicles), Silver Spring Networks (smart grid), Solyndra (solar), Codexis (biofuels), as well as others.  If we see a string of successful IPOs, momentum for cleantech venture investing should experience further pick-up, and we should see increased interest from institutions willing to back venture capital funds.  

All of this plays out for 2010 to potentially be a big year for real cleantech businesses – those with exciting revenue growth, IPOs and, yes, some even with profits. 

One major variable in the 2010 forecast:  Legislation around cap and trade will undoubtedly be a hotly discussed item this year.  The passage of any legislation that has the impact of increasing the price of fossil-based energy sources will provide additional market momentum and increase the ability of cleantech companies to compete in the open marketplace.  Even if the provisions of such legislation do not go into effect for several years, I suspect the market will begin to react to the pending changes fairly rapidly.  But more on this next time.

EnerNoc


Comverge


Cree



(Financial Data from Google Finance)

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 10:35 PM | Permalink

by Bill Paul

There's no such thing as an "experienced" alternative energy investor. The sector simply is too new. Also, like an iceberg, most of it lies hidden beneath the surface.

To succeed in these uncharted waters, I believe that alternative energy investors (a group that eventually will include all investors) need to follow a particular set of guidelines that I've started identifying in recent articles. The first guideline is that you must be a long-term investor with a time horizon of at least three to five years. Otherwise, you'll miss out on most of the incredible financial payoff that is to come as the world continues to slowly but surely accept the need to ratchet down greenhouse gas output in ways that don't undermine economic growth.

The second guideline is that to find the best green energy investment prospects, you've got to scour the world, because while Washington continues to waste time fighting over whether climate change is real, the rest of the world is developing the technologies that will become the backbone of a carbon-constrained economy that will continue to deliver solid global growth.

Now here's my third: many of the best long-term green energy prospects are companies whose current operations are "dirty." Two cases in point: Danish shipping and oil group A.P. Moller-Maersk (Symbol AMKAF) and South Korean steelmaker POSCO (Symbol PKX).

The foolish people at the U.S. Chamber of Commerce who think they're helping their constituency by fighting against climate change legislation need to rethink their position, because Maersk and POSCO show how foreign firms that compete with CoC members intend to grow by going green, beating out their U.S. rivals on new multi-billion-dollar business opportunities.

For Maersk, the future involves transporting carbon dioxide gas in specially-built tanker ships from coal-fired power plants where the CO2 is generated to offshore oil drilling platforms where it will be used for enhanced oil recovery (EOR). Maersk recently announced a deal with Finnish power producers that a Maersk official said will be "the first step for us to develop CCS (carbon capture and sequestration) as a business." The executive said that Maersk plans to build a fleet of specially-designed CO2-carrying tankers that will deliver CO2 to oil producers throughout the world.

POSCO, the world's fourth largest steelmaker, is also thinking really big. The company recently said it plans to invest about $6 billion over the next eight years on a variety of green energy technologies. POSCO reportedly believes its $6 billion investment will generate roughly $9 billion in new revenue during the same stretch.

POSCO is investing in wind power, fuel cells, the smart grid, synthetic natural gas and nuclear power. It sees its investment further paying off in a 30% reduction in its own greenhouse gas emissions, which could wind up generating additional revenue by enabling POSCO to sell emission "credits" to other companies.

Who will be buying POSCO's credits? A lot may wind up getting bought by U.S. firms that were led astray by the U.S. Chamber of Commerce.

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 04:18 AM | Permalink | Comments (0)

Tom Konrad, CFA

Colorado's recently released Renewable Energy Development Infrastructure (REDI) report looks at what the resource-rich state needs to do to accomplish the state goal of reducing CO₂ emissions 20% from 2005 levels by 2020.  Investors who expect the developed world to attempt similar cuts in emissions should take note of the report's conclusions, and invest accordingly.

Since Colorado Governor Bill Ritter recruited my friend Morey Wolfson for the Colorado Governor's Energy Office (GEO) he's had a lot less time to socialize with the rest of us in the clean energy community, but we caught up over lunch during the International Peak Oil Conference in October where I was speaking on investing for a peak oil world, and he is on the advisory board of the sponsoring organization, ASPO-USA.

Morey told me he had spent the last few months working on a report for GEO on the improvements needed in Colorado's energy infrastructure.  Even though Colorado is in the top ten states for several renewable energy resources (Wind, Solar, and Geothermal,) it will be difficult to achieve significant emissions reductions in the fast-growing state, and I find government reports an excellent place to look for a clue to future government action.  

Anticipating government action is critical to any investor, so to the extent that government reports are likely to be used by political decision makers, they are also likely to be useful for investors as well. I've found useful nuggets in similar reports in the past, including The Arizona Renewable Enegy Assessment, and both the California Renewable Energy Transmission Initiative Phase 1A and Phase 2A.  These reports have been the source of the best unbiased assessments of the cost of clean energy I've been able to find.  I used a similar approach in developing the Model Clean Energy Portfolio included in my Green Energy Investing for Beginners series.  No portfolio should be static, however, and allocations should be adjusted to reflect changes in the investment environment and new information we glean from reports such as Colorado's recent REDI report.  The report is also the source of all the charts in this article.

REDI Recommendations

The REDI report has several recommendations to policymakers:

1. Greatly increase investment in demand-side resources (energy efficiency, demand-side management, demand response, and conservation.)
2. Greatly increase investment in Renewable Energy development, particularly utility-scale wind and solar generation.
3. Accelerate the construction of high voltage electric power transmission to deliver renewable energy from Colorado's renewable resource generation areas to the state's major load centers.
4. Strategically use natural gas-fired power generation to provide needed new power to the grid and to integrate naturally variable renewable resources.
5. Consider decreasing the utilization factor of coal-fired generation and/or consider early retirement of the oldest and least efficient of the state's coal-fired generation stations.

What it Means for Investors

Recommendations 1 and 2 are not surprising, but they should be interesting to investors in that energy efficiency gets as much emphasis as renewable energy, even in a renewable-energy rich state such as Colorado.  On a national level, the implication is that energy efficiency should be given more emphasis than renewables if we are committed to achieving aggressive carbon reduction goals.  This conclusion is reinforced when you consider the energy productivity of demand side resources compared to supply side renewables: it takes a lot more energy to build the equipment to produce renewable energy than to install the equipment needed to save the same energy.

Recommendation 3 won't come as any great supply to long time readers; I've been advocating transmission investments practically as long as I've been writing about investing in renewable energy.  As you can see from the electricity cost chart to the right, transmission currently only accounts for 7% of our national electricity bill.  When critics decry the multi-million dollar expense of long range transmission in favor of local generation and distribution upgrades, they seldom put a cost to the upgrades they call for for the simple reason that local renewables without long range transmission will cost much more than building renewables along with transmission to support them and smooth out their natural variability.

 

Recommendation 4 should be good for natural gas producers, pipelines, and suppliers of turbines.  Given the many opportunities in clean energy, I usually don't consider investments in fossil fuels, even relatively clean ones such as natural gas, but this should be a note of caution if you're considering shorting natural gas stocks.

Recommendation number 5 is bad for coal miners.  Either reducing utilization or shutting down of coal plants means less coal being burnt, hurting demand for coal.  Investors in public utilities with a lot of coal fired generation, however, might stand to benefit.  This is because old coal plants are mostly depreciated, and investors have already received the return of their capital.  In order for investors to earn a return from regulated utility operations, they have to invest in new generation or demand side resources.  New investments in demand- and supply-side resources will be higher if old coal plants are shut down or used less, providing more new investment opportunities for utilities.

Coal miners, on the other hand, are not likely to start supplying wind when the utilities buy less coal, so stay tuned for a future installment of my Green Energy Investing for Experts series that takes a look at the downside for coal miners.

DISCLOSURE: None.

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

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

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)

Saj Karsan

EnviroStar (EVI) is a distributor of laundry equipment that has developed a proprietary dry-wet-cleaning machine that avoids the use of perchloroethylene (Perc), a harmful chemical that the International Agency for Research on Cancer has deemed a carcinogen. Perc is also classified as a hazardous air contaminant by the US Environment Protection Agency, and its use will become illegal in the state of California in the year 2023. EnviroStar's patented Green-Jet process uses an environmentally-friendly, water-based solution that is both non-toxic and requires less energy consumption than traditional dry-cleaning methods.

This is currently a tiny company, with a market cap of just $7 million. But for value investors who simply focus on buying businesses that trade at discounts to their intrinsic values (instead of trying to apply small-cap or illiquidity discounts), some of this company's numbers are appealing.

The company's market cap is not much higher than its net cash position of $6 million. Often, a stock with a high cash to market cap ratio is one that is a perennial money-loser. But not in this case. Operating income over the last 7 years stands above the company's current market cap! Demand for heavy-duty equipment has, of course, waned through this recession, but there are two important attributes of this company that reduce its risk: its customers and its suppliers.

The company is not reliant on any one customer, as it distributes its products to over 1700 customers in various industries (hotel/motel, dry cleaners, hospitals etc). A diversified customer base reduces a company's risk, as its revenues/earnings are not reliant on a potential single point of failure.

Furthermore, the company is not burdened with the fixed costs associated with manufacturing this equipment. Instead, the company outsources the manufacturing to various suppliers. By acting solely as a distributor, the company has a more flexible cost structure, allowing it to react quickly to a lower demand environment. As a result, the company should be able to restore margins to previous levels with ease, relative to fixed-cost manufacturers.

The biggest risk to this company may be the way its controlling (and managing) shareholders appear to view public stockholders: as opponents rather than partners. Last December, the controlling shareholders tried to take advantage of a misbehaving market by making a bid for the remainder of the company. The bid, which valued the entire company at $6 million, likely so undervalued the company's assets that it was withdrawn just six days later. Consummation of the deal required a fairness opinion that the price offered was fair for the public stockholders, an opinion no financial advisor could likely offer with a straight face.

Despite this issue, the managing shareholders have done a great job with the company itself. Returns on equity have been commendable over the last few years, despite the fact that the company keeps a fairly sizable cash buffer around. As a result, Mr. Market appears to offer an excellent entry point at these price levels.

Saj Karsan is a guest contributor on AltEnergyStocks.com. Saj manages Karsan Value Funds, and regularly writes for Barel Karsan.

DISCLOSURE: Author has a long position in shares of EVI

Posted by Guest Contributor at 10:32 PM | Permalink | Comments (0)

Tom Konrad, CFA

I write about investing in Renewable Energy, Energy Efficiency, and other green technologies because I'm worried.  I'm worried that the inevitable transition away from fossil fuels driven by peaking supply and climate change could be much more painful than it needs to be because, as a society, we have massively underinvested in the infrastructure that we will need for the transition.

I don't care if my readers are motivated by an altruistic wish to make the world a better place, or they just want to cash in on what promises to be the hottest stock market sector for years to come.   I expect that most of you, like me, have some of both, and hope to do very well while doing good.

Whatever your motivation, I want to give you the tools to accomplish your goal, because, if you invest in the companies in this sector, they will be better able to continue developing and deploying the technology and infrastructure we all will need not too far down the road.  This too is both altruistic and selfish: I don't want to live in a world where we managed the transition badly.

That said, here are your tools.  My intent is that in a few hours of reading these articles, you will know how to prepare your portfolio for the transition and will be able to use that information after taking into account your personal resources, needs, and investing experience.

If you don't feel that you know what you need to do after reading all four, leave a comment.  The answer to your question could very well end up being part five.

Part 3: Before you invest in Green Energy.

Part 1: Choosing between Green Energy Stocks, ETFs, and Mutual Funds

Part 2: How much to invest in Green Energy?

Part 4: Choosing the best Green sectors.

Part 5: The Basics from a Small Canadian Investor's Perspective

Part 6: How Many Stocks Should You Buy?

I've changed the order to give the series a more logical flow.  Part 3 should have really been part 1, but I wrote it at a reader's suggestion, after part 2 was published.  

Stay tuned for a short series on Green Energy Investing for Experts to be published in December.  (The link is to a search, articles will show up as they are published.)

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 11:03 PM | Permalink | Comments (0) | TrackBacks (0)

by John V. Anderson

The Water-Electricity Connection: Basic Principles

There’s been a lot of discussion – and a fair amount of controversy – lately about water use in power plants. Unfortunately a lot of this discussion is based on an incomplete understanding of the fundamental issues involved. First of all, virtually all of the non-hydro power we consume is generated by heat engines of one sort or another. All heat engines absorb energy from a hot source (e.g. a flame, nuclear core, or solar), and they all reject energy to a cold sink – that is they all need some type of cooling. 

And of course all heat engines are subject to the laws of thermodynamics which dictate that the maximum efficiency a heat engine can achieve is a quantity called the Carnot efficiency. The most important impact of this law for our purposes here is that the efficiency of any heat engine is strongly dependent on the difference in temperature between the hot temperature and the cold temperature. If we can raise the hot temperature relative to the cold temperature, or lower the cold temperature relative to the hot temperature, then we can improve efficiency. Since any energy not converted to electricity must be rejected, increasing the efficiency has the additional salutary effect of reducing the amount of energy that must be rejected. 

Gas Turbines

Now, gas turbines (or combustion turbines) appear to violate this rule since they don’t need water cooling. However, this is deceptive. In fact, they are simply using the atmosphere as their cool reservoir. They pull cool ambient temperature air from the atmosphere and then return it to the atmosphere at a very high temperature (typically 1000 F or more). The maximum temperature inside a gas turbine is limited by materials issues, and is pretty well fixed for the purposes of our discussion. Since the hot temperature is essentially fixed, the temperature difference is driven by the temperature of the inlet air: the cooler the inlet air the higher the efficiency. (You might note that gas turbines are actually running at their poorest efficiency during the very hottest summer days when they are most commonly used for peak generation.) 

Looking at the exhaust from a gas turbine, it is fairly obvious that this very hot air still has quite a bit of energy in it even though it is at too low a pressure to be useful in a turbine. Combined cycles work by using this high temperature exhaust air to boil water and raise steam for a steam turbine, usually referred to as a “bottoming cycle”. It is identical in nearly all respects to any other steam cycle except for the source of heat. 

Steam Cycles & Types of Cooling

In a typical steam cycle (a version of a heat engine called a Rankine cycle) the highest temperature is the steam leaving the boiler to go to the turbine, and the low temperature is in the condenser where that steam is condensed before returning to the boiler. Raising the temperature from the boiler and/or lowering the condenser temperature will increase the efficiency. As before, the hot steam temperature is set by materials constraints and conditions within the system and is pretty well fixed (see below). The condenser temperature is dependent on ambient conditions and on the type of cooling used. 

There are actually three approaches to cooling steam cycles. The first is to draw water from a lake, river or ocean, use it to cool the condenser of the plant, and then return it to its source. Unfortunately this requires pumping a large amount of water and the return water is typically much warmer than the inlet water, leading to undesirable ecological consequences. For these reasons this type of cooling is used much less frequently in the last couple of decades. However, this approach has the advantage that the difference between hot and cold temperatures – and thus the efficiency – is almost entirely independent of ambient temperature. The plant will run at the same efficiency winter or summer. 

Recalculating Cooling

The second cooling approach is called “recirculating” cooling. In this approach, water is circulated between the condenser and a cooling tower. In the cooling tower some of the water is evaporated, and the rest is circulated back to the condenser. New water is added on each cycle to replace the water that is evaporated and to prevent the buildup of dissolved salts in the water. Now as we all know from swimming, evaporating water absorbs quite a lot of energy and can cool things pretty effectively (this is the difference between dry bulb and wet bulb temperatures). Thus the evaporation of some of the water will cool the remainder of water to well below ambient temperature. This is particularly true on very hot, dry days, which create peak loads and the highest demand for power. Using this type of cooling largely relieves the dependence of the efficiency on the ambient conditions. 

Dry Cooling

The third type of cooling is dry cooling. The warm water from the condenser is run through a series of fan-coils (think of a really, really big automobile radiator). Ambient air is blown past the fan coil and the water is cooled to slightly warmer than the ambient air. Now, this approach has been used only rarely for large steam plants (although it is pretty common in some smaller geothermal plants) because it extracts several types of penalty on the cost of energy. First of all, as we have seen above the efficiency of the plant now decreases as the ambient temperature increases. This effect can amount to a 20% or more reduction in the instantaneous output of the plant, and perhaps a 5-10% decrease on an annual basis in hot locations like the Mojave or Sonoran deserts. In addition, the fan-coils used to cool the water are fairly expensive relative to a cooling tower. 

Hybrid Cooling

A new hybrid approach to cooling is emerging which can reduce both the performance penalty of dry cooling and the amount of water consumed by recirculating cooling. This hybrid technique uses dry cooling whenever the ambient temperature and the power demand are low enough. Then as the temperature and the power demand rise, wet cooling is used to supplement the dry cooling and minimize the efficiency penalty on very hot days. Although this approach increases the cost of the system it is likely to see increased use, especially in the southwestern US where water issues are coming to the fore. 

Cost and Water Savings

With this understanding, the issue of cooling becomes one of cost, and we can start to have a rational discussion about tradeoffs and how we value things. Electricity made in dry and/or hybrid cooling plants will cost somewhat more than in a recirculating cooling system, but will use less water. Is the additional water worth enough to justify the additional cost for water? Or is a lower power bill worth enough to justify additional water use for power generation? 

Water Use in Solar Power

This issue of cooling and water use is currently raising lots of questions (and creating lots of confusion!) because of the concern about large solar thermal plants in the deserts of CA and AZ. Today’s reality is that some types of solar plants have material limitations that keep the hottest temperature lower than in a coal or nuclear plant. For this reason, their efficiency is slightly lower (perhaps 28-30% vs 32-34%) and thus their cooling needs are slightly higher. However, please note that the solar thermal technology is rapidly evolving, and there are already several approaches that are likely to eliminate this difference in the hot temperatures in the next generation of plants. 

To some extent, solar thermal is a victim of timing. Earlier coal and nuclear plants routinely purchased water rights which almost no one took exception to. In this regard solar thermal plants are being held to a higher standard than the earlier conventional plants. However, that is the growing reality of life in the southwestern US, and we will all need to adapt to it. 

As an aside, photovoltaic solar (PV) doesn’t require any cooling water. However, it has two other disadvantages relative to solar thermal. The first is cost. The societal cost (total installed cost, not the cost to the owner) of a PV system remains significantly higher than that for a solar thermal plant. Ongoing efforts by the PV industry to lower those costs seem likely to reduce that cost disadvantage, but the non-solar (balance of plant, or BOP) parts of a PV system will still likely cost between $3 and $4 per peak watt regardless of what the panels cost. 

Timing of Solar Electricity

The second disadvantage is more serious from a broader system perspective. PV makes electricity instantaneously as sunlight hits it. If the system doesn’t need the energy at that time, more cost-effective systems must be turned down or the PV energy must be sloughed off. On the other hand, although the peak in PV output correlates fairly well with the beginning of the peak demand periods (usually mid-afternoon on hot summer days in this part of the world), the output from the PV system falls off too early to meet the tail of the peak load that extends into the evening (end of peak on the APS system is now 8:00 PM). 

A further disadvantage is that all the PV systems in a particular geography are likely to turn on and off essentially together. If there are only a few PV systems on a particular power line this isn’t much of an issue. However, as the PV-generated power becomes a larger fraction of the energy on that line the sudden jump -- or drop -- from all the PV systems going on or off simultaneously creates significant difficulty for managing the loads on that line. 

By contrast solar thermal plants can store the hot liquid they generate so that they can “ride through” short periods without sun, or shut down in an orderly manner for longer cloudy periods. In addition, if the storage is large enough the plant can simply collect energy from the sunlight without generating electricity until the grid needs the power. For example, the SEGS plants in CA routinely generate 100% of its capacity through all of Southern California Edison’s peak summer periods. 

Conclusion

In many ways it is unfortunate that these questions don’t behave in a way that allows simple, quick answers. The electric grid is one of the largest and most complicated man-made devices ever assembled, and we are now operating it in ways that weren’t anticipated by its original designers. Despite that, it has provided low-cost and reliable energy that has powered our economy in so many ways that we aren’t even aware of many of them. 

For a variety of excellent reasons we are now starting to re-think how we want this huge device to work and what new services we want from it. In order to make decisions that will work well for us over the long term we need to be smart about how this huge device actually works, what it can do and what it can’t. We all need to learn quickly and think carefully before we make changes.

John Anderson has a 30 year career in clean energy technology, investments and markets. He is currently an independent consultant helping clients with due diligence, project development, and strategic planning in the area of clean energy. His clients include electric utilities, Fortune 500 firms, and individual investors. Previously John served as the Manager of the Energy and Resources practice at the Rocky Mountain Institute, and the founding Managing Director of the Connecticut Clean Energy Fund, as well as the COO of a small fuel cell startup. John began his career at NREL, the National Renewable Energy Laboratory, where he worked on energy in buildings, concentrating solar power, geothermal, and solar chemistry technologies. John received a MSME from the Solar Energy Lab at UW-Wisconsin in Madison, and is a registered Professional Engineer.

John Can be reached at jva1000 [at] gmail,com or 303 885 9264

Posted by Guest Contributor at 07:39 PM | Permalink | Comments (4) | TrackBacks (0)

David Gold

Sectors like solar, biofuels and smart grid have received a significant overweighting of venture capital investment compared to other sectors. Is this because they are better investment opportunities or because venture capitalists (VCs), being human, invest in what they know and who they know? While many entrepreneurs may not believe it, VCs are human, too.

In my last post, “Human Capital, Not Venture Capital, the Biggest Cleantech Need,” I discussed how the greatest challenge today to growing a successful early-stage cleantech business is the shortage of successful, experienced cleantech entrepreneurs. But finding the right human capital to build great cleantech businesses isn’t the only stumbling block: Human capitalists (VCs) have been limited by their own experiences and networks.

At the end of the day, venture capitalists almost always invest first in people. A great, experienced management team can make a business out of an average technology. A bad management team can destroy the most amazing of technologies. Over the past decade, as cleantech VC investment started to expand to more than a handful of specialized funds, VCs naturally turned to their business networks to learn about the sectors, identify opportunities and build management teams. Given that the largest categories of VC investments in the preceding few decades have been in software/web, semiconductors, information technology and pharmaceuticals, these are also the areas where the VCs’ largest network of experienced successful entrepreneurs resided.

As crossover entrepreneurs and crossover VCs started to explore or create opportunities, they naturally looked where their knowledge could be most applied. It should not be surprising that the lion’s share of VC investment dollars have been going into areas that have closely related technology foundations to the traditional areas of VC investment. Sectors like solar, smart grid, biofuels and LEDs have received most of the VC dollars and, as a result, increased press hype. The table below highlights the approximate portion of cleantech VC investments in some of these key areas over the past three years.

No doubt there are exciting investments to be made in these sectors. Our fund, Access Venture Partners, has invested in both an LED lighting company (TerraLUX) and a smartgrid company (Tendril Networks). But what about sectors like green building materials, industrial energy efficiency, geothermal and nuclear? They serve equally enormous markets (if not larger) and at least in some areas (if not most) have equal or greater potential impact on the economy and the environment.

Solar is a particular anomaly, receiving the single largest share of all cleantech venture capital. While sexy because of its elegance, solar is a challenged technology. The economics of solar must struggle against the triple confluence of very low efficiencies, very high costs and the fact the sun simply doesn’t shine much of the time (think night and clouds). No doubt that solar venture investments are targeted at changing those factors – except for the sun, of course. There are limits to what even VCs can accomplish. But even if the cost of solar cells dropped to zero, solar still would find itself challenged to compete with other renewables, let alone traditional energy, because at least half the system cost is outside of the cells.

Geothermal, which unlike solar can be used as “base load” (meaning that it is always on), is at the other end of the spectrum. There have been few geothermal venture capital investments, yet it has some of the most compelling economics at both the utility and home scale. I would highlight both MIT’s 2006 report on the huge potential of geothermal energy and, of more contemporary interest, the October 2009 issue of Consumer Reports, which showed how a geothermal heat pump’s potential economic return usually outperforms that of a home-based solar thermal system.

So why the VC investment preference for solar over geothermal? I’m betting that much of the bias has to do with the fact that not many VCs have strong networks of geologists, drilling technologists, heat pump engineers and steam turbine power generation experts to build great geothermal companies (myself included). While it is certainly important to be knowledgeable and comfortable with the people and technology of a company, VCs must challenge themselves to think outside their own box. If the cleantech market is going to fulfill its full business potential, VCs must push themselves beyond the normal human inclination to stick with what’s familiar. A comfortable investment may not be a great investment. Cleantech VCs need to take a peek over the side of our box. What we see and what we can learn may surprise us. 

Cleantech Segment	Traditional VC Corollary	Estimated % of Cleantech VC Investment $’s 2006-2008
Solar	Semiconductors	33%+
Biofuels	Biotech	20%+
SmartGrid	Software, Web, Information Technology	14%+
LED Lighting	Semiconductors and Information Technology	5%+
Geothermal	None	<2%
Nuclear	None	<2%
Building Materials and Efficiency	None	<2%
Industrial Energy Efficiency	None	Not tracked… likely <2%

Data aggregated from sources including NVCA, PriceWaterHouse Coopers MoneyTree and Greentech Media. Data from these organizations use different sources that yield different totals and each has different categories they track with cleantech funding.

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 07:41 PM | Permalink | Comments (0)

David Gold

Building great businesses typically requires three key ingredients: phenomenal people, compelling technology and investment capital. Cleantech companies are no exception. While cleantech venture capital investments have expanded rapidly, averaging an annual growth rate of 65% over the past five years and now representing over 15% of all venture investments, the compelling technologies are mostly early in their development cycles and the human eco-system for early stage cleantech companies is in its infancy. There is much buzz about the venture capital and government funding that is being invested in cleantech companies, but the immaturity of the cleantech entrepreneurial ecosystem is overlooked as a significant challenge in accelerating the growth of successful cleantech companies. 

In the more traditional areas of VC investment such as software/internet, life sciences, and semi-conductors there are a relatively large number of successful entrepreneurs who have had exit events that made them wealthy. These individuals are the most likely source of smart early angel financing for other start-ups in the same sector. I emphasize “smart” because angel investors who invest in companies within industries that they know well not only make wiser investments but also can add real value to those businesses. And they tend to be more prolific investors within those industries for just that reason. The reality is that the list of successful cleantech entrepreneurs, where success is defined by a healthy exit event, is very short. 

Early stage cleantech companies struggle much more than companies in traditional areas of venture capital to find wise angel investors, or advisors and executives with both industry and entrepreneurial experience. While crossover entrepreneurs – those with success in a different sector who desire to get into cleantech – can be helpful and bring valuable wisdom, nothing can substitute for the valuable knowledge and experience gained by building a company within the same sector. Efforts like the Cleantech Open, some of the emerging cleantech incubators (like CleanLaunch, Austin’s Cleantech incubator and San Francisco’s incubator) and cleantech network groups (like Colorado Greentech Group, the Renewable Energy Business Network and the CleanTX Foundation) can assist in the tough challenge of bringing the right mix of entrepreneurial, business and industry expertise together for an early stage cleantech company. But, in the end, only time will fully cure this problem by generating experienced and successful entrepreneurs who can breed the second generation of cleantech companies. In the mean time, the challenges of growing and investing in early stage cleantech companies are as great as they will ever be. Fortunately, I believe, the rewards will be equally great.

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

Posted by David Gold at 05:37 AM | Permalink | Comments (0)

Charles Morand

The relationship - or lack thereof - between oil prices and the performance of alt energy stocks has been a long-time interest of mine. I discussed it last in late March when I looked at correlations between the daily returns of alt energy and fossil energy ETFs. At the time, I found that only a weak relationship existed between the two and that if someone wanted to make a thematic investment play on Peak Oil, alt energy ETFs were not an ideal way to do so. 

Seeing as the popular press and countless "experts" continue to claim, whenever they get a chance, that the fortunes of alternative energy stocks are closely tied to the price of oil, I figured I would revisit the topic.

Fossil & Alternative Energy: The Relationship That Isn't There

This time around, I took a slightly different approach for my analysis: I correlated the weekly returns for US oil and US natural gas directly (as opposed to through an ETF) with returns for the S&P 500 and four alt energy ETFs. For US Oil and Nat Gas, I used price data provided by the Energy Information Administration here (Spot Price FOB Weighted by Estimated Export Volume) and here (Contract 1), respectively. I got ETF and S&P 500 price and index value data from Google Finance.

For the ETFs, I picked the Claymore/Mac Global Solar Index ETF (TAN) as the solar sector representative, because I took a position in it in March (which I liquidated last week even though I initially claimed I would hang on to it for 18 to 24 months. I have now grown more worried about downside risk than I am optimistic about upside prospects over that time horizon, so I took my money out).     

The other ETFs were: the First Trust Global Wind Energy Index (FAN) for wind, because it represents a more direct play on the sector than the alternative; the PowerShares Clean Energy (PBW) ETF for alt energy other than solar and wind, as an analysis I conducted earlier this year indicated it is the best way to access other sectors; and the Powershares Global Progressive Transport (PTRP) ETF, as it provides the only proxy I know of for returns on a basket of stocks with exposure to alternative modes of transportation.          

The graph below displays returns for all four ETFs, Oil, Nat Gas and the S&P 500 between Jan. 1, 2007 and Sep. 25, 2009 (click on the image for a large view).             



The table below shows returns and volatility for all seven assets over the same time interval but broken down into sub-periods. Seeing as 2009 and the post-Lehman collapse period have been eventful times to say the least, I thought it would make sense to create a few distinct sub-periods for analytical purposes.

What jumped out at me from this table is the relatively strong performance of the Powershares Global Progressive Transport (PTRP) ETF, even after adjusting for volatility. As the correlation analysis below demonstrates, this performance is not due to a rise in oil prices.

My going theory is that there is a Green Stimulus Effect at work given how much of global stimulus dollars have gone to transportation programs. This would be something worth exploring further but it certainly seems in line, at least on the surface, with a prediction I made nearly one year ago. 



The following three tables contain the real meat of my analysis. They are fairly self-explanatory: they show correlation coefficients between US Oil, US Nat Gas and the S&P 500 with all other assets. The correlations are for the periods outlined in the tables or since inception in the case of PTRP (Sep. 19, 2008), TAN (Apr. 18, 2008) and FAN (Jun. 20, 2008). The correlation coefficients above 0.5 are highlighted.




These results are, once again, in line with my expectations: there is little reason to believe that there is a strong relationship between changes in the price of oil and the performance of alt energy stocks. Even for natural gas, where one could expect a correlation with wind and solar given that all three fuels are used in power generation (or load abatement), there does not seem to be a strong relationship.

TAN and FAN have not yet been around for long enough to analyze returns going very far back into the past, but PBW has. Although the correlation between PBW's returns and oil's returns seems to have strengthened somewhat in the past year, it certainly does not qualify as strong.

I must admit that I was fairly surprised to find such a low correlation between the returns on oil and those on the PTRP ETF. My guess is that this ETF hasn't been around long enough, and that a relationship might emerge under an extreme Peak Oil scenario. That said, spending on public transportation is heavily dependent on the fiscal health of various levels of government, and we've just been moved from the emergency room to the critical care unit.    

On the other hand, I was not particularly surprised to see that returns for all four alt energy ETFs are strongly correlated with returns for the S&P 500 - that seems intuitive enough given that they all belong to the same asset class. 

Conclusion

It doesn't really matter how one slices and dices the data: there just does not appear to be a strong relationship between returns on oil and returns on alt energy stocks, including alternative modes of transportation.

That's not going to matter to a great many commentators who will continue to claim in newspaper and magazine articles, on blogs and on TV that the success of alt energy stocks is closely tied to the price of crude, even though that's mostly untrue.

Those who invest in alt energy should, however, pay close attention. These results suggest that there are far more important factors than oil prices, most notably returns in equity markets in general and regulatory incentives by governments.

There is a good chance that equity returns and returns on oil will diverge in the next couple of years as oil prices climb and equities stagnate or decline. If such a scenario materializes, those who have the relationship backwards could be in for unpleasant surprises.   
  
DISCLOSURE: None

Posted by Charles Morand at 09:18 PM | Permalink | Comments (6)

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

This is the third installment of my review of the book book "Investment Opportunities for a Low Carbon World". The second installment covered geothermal power and energy efficiency and the first installment covered wind and solar.

This post reviews three interrelated chapters on the world of cleantech and alt energy indices, funds and ETFs. Two of these three chapters are my favorite in the book so far -  they provide very useful information for the novice investor with an interest in alt energy investing but limited time and knowledge for successful stock picking. 

Cleantech and alt energy are challenging sectors to invest for several reasons: (1) pure-plays tend to be risky investments because substantial technology and business risks often exist; (2) when pure-plays are not so risky (i.e. wind power), stocks tend to trade at outrageous multiples, with several years of strong growth already fully priced in; (3) the stocks of non-pure plays with some exposure to alt energy trade, more often than not, based on what happens in other parts of the company, requiring investors to own businesses they might have little interest in or understanding of (e.g. General Electric (GE) and Siemens (S)).        

The alternative to equities is to invest in one of the alternative energy and cleantech ETFs (either long or short) or purchase one of the alt energy mutual funds. I generally believe the latter option to be less desirable than the former, mostly because of high expense ratios and other fees. ETFs, in my view, provide an excellent way for retail investors to gain exposure to the sector - although overpricing and volatility issues still exist, firm-level risk is eliminated and risk is spread over a large number of securities at a relatively low cost.

Measuring the Performance of Environmental Technology Companies

David Harris, FTSE Group

This chapter provides an introduction to cleantech and alt energy stock indices. Early on in the chapter, the author notes:

"Active managers claim they can identify those companies with above market average growth potential, but at this stage in the sector's evolution it is impossible to know which environmental technology companies will be the winners"

While I don't think this assessment applies equally to all sub-sectors of the environmental technology market, this statement still sums up relatively well the landscape for most retail investors and, as mentioned above, provides a strong argument for index-based investing.  

The chapter then moves on to provide a methodology for breaking down the environmental technology sector into sub-sectors, based on the approach used by FTSE in making its Environmental Technology Index Series. It then lists out the main environmental technology indices available and their key characteristics.

Overall, this is a useful chapter for investors in understanding how index makers approach the process of index creation. Since indices form the backbone of ETFs and are the single most critical determinant of ETFs' relative performance, this is a process worth understanding. However, the author could have provided more technical information to increase the chapter's usefulness to investors with an intermediate level of knowledge.

Investment Approaches and Products for Investors

Clare Brook, WHEB Asset Management

This chapter provides a review of the following investment vehicles: socially responsible (SRI)/ethical funds, cleantech mutual funds, private equity cleantech funds and environmental hedge funds.

We learn that the largest holdings in most ethical/SRI funds are often in industries unrelated to environmental tech such as financial services. That is because such funds, unlike cleantech and alt energy mutual funds, do not invest in anything specific - they merely avoid investing in companies and industries that violate pre-determined ethical standards. For cleantech investors, those funds are generally useless.

As far as real cleantech and alt energy mutual funds go, the author discusses the problem of over-valuation mentioned above - in her view, valuations often reflect more a scarcity of investment options in pure-play cleantech stocks than realistic expectations for future growth.

The criteria provided by the author to evaluate different investment options are the most part of this chapter. The one thing that the author stresses across different actively-managed investment products is the quality of the management team, its experience and its track record. I would tend to agree - if someone decides to invest in mutual funds, these factors should arguably weigh more than the expense ratio, as they help put the expense ratio into perspective.

Exchange Traded Funds as an Investment Approach

Lillian Goldthwaite, Friends Provident  

This chapter provides a detailed overview of ETFs and makes the case well for using them in a portfolio. I particularly liked this chapter.

According to the author, some of the main strengths of ETFs are: they are traded on exchanges and can be bought and sold (and priced) throughout the day; they can be sold short, bought on margin and loaned; the portfolio can be viewed in its entirety at all times and the index construction process is transparent; and the process by which institutional investors can acquire and redeem shares by trading in the stocks of companies in the index ensures that no sizable gap emerges between net asset value and portfolio value.

As with the previous chapter, the author provides a checklist of items to research when doing the due diligence on an ETF. The chapter concludes with a list of ETFs in cleantech and alt energy, but also in nuclear energy, carbon emissions, timber and water.

The author does not delve particularly deep into cleantech  per se, keeping the discussion focused instead on ETFs more generally. 

Overall, I found this chapter interesting and quite useful. As is the case with the preceding two, there is less to say about this chapter than there was about the ones on environmental technologies that I reviewed in the first couple of installments, mostly because these chapters are shorter.

The more seasoned investor is unlikely to learn much from this section of the book. But so it goes for such books in general; they are ideally suited for novice investors who want to get started investing into the sector and want a framework to approach the process.

For those interested in cleantech and alt energy ETFs, the following articles might be of interest:

Wind
Solar
General alt energy and cleantech 
Carbon emissions   

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 09:46 PM | Permalink | Comments (0)

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)

Charles Morand

Tom and I recently received complimentary copies of a new book called "Investment Opportunities for a Low Carbon World", edited FTSE Group's Director of Responsible Investment Will Oulton*. 



The book is a compendium of articles by 31 different authors broken down into three main categories: (1) environmental and low-carbon technologies; (2) investment approaches, products and markets; and (3) regulation, incentives, investor and company case studies.

While Tom will provide a comprehensive review of the book once he's finished reading it in its entirety, I will instead review a few selected chapters over the course of the next couple of weeks.

I decided on this approach as that is how I generally use such a resource; I select the chapters and authors that I am interested in and I read only what I selected. That said, the majority of chapters in this book were of interest to me and I ended up selecting 19 out of 27 that I'm going to read (I won't be reviewing them all!) Truth be told, reviewing the contents section made me feel like a kid in a candy store and I suspect that most alt energy investing aficionados would feel the same. If I like what I read, I will most likely finish the book.    

This first post provides reviews of Chapters 1 and 2 on the wind and solar sectors.

Wind Power

By Mark Thompson, Tiptree Investments ltd

I tend to consider myself pretty well-versed in all things wind power, and so I was especially eager to read this chapter. Overall, I was very pleasantly surprised.

The author provides a good review of the wind turbine and wind turbine component industries. I especially enjoyed the technical discussion on turbine size and optimizing turbine output, which will become a critical competitive element for turbine makers.

For instance, we learn that because of the relationship between diameter and surface area for a circle, the power of one machine can be increased to match that of several smaller machines by simply lengthening the blades, thus lowering requirements for a range of other components and materials (for instance, two turbines with rotor diameters of 40 meters will have a power output of about 1000 kW, whereas one turbine with a rotor diameter of 80 meters can power 2500 kW.) Because of the mathematics of this, power output increases acheived through longer blades should further improve the economics of wind, so this is definitely a trend worth keeping an eye on.  

We also learn that while the turbine market has been chronically under supplied for the past few years, conferring the incumbents an appreciable amount of market power - the author estimates that the top six makers hold a combined 84% market share -, barriers to entry remain high and very difficult to surmount for would-be suppliers. Concerns over quality, durability, track-record and the strength of the balance sheet to support warranties are all factors that make it very difficult to secure funding for projects using a newcomer's technology. It is fair to say that Thompson is bearish on new market entrants.

Finally, we learn that the trend toward turbine makers internalizing sub-component design and manufacturing is restricting investment opportunities in pure-play supply chain opportunities.

However, what I enjoyed the most about this chapter was the detailed overview of how wind projects are built and what factors make them successful. When it comes to wind power, investment commentators tend to focus on turbines and turbine components, even though very interesting opportunities exist in the project development and operation space. In the author's words: "the development process offers some of the best returns in the sector [...]."

One key point made by the author in that regard is that headline figures about the size of various developers' portfolios are rarely - if ever - comparable given the various developments stages involved in bringing a project into operation. The risk-return profile for pure-play wind power developers is far more driven by the quality of the projects than by the size of the portfolio. However, disclosure tends to be weak in that regard, making it difficult for small investors to gauge the real value of a portfolio.

Overall, I thoroughly enjoyed this chapter. In my view, the information would be most useful to a fundamentally-driven investor looking to really understand how wind power and the wind power industry really work. While the chapter does not answer every question an investor might have, it nonetheless provides the right balance of technical and business information to set someone on the right path. It is a reference to which I will go back.  

Those looking primarily for stock picks, however, will be disappointed. The lack of stock picks is probably the chapter's weakest point, especially given that the book is purportedly about investment opportunities. Having said that, investment ideas abound on the Internet these days and books focused too heavily on providing stock picks at the expense of more general information risk having very short shelf-lives.

Solar Power          

By Matthias Fawer, Bank Sarasin

Writing a book or a book chapter on solar power, especially solar PV, is always a risky endeavor as the information could be outdated 12 months after publication. I thus salute the effort of those who undertake to do it, but in my view this sector is best left to specialist consultancies and sell-side analysts because they can easily update their analysis when conditions change, something that happens frequently in the world of solar PV.

Matthias Fawer's chapter does, in a lot of ways, read like a sell-side report. It covers three broad sub-sectors of solar: (1) solar photovoltaic; (b) solar thermal; and (c) solar collectors. Other than for solar thermal, the way in which the chapter is written assumes the reader already has a fair bit of solar knowledge. For instance, unlike your typical generalist piece on solar PV, few if any details are provided on what the main solar PV cell technologies are, how they compare in terms of price and performance and which company makes them.

The advantage of this approach is that it allows the author to jump straight into industry-level dynamics and not waste precious space explaining what many people already know. For instance, we learn fairly early on that Bank Sarasin sees silicon cell production appreciably outpacing module production until about 2012, potentially providing module makers with a margin expansion opportunity. We also learn that the plant engineering firms that had done so well when every cell manufacturer and their grandmother was adding production capacity during 2007 and 2008 could underperform in the next few years.

Of course the drawback from not providing a lot of technical background is that it makes the chapter a lot less useful for the novice solar investor, or even for the investor who knows a little bit but does not follow the industry closely. The author does, however, provide a ranking of the "strategic positioning" of 27 solar PV firms based on a proprietary model, with his top pick being Q-Cells (QCLSF.PK) from Germany.

The section on solar thermal, also known as concentrating solar power (CSP), contains more basic information on the technology, and provides an overall very good introduction to the sector. Unfortunately, there is a dearth of CSP investment options, and this sector is thus effectively off-limit to most retail investors.

The section I liked the most in the chapter was the one on solar collectors for building and water heating, an industry I knew about but had never researched. I learned, much to my amazement, that by the end of 2008 there was 142 GW of solar collector capacity installed worldwide, versus 12 GW of solar PV and 1.3 GW of CSP.

China is by far the largest market for solar collectors and, unlike in other industries, it absorbs, according to the author, 90% of its own production. Fawer expects annual growth to be about 25% until 2011 and to settle at 18% between 2011 and 2020. However, the much larger installed base currently means that the absolute level of new installations could be quite massive. Although the section on solar collector does not provide stock picks, it most definitely poked my interest and convinced me to look further into this.

Overall, while I was a bit underwhelmed by the solar PV section, I found the CSP section useful and the section on solar collectors very interesting. A greater technical focus would have strengthened the chapter given how technologically complex solar is, and more stock picks would have been appreciated. However, I will definitely go back to the chapter when I do research on solar collectors and even CSP.

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 06:03 PM | Permalink | Comments (3)

Charles Morand

It seems as though the darkest clouds are finally dissipating over alt energy's financing horizon. Over the past few weeks, money has started flowing into the sector again, as evidenced by a number of recent deal announcements:

1. On June 9, I reported on the upcoming IPO for Magma Energy Corp., a geothermal exploration company. The IPO's size will be upped from an initial C$50 MM to C$100 MM, a sign of increased market appetite 
2. SunPower Corp. raised $418 MM in early May through a share and debt offering, and recently announced it had reached a $100 MM deal with Wells Fargo to fund commercial-scale solar PV projects across the US
3. John reported a few days ago that A123 Systems had amended the SEC registration statement for its proposed IPO, positing that it could be much larger than initially anticipated
4.  In late May, Suntech Power raised $277 MM from a follow-on offering of its American Depositary Shares (ADSs), and recently received a $50 MM convertible loan from the IFC
5. On June 23, Yingli Green raised $193 MM through a follow-on offering of its ADSs
6. On June 25, Trina Solar secured credit facilities of about $57 MM
7. New Energy Finance just reported a slight increase in asset financing for Q2 2009, although it cautioned that money flows into renewable energy projects were: (1) down substantially from what they were a year ago (~66% in the US); and (2) far below the level where they need to be if greenhouse gas emissions are to be brought under control by 2020

As noted by both New Energy Finance and John, requirements for matching funds under the ARRA mean that firms that want to access government grants will have to put up some of their own money, potentially leading some of them to go to market even if conditions aren't ideal.

The recent upsurge in public market financing also certainly has to do with  buoyant markets and higher oil prices, a window that could close if the general sentiment turns negative in the coming weeks.

This increased financing activity is good news to be sure. Pure-play alt energy firms, by virtue of the sectors they do business in, typically have much weaker balance sheets than conventional energy firms or firms in more established industries. They are thus generally in a much weaker position to ride out a long capital markets drought.

But the industry is far from out of the woods yet, and I remain convinced that questionable firms are in a much weaker position to conceal their flaws behind generalized cleantech exuberance than they were in 2006 and 2007. The last rally lifted some boats that didn't deserve lifting, and sooner or later those boats will sink again.

DISCLOSURE: None       
            

Posted by Charles Morand at 11:44 PM | Permalink | Comments (0)

Renewable Electricity cost estimates from a California transmission study and the investment implications.

Tom Konrad, Ph.D., CFA

The seemingly simple question, "How much does wind/solar/geothermal/etc. cost per kWh?" can be surprisingly difficult to answer.  Advocates often cite particularly low figures, but they are often based on particularly favorable conditions, or analyses that don't include all the costs (for instance, costs of permitting.)  Opponents do the opposite, often assuming particularly unfavorable conditions, or adding in costs which they would never consider adding in for their favored technology.  Adding to the confusion, levelized cost of generation calculations are very sensitive to the interest rate used to discount capital cost and the lifetime of the investment. 

A couple years ago, I put together some slides meant to give a visual comparison of transportation fuels, and another set for electricity generation technologies.  These slides were intended to be more qualitative than quantitative, and were based on my personal synthesis of a large number of reports, rather than using a single methodology for each.  More recently, I brought you an economic comparison of energy storage technologies (and alternatives to storage) based on a quantitative review of the literature.

Costs of Electricity Generation

Recently, a friend who invests in cleantech startups asked me for an update of comparisons of electricity generation technologies.  I have not done an update, but I have found more studies that take fairly impartial looks at the available technologies.  The most comprehensive one I've found is the one Black and Veatch (B&V) did for the California Renewable Energy Transmission Initiative (RETI.)  B&V looked at the costs of generation of various renewable energy resources in the California region, as a first step in planning new electricity transmission to the best resources. 

The Phase 1A report is available on the RETI website (large PDF), and is excellent reading for anyone interested in a relatively unbiased view of the real costs of renewable energy.  It is a regional report (similar to, if much more comprehensive than, the Arizona Resource Assessment I wrote about in late 2007,) so people living in other regions should adjust the numbers to reflect resource availability.  California and the surrounding area have good wind, hydro, and biomass resources, as well as world-class solar and geothermal resources.  In the Southeast US, biomass based power would probably be cheaper, but wind, geothermal, and solar more expensive, while in the Great Plains, wind would be cheaper, but solar, hydro and geothermal would be more expensive.  You get the idea.

Here are some highlights:

Levelized Cost of Generation:

 

It's interesting to note that the five least expensive renewable energy resources in the list are either baseload resources (Geothermal and Biomass cofiring) or have some potential to be dispatchable (hydropower, and landfill gas, if used in conjunction with storage for the methane.)  Although wind is a variable resource, there are inexpensive potential sources or renewable electricity that are easy to integrate into the grid.   

Although many of these are relatively small in terms of the total amount of energy produced, they can still be profitable investments, since most investors focus on the better-known renewables such as wind and solar.  Charles recently brought you two articles highlighting investments in Geothermal and Biomass cofiring.  Covanta Holding (NYSE:CVA) is an owner and operator of waste-to-energy facilities including both landfill gas and biomass.  For hydropower investments, you can look at several of the Clean Energy Income Trusts, or suppliers of parts and services for hydropower projects such as AECOM Technology Corp. (NYSE:ACM).  

Performance and Cost Summary

 

Resource Size and Industry Maturity

To the extent that the California region is representative, B&V's comments about the size of the resource will also be interesting to investors.  Although companies such as the ones discussed above can be very profitable, a limited resource will place future constraints on growth.  Investors hoping for growth will want to focus on companies focused on types of renewable energy with the largest resources.  

They said:

• Solar photovoltaic (PV) is unique among renewable technologies, as it can be located almost anywhere, and scaled to virtually any size.

• "There is several hundred MW of potential small-scale (>10 MW) hydro generation available in California, Washington and British Columbia. ... This potential is small compared with other resources assessed.

• Wave and Marine Current – These technologies offer substantial technical potential but are unlikely to achieve a commercial level of development sufficient to contribute to California’s RPS goals within the planning horizon [before 2020].

Hence, it will be no surprise to anyone that solar PV is the greatest past and potential growth story of all renewable electricity technologies.  Hydro, in contrast has substantial potential for profitable investment, but investors should focus on the current profitability of the companies in the sector, not on the limited growth potential. 

Investors considering purchasing Wave or Marine Current stocks should take a deep breath and consider other sectors.  Such development stage technologies may have great potential, but research stage technologies are not usually great investments for retail investors: most of the companies are still private, and so there is very little chance that the few public companies are going to be the ones that succeed in bringing the technology to market.

DISCLOSURE: Tom Konrad and/or his clients own CVA and ACM.

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 01:28 PM | Permalink | Comments (6) | TrackBacks (0)

Tom Konrad, Ph.D.

I recently moderated a panel on Financing Renewable Energy for the Colorado CFA Society.  I took down choice quotes, with the plan of using them on Alt Energy Stocks' new twitter feed.   I ended up with enough material for a short article.

My panelists were Garvin Jabusch, COO of Green Alpha Advisors, a green-focused investment advisory firm in Boulder; David Gold, a partner at Access Venture Partners, and manager of their Cleantech investments, and Brian Greenman, of Greenman Financial Advisors, who does project development and finance for community wind developers.  The broad range of perspectives seemed to strongly engage the audience of professional money managers and analysts.

Here are some highlights (some are paraphrases, when my notes were not word for word.)

The State of Wind

Greenman: Community wind is like the Wild West.  Everything is negotiable... It gets interesting when these small players run out of something: money, turbines, anything.

Greenman: There has been only one PTC based wind deal in all of 2009 to date.  People expected a bigger boost from all the attention.  It will come, but it takes time and we're going to have to wait.

The State of Cleantech Venture Capital

GOLD: All Venture Capital is down and that includes Cleantech.  It's not different from the rest of venture capital, except that Cleantech has been hit by a double-whammy: the falling price of our main competitor: Oil.

GOLD: There's a big distraction factor of [early stage] companies chasing government dollars.  This is good if it means they don't go broke, but those dollars will be irrationally allocated.  The stimulus will not have the same impact that the macro efforts of getting the whole economy going would.

The State of Postcarbon Stocks

JABUSCH: Our basket of post-hydrocarbon economy stocks has been strongly outperforming the S&P 500 year to date, so we know money is flowing into the most eco-efficient companies.  Since a significant number of the companies are small and micro stocks, we think that most of this is smart money.

JABUSCH: When you add a price for carbon, that will change the structure of how carbon-intensive enterprises are valued.

Try, Try Again

GOLD: Cap and Trade will be passed in some form this year.  The first attempt at Cap and Trade will have many, many problems.  We'll have to go back and revisit it after we see what they are.

Solar vs. Clean Coal

JABUSCH: Solar is already way cheaper than "Clean Coal," when you count the costs of carbon sequestration, if "Clean Coal" can even be made to work.

Wind vs. Coal

Greenman: Everyone in wind wants to get away from the PTC [Production Tax Credit].  Wind is the cheapest form of electricity from new construction, and wind can compete without subsidies when fossil fuels compete without subsidies.

Getting a Job in Cleantech

Greenman: Get out there, start doing stuff, eventually you'll get paid for it.  Clean Energy is an incredibly welcoming community, and there are many organizations to help you network.

Handling Risks

GOLD: As Venture Capitalists, we won't take policy risk.  If the company will only be sucessful based on the implementation of policy XYZ, we won't invest.

Greenman: For wind, the policy framework is the PTC and the ITC [Investment Tax Credit], and we now have several years of visibility for those.  If you can get the project built in the next 2-3 years when we know that we have support in Washington, your PTC will be locked in for ten years forward... or you can take a cash grant in the form of the ITC.

JABUSCH: This is like the early stages of biotech.  Everyone knew great things were going to happen, but knowing which companies would win was difficult.  We therefore use big baskets of stocks (82 right now) to increase the odds we're betting on future winners.  We like to say, The writing is on the wall for clean energy, but it's still hard to decipher.

Greenman: For wind farms, the big risks are not technology... they are getting transmission interconnection and electricity off-takers.  These risks are measurable... we call it "Fatal Flaw" analysis, but the risks are always there and you have to decide.

U.S. vs. Them

JABUSCH: Everyone has a better vehicle than the GM Volt.  But the markets are so big, and the opportunities are so gigantic, the US does have time to catch up with the rest of the world, and even take a leadership position again.

Posted by Tom Konrad at 05:30 PM | Permalink | Comments (0) | TrackBacks (0)

A comparison of the charts for clean energy ETFs and broader market ETFs seems to show that, clean energy funds have, if anything, underperformed the market as a whole in recent months.  Nevertheless, the quarterly performance update for my 10 Clean Energy Stocks for 2009 showed my picks strongly outperforming the market, although the much riskier 10 Clean Energy Gambles was only performing in-line with the sector indices.

It's unlikely that my picks are due to stock picking skill.  My personal experience has shown that I'm much better at picking sectors than individual stocks: my strength is in spotting trends, not picking individual companies which will outperform. 

Trend Spotting

If my picks are not doing better because of stockpicking, it's either because of luck, or because I spotted a trend.  The relative performance of the two portfolios gives a clue as to what it might be.  When Lehman Brothers declared bankruptcy, I began selling stocks that had weak cash flows or balance sheets, and I continue to believe that companies which can internally finance all their capital expenditures and expenses will outperform the rest for years to come.  As such, my Ten Clean Energy Stocks all had strong balance sheets and cash flows, while most of the Ten Clean Energy Gambles will likely need to raise more money by the end of the year.

If I'm right about this trend, then clean energy stocks have indeed been outperforming the market, but this trend has been masked as the market as a whole fell by the fact that most clean energy stocks are young growth companies; they often have weaker balance sheets and cash-flows than older, more established companies.  

Testing the Trend.

To test my hypothesis, I turned to the Capital Asset Pricing Model, or CAPM.  CAPM accounts for the general riskiness of companies by means of a statistic Beta, which is a measure of how much a company moves in response to moves of the market as a whole.  Because clean energy companies tend to be riskier than the market as a whole, they tend to have Betas greater than one, and hence tend to decline more than the market as a whole when it declines, but advance more than the market as a whole when it advances.  Some commentators think that green funds will outperform in a recovery solely because of the higher Beta, but I suspect there's more to it.   Any difference between the  performance of a stock and the expected performance given the performance of the market as a whole is called Alpha, and if my hypothesis is correct, clean energy stocks are likely to have had positive alpha over recent months.

I chose to test my hypothesis over three and six month periods, since that is how long I feel I have been seeing an out-performance of clean energy stocks (I think it started slightly before President Obama's election, when it became fairly clear that he was going to win.)  The CAPM model says:

Alpha = Actual Return - (RFR + Beta*(RM-RFR))

Where RFR is the risk-free rate, usually taken to be a long term treasury rate of interest, and RM is the market return.  On October 24, 2008, the ten year Treasury note was yielding 3.7%, and on January 27, it was 2.5%.  The total return of the S&P 500 has been -1.2% and 2.4% for six and three months, as of April 24th.  That means that for the 3 month period, RFR₃ = 2.5%/4 = 0.6%, and RM₃-RFR₃= 2.4%-0.6% = 1.8%, while for the 6 month period since October 24, RFR₆ = 3.7%/2 = 1.9%, and RM₆-RFR₆= -1.2%-1.9% = -3.1%.

With this data in hand we can now check to see if clean energy stocks in general have been outperforming.  

Clean Energy ETFs

To understand how the sector is performing as a whole, I will use several Clean Energy ETFs: for the sector as a whole, the two domestic ETFs: The First Trust NASDAQ Clean Edge US Liquid (QCLN) and The PowerShares Clean Energy (PBW.)

ETF	Beta	3 month		6 Month
		Performance	Alpha	Performance	Alpha
QCLN	1.85	9.4%	5.5%	4.4%	8.2%
PBW	1.74	7.7%	4.0%	-1.4%	2.1%

Clearly, both these clean energy ETFs have been strongly outperforming the market since Obama was elected and assumed office.  Until the recent market recovery, however, the general market downtrend, combined with the high Betas of alternative energy stocks have been obscuring the strong outperformance. 

Subsectors: Solar, Geothermal, Efficiency, Smart Grid

There are also Solar ETFs and Wind ETFs, which would allow us to see how these subsectors are performing relative to the whole market, but this would require comparison with a global market index, and some time spent importing data into a spreadsheet to calculate beta.  As I mentioned at the end of a recent article on clean energy mutual funds, I expect that the subsectors most likely to outperform are those on which President Obama has been emphasizing in his policy: Energy Efficiency, Smart Grid, High Speed Rail and Transit stocks and those power generation sectors which are most likely to contribute significantly to his goal of tripling renewable energy, Geothermal and Wind.  Solar has also been outperforming, but only over a much shorter time period.  

The boost to solar came from China, not Obama, and so it has only been felt for the last month or so.  Since I don't have appropriate sector ETFs, I used a selection of individual stocks I hoped might be representative of their sector.  I mostly chose stocks which are not in one of the two sets of ten stocks for 2009 discussed above.

Some of these stocks follow the patterns I would expect if their performance is being driven by the new administration's policies, but with just a few companies to choose from, I hesitate to draw conclusions about clean energy subsectors.  Probably the best fit is the battery manufacturer Enersys (ENS).  Battery manufacturers received a large boost from the stimulus package, and, this was more of a surprise than with other clean energy sectors. If you look at my discussion of the likely components of the stimulus package from December, you will see that I expected investment in the electric grid (including smart grid), energy efficiency, wind, and geothermal.  

    Batteries were not on my radar, and the large investment in battery technology seems to have come as a surprise to most other investors as well.  Enersys slid in the three months after the election but before the stimulus was unveiled, but then took off in the last three months. In contrast, the gains in my wind stock, smart grid, rail, and energy efficiency stocks were spread out over the whole 6 month period.  The geothermal stock saw most of its gains early on, perhaps because there was little explicit boost for geothermal in the American Recovery and Reinvestment Act.

Stock	Beta	3 month		6 Month
		Performance	Alpha	Performance	Alpha
FSLR (solar)	1.99	4.5%	0.3%	22%	27%
AMSC (wind)	1.87	51.7%	48%	123%	127%
ORA (geothermal*)	1.21	-.6%	-3.3%	35%	36%
PEIX (ethanol)	1.55	-27%	-30%	-47%	-44%
ENS (batteries)	1.16	56%	53%	29%	31%
ENOC (smart grid)	1.52	74%	71%	190%	193%
POWI (energy efficiency)	1.14	8.0%	5.4%	25%	27%
PRPX (rail)	1.39	11%	8%	41%	43%

* Ormat (ORA) is in my Ten Clean Energy Stocks for 2009, but there really is no other choice for a representative geothermal stock.

Tom Konrad, Ph.D.

DISCLOSURE: The author has long positions in AMSC, FAN, ORA, PRPX, and POWI.

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 04:38 PM | Permalink | Comments (2) | TrackBacks (0)

Two months ago, Tom told us how he'd dipped a toe into the black stuff (i.e. bought the OIL etf) on grounds that current supply destruction related to the depressed price of crude oil would eventually lead to the same kind of supply-demand crunch that led oil to spike during the 2004 to mid-2008 period.

If you need evidence that the current price of crude is wreaking havoc in the world of oil & gas exploration, look no further than Alberta and its oil sands. The oil sands contain the second largest oil reserves in the world after Saudi Arabia, but more importantly will account for the lion's share of incremental supply as conventional oil production continues to decline. The province's economy, which had been growing at a breakneck pace for the past five years, has come to a grinding halt: employment insurance claims grew by twice the Canadian average over the past year; personal bankruptcies jumped by 61%; and home foreclosures are on the rise. This is the result of significant project cancellations that will no-doubt limit Alberta's ability to ramp-up output once prices climb back again.

It is thus no surprise that Cambridge Energy Research Associates and others are warning about the economic hazards of curtailing investments into conventional and alternative energy.  

Alt Energy & Fossil Energy

Oil being the most followed of the energy commodities, it is no surprise that it is receiving most of the media attention. Arguably, natural gas and coal prices should matter more to alt energy investors than oil prices: according to REN21, of the $71 billion invested in renewable energy in 2007, 47% went into wind and 30% into solar PV. Both technologies are used for power generation (investments into transportation alternatives are comparatively small) and, in the US, coal and natural gas are the dominant fuels in power production. The relentless focus of the popular press and other pundits on the the economic case for alternative energy being closely tied to the price of crude oil is thus mostly misplaced.

Case in point, last November, a reader wrote me with a correlation analysis conducted over a 5-year period (or, where there wasn't five years' worth of data, since inception). The correlation coefficients between the returns on crude oil and those on alt energy securities were as follows: GEX, 0.19; PBW, 0.14; TAN, 0.18; and the index underlying FAN, 0.19. These are, by most measures, pretty low correlation coefficients. Given the reader's reputation, I trusted the numbers. 

Nevertheless, in alt energy investing as in life, perception is often reality. Given the many signs pointing toward a rapid escalation in crude prices - demand can and will rebound far quicker than supply - I decided to re-explore the relationship between fossil and alt energies. If a strong positive correlation can be found between alt energy investments and crude oil, natural gas and coal investments, there may not be a need to dip a toe into the black (or colorless) stuff at all - one can focus on alt energy alone and still enjoy the ride up.

In order to verify this, I ran a basic correlation analysis with the daily returns on the KOL (coal), OIL (crude) and UNG (nat gas) ETFs/ETN on the one end, and the daily returns on the alt energy ETFs on the other. I got the return data from Yahoo Finance using the Adjusted Close prices that include dividends and splits. Given the results above from our reader's analysis, I only went back six months to see if the (lack of a) relationship still held.   

OIL and UNG track the prices of futures contracts in the underlying commodities, so they are pretty decent securities to use to estimate the returns on crude and nat gas investments. KOL, on the other hand, tracks a basket of coal company stocks. It's the closest thing I could find but it's not ideal as stock returns don't necessarily track commodity returns. For instance, large mining firms will often sell a high proportion of their output through fixed-price contracts, preventing them from benefiting from sudden surges in spot prices. 

The boxes delineate general alt energy ETFs (ICLN to GEX), the solar ETFs (TAN, KWT) and the wind ETFs (FAN, PWND). There aren't any notable differences between the ETF categories, with the most significant differences being between the fossil fuel ETFs/ETN and the alt energy ETFs.   

The relationship between alt energy stocks and coal stocks appears relatively strong. However, in the absence of return data on coal, it's hard to tell whether investing in alt energy stocks (or coal stocks for that matter) is an optimal way of playing increasing coal prices. Given the structure of the coal market, with significantly less involvement by purely financial actors than in oil or natural gas markets, this is a hard one to play for retail investors, although data appears to suggest there is a play.

Though the correlation appears to have strengthened somewhat between crude oil and alt energy investments in the last six months, it remains weak enough that if someone wants to play a return to expensive oil they are still better off dipping a toe (or even an entire foot!) in the black stuff. The same holds for nat gas.

This quick and dirty analysis wouldn't withstand close methodological scrutiny. My only intent here was to see whether these relationships were worth exploring further - they are not. If you want to benefit from crude oil and nat gas price increases and have no ethical qualms about it, invest in them directly!

DISCLOSURE: Charles Morand has a long position in TAN.

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 09:35 PM | Permalink | Comments (3)

Last week, Jefferies & Co. held its Global Clean Technology Conference. Unsurprisingly, the tone wasn't as optimistic as in previous years, with cash and funding worries top of mind. Nearly two months ago, I discussed some tangible signs pointing to looming problems in the industry. However, despite all the gloom, it seems as though several firms (and investors!) are expecting the American Reinvestment and Recovery Act (ARRA) to provide the industry with a lifeline. But will this really be the case?

For one thing, the major environmental spending programs in the ARRA are relatively targeted (i.e. smart grid, storage, clean transportation) and, although a broad range of companies could benefit from measures such as an extension of the production tax credit, direct government cash payouts will not be forthcoming for all. What's more, it now looks like Obama's plan for a cap-and-trade system, which would have provided a major boost for clean power, will be scrapped. This is something I discussed a little while ago: while I do believe a cap-and-trade program will one day be part of the the US environmental regulatory landscape, it's a very tough sell at best - and political suicide at worst - in the midst of an economic slump that is leaving millions of unemployed in its wake. Whether environmentalists like it or not, the general public still sees greenhouse gas regulation as a negative-sum affair.

Can the ARRA single-handedly prevent the sector from going through a massive shake-out that will see many of the smaller firms wiped out or taken over? That's highly unlikely. Like any industry, alt energy's lifeblood is financing, and no legislation can fully make up for dysfunctional capital markets. At this point in the game, with many world governments having declared their unconditional support for clean energy, there's still one key ingredient missing: it's the banks, stupid! (At least according to Vestas' CEO in the interview below)

Given the slow pace at which normal credit conditions are returning and enduring doubts about the viability of many banks, I don't expect a broad-based rally in alt energy/cleantech stocks on the back of the ARRA this year. While certain select stocks will most certainly do well, the potential beneficiaries of the ARRA have by now mostly been identified. Those who expect a rapid return to the days when cleantech stocks outperformed just by virtue of being cleantech stocks are in for a nasty surprise; a general rally in equities, if it does occur in 2009, might pull the good (i.e. operating profits, free cash flows, high current ratios and low total debt levels) alt energy firms up but will leave the sketchy ones behind. This is a new era, and investors are a lot more risk-conscious than they used to be.

Posted by Charles Morand at 10:55 AM | Permalink | Comments (0)

Last month, I wrote about how Ontario, North America's 6th largest jurisdiction by population, had tabled a Green Energy Act to boost the alternative energy industry's growth in the province. In that post, I mentioned that officials would soon release the rules for a feed-in tariff (FIT) system. FITs, which pay fixed rates for renewable power, are all but absent in North America, although they are popular incentive in Europe. Germany's FIT is largely responsible for that country's dominance in solar PV today despite mediocre sun conditions. 

Ontario released the draft rules and proposed prices for its FIT a few hours ago. Proposed prices are as follows:

Fuel Type	Size Tranches	C$/kWh	US$/kWh (x0.79)
Biomass*	Any size	12.2	9.6
Biogas*	≤ 5 MW	14.7	11.6
	> 5 MW	10.4	8.2
Waterpower*	≤ 50 MW	12.9	10.2
	≤ 2 MW (community-based or aboriginal)	13.4	10.6
Landfill gas*	≤ 5 MW	11.1	8.8
	> 5 MW	10.3	8.1
Solar PV	≤ 10 kW (rooftop)	80.2	63.4
	10 - 100 kW (rooftop)	71.3	56.3
	100 - 150 kW (rooftop)	63.5	50.2
	> 500 kW (rooftop)	53.9	42.6
	≤ 10 MW (ground mounted)	44.3	35.0
Wind	Any size onshore	13.5	10.7
	Any size offshore	19.0	15.0
	Community-based or aboriginal (≤ 10 MW)	14.4	11.4
* 35% premium during weekday on-peak hours (11am to 7pm) and 10% discount during off-speak hours

The suggested pricing levels are relatively high and, as discussed in my original article on this topic, should benefit the clean energy independent power producers active in the province. Of special interest is the fact that Ontario is proposing to implement a tariff for offshore wind, and could thus be the first Great Lakes jurisdiction to see significant offshore installations go up (that is, if they get the tariff right!). The solar PV tariffs are based on the tiered German approach and should trigger significant installations if credit doesn't prove to be a problem for households and businesses.      

To be continued...

Posted by Charles Morand at 10:58 PM | Permalink | Comments (4)

It is fair to say that most people continue to equate the terms "alternative" and "energy" with expensive, unreliable and plain unpractical. This naturally leads a majority of people to view alternative energy investing as a high-risk play on some unproven technology with an uncertain probability of success.

This is a perception we've tried to dispel on several occasions, whether we were talking about blue chip alt energy stocks, dividend alt energy stocks or utility alt energy stocks.

It's also fair to say that most people don't typically associate value investing and, by extension, Warren Buffett, with alternative energy. Yet after finishing to read the 2008 edition of his annual letter to Berkshire Hathaway's shareholders, I couldn't help but think that there were a couple of interesting nuggets (I know, I'm a week late).

A Few Classic Buffett Quotes

Although they have nothing to do with alternative energy, I couldn't help but include the few quotes below:

• On the markets: "By yearend [2008], investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game."
• On the economy: "By the fourth quarter [2008], the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have never before witnessed." [Italics mine]
• On markets and the economy: "We're certain, for example, that the economy will be in shambles throughout 2009 - and, for that matter, probably well beyond - but that conclusion does not tell us whether the stock market will rise or fall."
• On investor psychology: "When investing, pessimism is your friend, euphoria the enemy."
• On acquisition opportunities at the GEICO unit: "[...] Tony and I feel like two mosquitoes in a nudist camp. Juicy targets are everywhere." [This is my personal favorite]

Warren Buffett On Alt (and not so alt) Energy

Wind Power

Berkshire's Regulated Utility business owns 87.4% of MidAmerican Energy Holdings which, in turn, owns a number of power and gas utilities. Buffett mentions he loves it when this business comes up with new projects "because in this capital-intensive business these ventures are often large. Such projects offer Berkshire the opportunity to put out substantial sums at decent returns."

And it so happens that many of these new projects have been in wind power. Buffett notes that MidAmerican's investments in wind capacity have made "Iowa number one among all states in the percentage of its generation capacity that comes from wind."

He further notes that since Berkshire purchased MidAmerican, "wind-based facilities have grown from zero to almost 20% of total capacity." When MidAmerican bought out PacifiCorp in 2006, installed wind capacity was expanded from 33 MW to 794 MW, a nearly 500% expansion.

In 2008 alone, the Oracle tells us, MidAmerican spent $1.8 billion on wind generation. Assuming a cost per installed MW of $2.5 million, that's about 720 MW - not bad for an energy source that's expensive, unreliable and unpractical. And so where has MidAmerican gone under Berkshire ownership? It has become the regulated utility with the largest ownership of wind capacity in the US.

Keep in mind that all this investment activity most likely had to be approved by Buffett, and that he is no "flavor of the month" guy - if the economics made no sense there would be no Berkshire money going into wind. The exact nature of their thinking on wind (i.e. is it a play on the PTC?) is unknown, but their actions certainly indicate a strong interest. 

Oil Prices   

Buffett identifies one of his biggest investment mistakes of 2008 as buying ConocoPhillips when oil and gas prices were still high. He "in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year." But he makes this prediction: "I still believe the odds are good that oil sells far higher in the future than the current $40-50 price."

Not much of a prediction huh? This is someone who thinks the following of forecasts: "But neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and loosing years [in equity markets] in advance. (In our usual opinionated view, we don't think anyone else can either.)"

Of course he would never say how much higher, nor does he need to for people to find him credible. But given Buffett's typical time horizons (i.e. decades), it's probably fair to assume that he sees what many of us alt energy investors do: a fundamental and, in the long run, unbridgeable (at a reasonable cost) gap between supply and demand for oil.

Conclusion

This doesn't leave us with much in terms of concrete investment ideas. However, it does confirm that some of the trends upon which the alt energy investment thesis is based are occurring, and that they are being picked up by some of the sharpest investing minds out there.

Posted by Charles Morand at 11:39 PM | Permalink | Comments (0)

Dedicated legislations have been at the core of some of the most impressive regional growth stories in alternative energy, most notably in Germany with the Renewable Energy Sources Act or in California with the various legislative solar initiatives. On Monday, the Canadian province of Ontario became the latest jurisdiction to join the fray as lawmakers introduced the Green Energy and Green Economy Act. Why should investors care? Because such legislations have been at the core of some of the most impressive regional growth stories in alternative energy. 

As a bit of a backgrounder on Ontario, there is currently about 800 MW of installed renewable power capacity (~95% wind) in the province with around 2,500 MW under power purchase agreement (PPA) and scheduled to be brought into commercial operations in the next few years. In late 2006, the province introduced a renewable power feed-in tariff incentive, the first one in North America. This incentive was suspended in May 2008 due to transmission constraints. By then, there were about 500 MW of solar capacity under PPA linked to the incentive, including one of the world's largest solar PV farms.

To put these numbers into perspective, California, the largest solar PV market in the US by quite a stretch, had around 500 MW of PV installed by the end of '07. Next came New Jersey at 69 MW and New York at 32 MW. None of the 500 MW under PPA in Ontario has yet reached commercial operation, and at least some of it will probably be cancelled given current credit conditions. Nevertheless, these figures provide a good idea of the market's potential is. The Canadian Solar Industries Association estimates that Ontario could install up to 16,000 MW of solar PV by 2025, with the potential on Toronto's rooftops alone estimated at 3,600 MW.   

The Green Energy and Green Economy Act

The Act targets three main areas: (1) renewable power generation; (2) energy efficiency; and (3) the smart grid.

1) Renewable Power Generation

Perhaps the most significant measures here are aimed at removing what had proven to be critical barriers to renewable energy projects reaching commercial operation in the province:

1. Renewable energy projects meeting certain criteria will be guaranteed a connection to transmitters and distributors' networks and will be given priority access over other forms of power generation
2. Transmitters and distributors will have to make the necessary network upgrades to allow for the connection of renewable power projects and the eventual expansion of renewable power capacity
3. Renewable power projects will be exempt from all forms of municipal permit requirements to counter a growing trend of NIMBY groups lobbying their municipal councils to block renewable energy projects  
4. A new office of Renewable Energy Facilitation has been created to help speed up the permitting process (e.g. environmental assessments, etc.)

On the revenue side, the legislation does the following:

1. The feed-in tariff that had been suspended in May 2008 will be reintroduced once new rules have been designed (no timeline provided but Q2 2009 has been thrown around)
2. A system of PPA auctions for large-scale renewable power projects that has been in operation since 2004 will be maintained 

Analysis

The measures aimed at removing barriers to renewable projects are significant. However, until the new rules around the feed-in tariff are released (e.g. pricing, eligible fuels, etc), the exact impact of the law will remain unclear. My own guess is that the government will be very aggressive with ramping up renewable energy installed capacity over the next five years as, as its name indicates, this law is also about the economy. If you believe the government, this bill is as much about creating a counter-cyclical effect as it is about cleaning up the environment. If my thesis is correct and this turns out to be a boon for developers, the following stocks should be watched:

Name	Ticker	Description	Potential Upside Related to Legislation
Algonquin Power Income Fund	AGQNF.PK	Ontario-based renewable power developer with exposure to Ontario (income trust)	V. High
Boralex	BRLXF.PK	Canadian renewable power developer with exposure to Ontario	V. High
Canadian Power Developers	CHDVF.PK	Canadian renewable power developer with significant exposure to Ontario	V. High
Great Lakes Hydro Income Fund	GLHIF.PK	Ontario-based hydro power developer (income trust)	V. High
Innergex Renewable Energy Inc.	INRGF.PK	Canadian renewable power developer with exposure to Ontario	V. High
Macquarie Power & Infrastructure Income Fund	MCQPF.PK	Ontario-based renewable power developer (income trust)	V. High
ARISE Technologies Corporation	APVNF.PK	Ontario-based silicon and PV cell manufacturer with a module installation segment. The module installation segment is focused on the Ontario residential market	V. High
Northland Power Income Fund	NPIFF.PK	Ontario-based power developer with some exposure to renewables (income trust)	High
Brookfield Asset Management	BAM	Infrastructure development firm with exposure to Ontario renewables	Medium
FPL	FPL	FPL Energy unit is one of the world's largest wind park owners and has exposure to Ontario wind	Low

2) Energy Efficiency

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

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

Analysis

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

3) The Smart Grid

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

The smart grid measures are:

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

Analysis

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

Conclusion

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

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

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

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

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

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)

Alt energy investors figured out early on in this crisis that a widespread shut-down of credit markets coupled with a substantial re-pricing of risk would not bode well for the industry. That's why alt energy stocks have outdone the overall market to the downside over the past year, with the iShares S&P Global Clean Energy Index (ICLN) down more than 60% Vs. the S&P 500 loosing a little under 40% over the same period.

Much of this carnage occurred before any real impacts on alt energy had been felt (current prices in equity markets are generally forward- rather backward-looking). Over the past couple of months, however, the proverbial chickens have come home to roost, and companies with weak balance sheets and/or no sales have been experiencing difficulties. Good companies have had to cut back staff and production. Here are some of the headlines that caught my attention:

Yesterday, clean locomotive maker Railpower Technologies Corp. (RLPPF.PK) filed for bankruptcy protection and put itself up for sale. I took a small position in this stock in May and liquidated it at a significant loss in October (this was a pretty bad call on my part but, like many people, I'd failed to grasp how dire things were going to get). Railpower's woes this time around were due entirely to bad luck (and terrible timing!): it had finally overcome initial execution problems and found a credible financial backer, only to have its plans wrecked by the economic maelstrom. Unfortunately, I don't think there'll be a third chance for this one.

Also yesterday, emerging turbine maker AAER Inc. (AAERF.PK) announced that it had extended the deadline on the deal it signed last October for the supply of 100 MW of turbines to a Canadian wind project by two months. The original agreement called for both parties (AAER and project developer Northland Power) to have secured the necessary financing (the former to produce and the latter develop) within four months. AAER has since gone to market and raised debt and equity financing. Northland's situation, however, is less clear. My take: Northland is unable to find cheap debt to develop its project and wants more time to see if things will normalize in the next couple of months. While not terrible, this certainly isn't great news.

VRB Power Systems, the large-scale energy storage technology developer that went bankrupt in November, announced a few days ago that it had finally liquidated its assets. Done like dinner!

Privately-held OptiSolar, a thin-film panel maker and solar park developer, cut 300 jobs in early January (50% of its staff) because of financing problems. Other solar firms, including Ausra, SunEdison, HelioVolt and Suntech Power (STP) have all recently announced staff cuts, although not to the same extent.

Wind tower maker DMI Industries, a unit of Otter Tail Corp. (OTTR), announced in early January a 20% reduction in its workforce at plants in the US and Canada. Not to be outdone, Clipper Windpower recently laid off 150 employees at a US plant (38% of the workforce), while LM Glasfiber let go of 150 and is halting production production at two Arkansas plants. Finally, Trinity Structural Towers, a unit of Trinity Industries (TRN), closed down a wind tower plant and laid off 131 workers in mid-January.

Micro-cap Canadian wind project developer EarthFirst Canada went belly-up in early November because it ran out of cash and couldn't find financing. This bankruptcy had been in the works for some time and I tried to play it...unsuccessfully.

DISCLOSURE: Charles Morand has positions in the following stocks: AAER, EarthFirst Canada.

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 11:53 AM | Permalink | Comments (7)

The public relations firm Waggener Edstrom released a survey of investors and analysts yesterday seeking opinions on what was in store for alternative energy for 2009 (link to the survey at the end of this article). Of the 81 respondents, 47 were institutional investors, 26 were brokerage analysts, five were from independent research firms and three were classified as "Other industry participants". Overall, 58% of respondents were from the buy side, 32% from the sell side and the remainder from "Other". Here are a few tidbits that caught my attention.

Storage: The Next Boom?

Overall, 50% of respondents expect alternative energy stocks to outperform the market in 2009 because of Obama's policies. Survey respondents are most bullish on energy storage stocks (including battery stocks) and wind stocks, with 43% believing that they will perform above or far above average (other categories include: biofuels, hydrogen & fuel cells and solar). Energy storage edges out wind in terms of bullishness with 15% of respondents believing storage stocks will perform far above average in 2009 (vs. 8% for wind).

This is an interesting development in my view and probably borne out of the recognition that, without significant technological improvements and cost decreases in storage technologies of all scales, alternative energy deployment will eventually plateau.

Unsurprisingly, biofuels receive the most bearish assessment with nearly a quarter of respondents believing the sector will perform far below average this year.

It's The Policies, Stupid!

When asked: "How do you think the following factors/variables will affect the performance of alternative energy stocks in 2009?", 38% of respondents say the Obama administration will have a very positive effect on the sector (1st overall choice), while 33% say government incentives in the US will also have a very positive effect (2nd overall).

Access to capital is viewed as having the most negative effect (33%) on alternative energy stocks, followed by oil and gas prices (14%). When asked: "Generally speaking, public interest and commercial investment in alternative energy will (continue to) diminish whenever oil and gas prices decline", 53% of respondents either agreed or strongly agreed Vs. 38% who disagreed or strongly disagreed.

This appears to indicate that while financing is the single largest risk to sector growth, investors are concerned about low energy prices lessening the case for alternative energy. Nevertheless, policy and regulatory developments are top-of-mind for investors. Apparently, several respondents (although the number isn't stated) revealed that their alternative energy investment theses rested on government incentives.  

Journalists Have Some Homework To Do

Overall, respondents feel that both the mainstream and business press do a poor job of covering the alternative energy sector, with the former often being overoptimistic and the latter being too sceptical.

Only 24% of respondents agree that "generally, the media cover the industry fully and fairly", with the balance (76%) believing that "journalists and other media often overlook or are underinformed about important aspects of the industry".

Stars & Dogs For 2009 

An investor survey wouldn't be the same without stock picks. Without further ado, here are respondents' views regarding the best and worst performing alternative energy stocks for 2009.

Best & Worst Performing Alternative Energy Stocks for 2009
Rank	Top Picks		Top Dogs
#	Company Name	Ticker	Company Name	Ticker
1	First Solar	FSLR	Solaria Energia	SEYMF.PK
2	Vestas	VWSYF.PK	Suntech Power	STP
3	Sunpower	SPWRA	Theolia	THIXF.PK
4	Iberdrola Renovables	IRVSF.PK	Vestas	VWSYF.PK
5	Covanta Holding	CVA	Aventine Renewable	AVA

Interestingly, the top picks don't include any storage or battery stocks while only one of the dogs is a biofuel stock (Aventine).

Either respondents don't want to reveal what they're buying or they won't put their money where their mouth is. I find it a little difficult to believe that respondents truly view storage as THE alternative energy sub-sector to be in for 2009 but can't identify a single storage stock they collectively like. 

The Survey

Access the survey of alternative energy investors and analysts.

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 11:55 PM | Permalink | Comments (6)

When I began writing about clean energy investing in 2006, my competition was sparse.  The quality blogs with industry heavyweights were either not focused on investing, or were primarily focused on venture capital.  Now the world has changed.  I keep finding new blogs and writers with a strong focus on both clean energy and public companies.  Here are a few I'd like to share with readers:

Dedicated Blogs

Energy Tech Stocks - Three articles a day can be a little daunting, but that's what happens when you try to cover everything.

Camino Energy - Their PurePlay indices are a great way to see what's happening with subsectors that don't have dedicated ETFs.

Best Sustainable Business Blogs

Although not strictly focused on investing, I've gained much useful knowledge and insight from these business writers:

Tyler Hamilton's Clean Break. A must read, especially if you're interested in Canadian companies.

Marc Gunther - Marc's writings on sustainable business are among the best in the field.

Joel Makower's Two Steps Forward.  Joel's probably first among the industry heavyweights I referred to in the intro.  He also showed the great insight of being the first one in this list to add me to his blogroll soon after I started writing.  Thanks, Joel!

Cleantech Blog - The Venture capital focused blog I alluded to in the intro.

The Wall Street Journal's Environmental Capital.

Seeking Alpha Writers

Seeking Alpha is a great aggregator of articles focused on stocks, and many excellent writers about alternative energy companies publish or are syndicated there.  Most of the best writers are already on this list elsewhere.  Two exceptions are:

Greentech Media has excellent writing on many aspects of clean energy, and Seeking Alpha does a good job of publishing just their investing-focused articles.

John Peterson - A battery and energy storage expert who publishes only on Seeking Alpha. 

Peak Oil Investors

Jim Kingsdale's Energy Investment Strategies is more broadly energy focused, but he's usually spot on when he writes about clean energy.

Honorable Mentions

Both Earth2Tech and Climate Progress have such good writing I wanted to mention them, despite the fact that they have little to say about investing.

Clean Energy Sector - This young blog shows a lot of promise.  Running across it made me think of writing this article.

Other thoughts

If all these are too much to keep up with, try our Cleantech News Blog Aggregator (CTN).  On Monday, I'll use the CTN algorithm to bring you the 10 most controversial stories of 2008 (link will be broken until then.)

If you're not in this list, and you think you should be, leave a comment.  If I get enough good suggestions, I'll write a follow-up.

Tom Konrad

Posted by Tom Konrad at 03:08 PM | Permalink | Comments (0) | TrackBacks (0)

As I've discussed previously, things haven't been easy of late for alt energy stocks, especially those of the pure-play kind. A few days ago, I was asked which, if any, alt energy stocks I could recommend in this environment. My answer was: none. While people continue to go on television claiming that alt energy's problem has to do with falling oil prices, in my view the real risk at the moment has do with financing - financing for the companies producing the technologies and financing for their customers. The two business models are simultaneously under attack: for technology firms, the model whereby a company burns through loads of cash in the hopes of eventually commercializing  a homerun application is dead, and for power producers and households installing solar panels and wind turbines current credit costs don't permit the necessary high degrees of leverage. As I've argued before, a temporary (i.e. 12 to 18 months) drop in oil prices will not phase policy-makers, and most of the demand right now is policy-driven.

So, for now, I would stay away from most pure-play alt energy stocks, at least until capital markets settle down and credit markets really normalize. However, as we've pointed out on many occasions, there are a wealth of companies out there with diversified revenue streams and appreciable market capitalizations that are moving into alt energy and cleantech. The dramatic drop in equity markets over the past few months has made the dividend yield on some those firms look quite attractive. For long-term investors, the advantage of purchasing a stock with a high dividend yield is that, provided the company can continue paying the dividend, you lock in an attractive yield on your security and you get to benefit from capital appreciation once markets recover.              

The table below lists a few diversified stocks with exposure to alt energy that currently have an attractive dividend yield (>4%). The next step would be to look into the ability of the firm to maintain this yield throughout the bad economy. 

Name (ticker)	Div. Yield (%)	Main Alt Energy Areas
General Electric (GE)	7.20	Wind turbine manufacturing; wind park ownership
Otter Tail Corporation (OTTR)	6.30	Power generation; wind turbine components (DMI)
Portland General Electric Co. (POR)	5.40	Power generation with strong exposure to wind
Xcel Energy Inc. (XEL)	5.10	Power generation with strong exposure to wind
The Timken Company (TKR)	5.00	Bearings for wind turbines
Koppers Holdings (KOP)	4.10	Railways ties and utility poles (treated wood)

Besides Otter Tail, the names in this table are not typically labelled "green energy" or "alternative energy" stocks. Most of the pure-plays pay no dividend. As stated above, a necessary next step would be to look into these firms to see if they will be able to maintain this dividend.

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

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

Posted by Charles Morand at 08:37 PM | Permalink | Comments (3)