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September 26, 2014

Big Money Looking For Green Investments

Sean Kidney

Climate Finance session at UN Summit is electric.  Insurers go wild with promises; investors plead for green investments; Jim Kim almost breaks out in song about green bonds.

It's the day after the UN Climate Summit party in New York. Yes I do feel as if I'm hungover; but it was a gas. If you're one of those who worry about the world, there is something magical in being inside the totemic General Assembly, with it's embodiment of one world idealism.

Ban Ki Moon's audacious Summit convening (that's really the only power we allow him) made for a really useful event: it bought out marchers around the world to ask their governments for action; and it extracted some useful new commitments, such as:

  • Germany and France each announced $1bn for the Green Climate Fund.
  • China said it will reduce carbon emissions (per unit of GDP) by 45% by 2020 compared with 2005 levels.​
  • The International Development Finance Club (IDFC) announced that it's on track to increase direct climate financing to $100bn a year by the end of 2015.

But above all there was an awful lot of talk about green bonds (and no, it wasn't just me being noisy). UN Secretary-General Ban Ki Moon talked about the opportunities of green bonds in his speech, World Bank President Jim Yong Kim spoke about scaling up - in fact he spoke rhapsodically on the topic - and the CEOs of Credit Agricole and Bank of America waxed lyrical on their application. And that was just the start of it.

Best of all, the Summit elicited some pretty cool commitments from institutional investors, those folks who now own half the planet on our behalfs (after all, we're the pension fund or insurance beneficiaries). We got:

  • A new Portfolio Decarbonization Coalition (PDC) made up of coalition of institutional investors, coordinated by our friends at CDP. They committed to decarbonizing $100bn of their investments by end 2015 and to measure and disclose the carbon footprint of $500 billion in investments. In fact spokesperson Mats Anderson, the CEO of Swedish pension fund AP4, said his fund would fully decabornize by 2020.
  • Three big pension funds announced they would grow their investments in low-carbon assets to more than $31 billion by 2020.
  • The media statement we put out yesterday listed more, like Barclay's new $1bn green bonds fund, ACTIAM's promise to have invested $1bn in green bonds by end 2015, and Zurich Insurance Group's $2bn commitment.

​Then the two insurance industry associations, ICMIF and the IIS, representing the majority of insurance companies globally, put out a humdinger. This is an industry that manages a third of the world’s investment capital - approximately $30 trillion. That gets attention. But only $42 billion can be called climate related investment (what have they been doing!). So they announced they would double the industry investment in climate investments to $84 billion by end of 2015. That's good.

Then they went further and announced then would multiply current investment in climate investments by 10 times by 2020 = $420 billion. A that point I was in love - that's a big kicker for climate change related investments. Of course the majority of their investments are in the form of bonds - which will mean increased demand for climate bonds and green bonds. Yes, that's increased demand in the already hot market.

But wait, there's more! Then, Angelien Kemna, CEO of the $400bn+ APG Asset Management came on, representing a coalition of investors with $24 trillion of assets under management - coordinated by the the Global Investor Council on Climate Change, the Principles for Responsible Investment and UNEP Finance Initiative. She effectively said "we stand ready to invest; please get us some deals" and called on policymakers to take action that supports greater investments in clean energy and climate solutions. That was also the theme of the Investor Statement we published yesterday.

So there's the theme. "The capital is ready, bring on the investments to be made! And green bonds."

——— Sean Kidney is Chair of the Climate Bonds Initiative, an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

September 10, 2014

Divesting: Last One Out Loses

Tom Konrad CFA

Anew report written by Nathaniel Bullard at Bloomberg New Energy Finance highlights the difficulties large institutional investors would have divesting from fossil fuels. What it does not specifically discuss is that these difficulties could lead to large financial losses for investors who see the difficulty of divesting as a reason to delay.

Just as we can't easily fill up our cars with solar power instead of gasoline, the report points out that there is no asset class that can directly substitute for oil and gas in large institutional portfolios.

A person with a short commute can simply ditch gasoline for renewable fuel by riding a bike, and small investors can easily divest from fossil fuels without sacrificing growth or yield by using small capitalization stocks and yield cos.

The relatively high yield of oil and gas stocks is the most difficult to replicate, even at its level of 2.41%, which the report describes as “not enormous.” According to the report, the only sector with a higher average yield is REITs (at 4.55%). REITs have a total market capitalization of less than a third of oil and gas stocks, so it would be impossible for more than a fraction of large investors to replace their oil and gas holdings with REITs.

The Instructive Case of Coal

In contrast to oil and gas, the report makes the point that because the market capitalization of coal companies is much smaller, divesting from coal alone is much easier than divesting from oil and gas. The report states that “Coal equities are less than 5% the total value of oil and gas equities, and have already trended down nearly 50% in the past five years... as a result, divesting from coal would be much easier then divesting from oil and gas.”

The report's author Nathaniel Bullard, told me in an interview that divesting from coal would have been more difficult just three years ago. He says, “US coal has had clear indicators of future change in place for a while. … Some coal equities have lost 90% of their value since 2011... This much diminished size means that... the same number of shares will represent a much smaller portion of an investor's overall portfolio relative to 2011.”

Hold High, Sell Low?

To put it more bluntly, investors who have already lost their shirts in coal stocks will have a much easier time selling their much-diminished holdings today than they would have when coal stocks were at their peak. Ironically, it's easier to sell low and buy high than vice-versa, especially for investors who manage large pools of money.

It does not take a multi-million dollar salary to know that waiting until your stocks have fallen by half before you sell is a suboptimal investment strategy. Despite past “clear indicators of future change” and lower estimates of future coal demand due to air pollution regulations in the coal industry, institutions like Stanford are only now beginning to divest from the sector. Most have not yet budged.

Are Oil and Gas Next?

The report begins with a quote from an executive who describes the divestment movement as “one of the fastest-moving debates I think I've seen in my 30 years in the markets”. If this fast-moving debate leads to fast-moving divestment, the sheer size of institutional oil and gas holdings would lead to a scale of the selling that could easily drive down prices of oil and gas stocks as fast as coal stocks have fallen over the past few years.

The divestment movement was only in its infancy when coal stocks peaked in 2011, so divestment has been only a minor contributor to their decline. Bullard attributes most of the decline to fundamental factors, such as low gas prices and (to a limited extent) wind power in the US, and concerns about air pollution in China.

That said, the long term fundamentals of oil and gas are not favorable. Industry costs are rising as producers shift towards unconventional sources such as tar sands and tight oil and gas which are extracted with relatively expensive techniques such as hydraulic fracturing (“fracking”). Meanwhile, high fuel prices are beginning to reduce average driving distances in mature markets such as the US and Europe while the declining costs of efficiency technologies such as hybrid and electric vehicles further lower demand. In the fastest growing vehicle fuel market, China, air pollution concerns have led the government to aggressively promote “new energy” vehicles, particularly hybrids and EVs.

Natural gas faces increasingly inexpensive competition in electricity markets from wind and solar generation. That, combined with technologies such as storage, smart grid, demand response, and better transmission which make it easier and cheaper for these variable sources to supply a larger portion of electricity demand with less reliance on dispatchable generation such as natural gas, hydropower, and biomass-fired electricity.

The fundamentals of all fossil fuels will be further undermined if the world ever makes a concerted effort to rein in carbon emissions. At the moment, the prospects for large scale regulatory moves seem dim, but at some point the increasing costs in terms of falling crop yields, widespread and severe heat waves and droughts, ocean acidification and the like will lead to political action. At this point it will almost certainly be too late to avoid significant economic and human costs from climate change, but that does not mean that it will not help us avoid even greater damage. And the longer we delay taking substantive actions to curb greenhouse gas emissions, the more draconian those actions will have to be. Drastic moves to curb carbon emissions will have even more drastic effects on the fundamentals of fossil fuel industries.

Conclusion

In part because it is so hard for large investors to exit fossil fuels, it is unlikely that a majority of such investors will move to divest before they have lost a large portion of their current holdings to price declines driven by the fundamental factors outlined above and selling from more motivated investors.

Some of the factors listed above, such as concerted political action to curb carbon emissions, may take a long time to be felt. Other factors, such as the declining cost of renewable energy and efficiency technologies and the increasing costs of fossil fuels are moving energy markets today.

When these factors will begin to hurt oil and gas stocks is unclear, but the coal industry shows that, although divesting is hard, it does not pay to wait too long.

This is where the analogy to replacing fossil fuels in your commute by buying an electric car breaks down. With electric cars, the more people own them, the easier and cheaper they will be to use: growth in charging infrastructure will rise with the adoption of plug-in vehicles, while higher volumes should help bring down their initial cost.

In contrast, it pays to be first rather than last when divesting from fossil fuels. While it is possible to be too early, at some point the worsening fundamentals of fossil fuel industries and/or a large scale divestment movement will undermine the value of all fossil fuel stocks. Those who divest sooner will have much more money to invest elsewhere than those who delay because divesting is just too hard.

Fortunately, small investors have it easy. Divesting, for once, is a place where the small investor has the advantage on Wall Street.

This article was first published on Renewable Energy World, and is republished with permission.

September 05, 2014

Capital Pacific Bank: Free Market Alternative with a Conscience

Not A Bankster

By Jeff Siegel

In the long, slow recovery from the 2008 financial collapse, the banking industry has increasingly been regarded as a buglight for the untrustworthy.

The Libor (London Interbank Offered Rate) scandal brought banking corruption to the front of the news, and showed the world a huge ethical hole that had burned through the middle of major banks.

In a 2012 essay entitled “Is Banking Unusually Corrupt, and If So, Why?” Financial analyst, Circuit Court judge and University of Chicago Law School Lecturer Richard A. Posner laid out the reasons why the system might foster unethical behavior.

"The complexity of modern finance, the greed and gullibility of individual financial consumers, and the difficulty that so many ordinary people have in understanding credit facilitate financial fraud, and financial sharp practices that fall short of fraud, enabling financial fraudsters to skirt criminal sanctions,” Posner said.

The public embraced a depression-era term to show its feelings of distrust and disgust.

“Banksters.”

A portmanteau of “bankers” and “gangsters,” the term was first used in 1933, but embraced anew when people saw what had become of their assets. Trust in banks sank.

Seventy-eight percent (78%) of people surveyed in the Consumer Banking Insights Study believed big banks were fully to blame for the financial crisis of 2008 and the subsequent recession. Thirty one percent (31%) of those people said they didn't trust big banks with their money even though they were already customers of one.

Smaller banks and credit unions started to become more attractive to disaffected customers as a result, and America's credit unions recently passed 100 million members, according to the Credit Union National Association (CUNA).

“[It's] the unique structure - not-for-profit, member-owned cooperative - of credit unions that gives them the ability to offer better rates and member-focused service,” CUNA said in a statement in August.

Beyond local banks and credit unions, Americans looking to bank differently have yet another option: the B Corp Bank.

A bank with a philosophy

Benefit Corporations and Certified B Corps are companies that are committed to responsibility beyond providing shareholder value. They have to uphold certain environmental standards, labor standards, and tax standards; and are bound to provide something more than just profit.

We recently took a look at B Corps and liked what we saw.

With more than 1,000 corporations submiting to B Corp certification, a select group of banks has begun to gravitate toward the philosophy, too. Earlier this summer, the sixth bank attained Certified B Corp status.

It's a public company, too.

Portland, Oregon's Capital Pacific Bank (OTCBB:CPBO) was founded in 2003 as a local bank to serve the needs of local businesses. In the intervening decade, it has grown into a full-scale financial institution that also has a mission of sustainability and community involvement.

B Labs has given CPB a score of 98 out of 200 on the B Corp certification scale. The lowest score allowed to keep certification is an 80, so it is closer to the low end of the scale than the high. However, it's only been certified for a couple of months, so its score can improve with each monthly review. It's also on par with the Business Development Bank of Canada, another Certified B Corp bank.

At the end of 2013, CPB had $239 million in total assets, and net income of $1.8 million, or $0.69 per share, the highest annual earnings in the company's history. It had double digit growth in both deposits and loans, and an 8.8% return on equity for the year. It closed out the year with a book value per common share of $8.36.

“Many banks are dealing with sluggish loan growth due to lackluster demand, low-interest rates, and increasing regulatory and compliance costs,” Mark Stevenson, CEO and President of Capital Pacific Bancop wrote in the company's annual report to shareholders. “Unlike many of our peers, we’ve been successful in achieving growth in our loans, deposits and net interest income in spite of these headwinds, and our profits have grown to record levels, putting us among the top performing banks in the Pacific Northwest.”

It's also worth noting that Capital Pacific Bank has only one single physical location. This was chosen to diminish its footprint and streamline its operations, and it shows that CPB is in tune with broader trends.

Branch closures in the U.S. hit its all-time highest level in 2013, with 1,487 branch locations closing over the course of 2013. This is the most significant decline ever recorded by SNL Financial, a financial market analysis firm.

Since the crisis of 2008, banks have increased their efforts in mobile and online banking services to cut any overlap in service. If a customer can deposit his checks and manage his finances online, he would have no reason to go to his local branch and waste several hours of his precious time.

Time is money, after all.

So Capital Pacific bank is keeping it small and local, while adhering to more stringent regulations outlined by B Labs. It's a new kind of bank for a post-crash economy.  And from a free market perspective, I like seeing this kind of alternative.

 signature

Jeff Siegel

Full Disclosure: I currently own shares of SCTY.

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

May 09, 2014

Renewable Energy Stocks By The kWh

Tom Konrad CFA

Disclosure: Long BEP.  Short PEGI $20 and $25 puts, short PEGI $30 and $35 calls, short NYLD $40 and $45 calls.

I recently sized up five renewable energy power producers using the metric that’s most often used for solar panels: Dollars per Watt ($/W).  It’s an intuitive metric, but has serious flaws both for evaluating solar installations and stocks.  Slightly better is Watts per Dollar (or W/$100 to make the numbers look nice) as shown in the chart from that article below.

The main advantage of W/$100 over $/W is that it’s additive: I can meaningfully stack the capacity contributions from various fuel sources.  (I.e. ookfield Renewable Energy Partners (NYSE:BEP) has 7 Watts of wind power, 33 Watts of Hydropower, and 2 Watts  of cogeneration for every $100 of Enterprise value, for a total of 7+33+2 = 42 Watts of capacity per $100.  You can’t perform a similar calculation with the number of dollars you have to invest in BEP to get a Watt of each type of energy production.)  That said, W/$100 retains the other disadvantages of $/W, most importantly that different types of power plants are used in different ways.

Watts per 100 dollars


Baseload plants such as geothermal run nearly constantly, while variable resources such as wind and solar produce variable amounts of power based on climatic conditions.  Dams allow hydropower to respond somewhat to demand for power, but run-of-river hydro facilities are totally dependent on water flows, and seasonal and annual flows are dependent on precipitation.

One way to account for all this is to look at annual energy production in GWh per year.  The data from the following chart is taken from each company’s 2013 annual report.  I had to drop SolarCity (NASD:SCTY) from the list because I could not find energy production data.

kWh per dollar

Ormat (NYSE:ORA) and NRG Yield (NASD:NYLD) only reported aggregate energy production for 2013, so I made some assumptions based typical capacity factors to allocate production between Ormat’s geothermal and waste heat operations, and between NRG Yield’s wind and solar farms.  Ormat’s products business which sells equipment to other geothermal and waste heat recovery operations is scaled based on the relative revenue earned by each segment, while NRG Yield’s thermal businesses provide heat or cooling, and are shown in thermal kWh, which typically have lower value than electrical kWh.

A new category which does not appear in the W/$100 chart is Brookfield Renewable Energy Partners’ (NYSE:BEP) Storage business.  This takes advantage of extra capacity in its hydroelectric dams buy pumping water back behind the dam when during times of low electricity demand, and allowing that water to flow back through the turbine and generate electricity when demand it high.

It’s interesting to note that Ormat and Brookfield look most attractive when evaluated on annual energy production, while NRG Yield looked best based on capacity.  This is because hydropower and geothermal are typically being used at closer to their potential output more of the time than solar and wind, and much more than NRG Yield’s thermal assets.   This variation is captured by a power plant’s “capacity factor,” which is the percentage of its theoretical maximum production it actually achieves.

The following chart shows the capacity factors actually achieved by these four companies in 2013:

Capacity Factors

Note that I had to guess at the relative capacity factors for NRG Yield’s wind and solar operations, since the company only provides aggregate energy production data.  In any case, NRG’s total renewable energy production is large relative to its renewable energy capacity,  so we can conclude that its wind and solar farms are in good locations for those resources.  There were no such complications with PAttern Energy Group (NASDAQ:PEGI) since all of its generation is wind power.

Final Thoughts

Annual energy production is still a very incomplete picture of the value of these company’s operations.  The value of electricity depends greatly on local market conditions, as well as the time and season.  Nor do any of these charts include the companies’ expansion plans.

Can we conclude anything from this series of charts comparing power produces by $/W, W/$100, annual kWh/$, and capacity factor? Perhaps only that it’s impossible to sum up a company’s operations in a single number, or even a hundred numbers.  Not that this will be a surprise to anyone who has cracked open a company’s annual report.

On the other hand, I never know what I’ll find when I decide to look at companies using a new metric.

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.

May 07, 2014

Renewable Energy Stocks By Dollars Per Watt

Tom Konrad CFA

Disclosure: I and my clients own HASI and BEP. I have short call positions in NYLD and PEGI, and short put positions in PEGI.

Dollars per watt ($/W) is a lousy measure of the economics of solar, but it persists.

Most likely, it persists because it seems familiar.  We can pay $4 for a watt of solar, or $4 for a Iced Hazelnut Macchiato at Starbucks.  Unfortunately, while the analogy may seem apt, this is a lot like knowing you’re getting a Macchiato without knowing if it’s a Tall, Grande, or Venti.  The actual energy production from a solar system depends greatly on a number of factors, including location, orientation, mounting structure, shading, string configuration, and choice of inverter.

Nevertheless, dollars per watt persists.  You’ll find it even in industry reports like US Solar Market Insight from GTM Research, as seen in this graph of annual PV installations and cost in dollars per watt:

PV Installations dpw GTM Research.png

Dollars of Stock Per Watt

Knowing that I can’t beat them, I decided to join them.  I used dollars per watt to provide a rough guide of how much solar an investor gets when buying the stock of publicly traded companies that own or finance solar: SolarCity (NASD:SCTY), NRG Yield (NASD:NYLD) and Hannon Armstrong Sustainable Infrastructure (NYSE:HASI) in a recent article about solar leases.

Here, I take it a little farther, and look at $/W for all renewables.  Below I also include wind farm owner and developer Pattern Energy Group (NASD:PEGI), geothermal company Ormat Technologies, Inc (ORA:NYSE) and hydropower and wind partnership Brookfield Renewable Energy Partners (NYSE:BEP.)   I dropped Hannon Armstrong from the list because I was not able to obtain sufficient information from the company about the renewable projects it has financed in time for publication.

The following chart shows how much of each company’s stock you would have to buy to get a watt of each type of renewable energy production:

Dollars per Watt RE

Note that one weakness of $/W is that the numbers are not additive.  If you spend $43 on a share of NRG Yield, you will be effectively buying a little over 2 watts of wind power and a little over 6 watts of solar.  You can’t get the solar without the wind.  If you only want one watt of any renewable energy, the green bars show that you could spend about $2.50 on either Brookfield or Pattern, $3.63 on Ormat, $5.05 on NRG Yield, or $13.89 on SolarCity.

Of course, renewable energy is not all you get when you buy these companies.  With SolarCity, you also get the solar installation business, and Ormat has a significant business selling equipment and services to other geothermal companies.  Most of NRG Yield’s business is not renewable at all: it also provides heating and cooling in commercial facilities, and has significant natural gas generation.  About 3% of Brookfield Renewable Energy Partners’ generation is from two natural gas co-generation facilities acquired “as part of larger hydro portfolio transactions many years ago,” according to a company spokesman.

While dollars per watt can be easy to grasp when thinking about just one technology, the metric starts to suffer when we consider a portfolio of several businesses.  Things become a little clearer when you consider watts bought per dollar spent.  The following chart shows how many watts of each type of business you would get if you bought $100 worth of each company’s securities:

Watts per 100 dollars

Conclusion

Dollars per watt is at best a rough starting point when evaluating a bid for solar on your home, or for evaluating companies that own renewable energy generation.  On the other hand, it works well with the intuition we’ve honed with years of trips to the grocery store and coffee shops.  That intuition may make these charts useful as you develop your understanding of renewable energy power producers.

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.

March 27, 2014

Our Investments Matter

Tom Konrad CFA

Many people consider themselves to be moral, but also feel morality has no place in investing.

There is much argument about whether “Socially Responsible Investing” helps or harms returns, but it is not a moral argument.  Some people believe gambling is immoral, others don’t.  Neither group makes a distinction between the morality of gambling winnings and gambling losses.

The main moral argument people make against socially responsible investing is that buying or selling a few shares of stock won’t have a real effect on giant corporations.  The added emotional distance many people get from investing through mutual funds or ETFs makes this easier to believe.

The question deserves direct scrutiny:

Do the stocks or mutual funds we buy affect the management of the companies we invest in?

This question has two parts.

  1. Do our investments affect stock prices?
  2. Does the stock price affect management behavior?

A company’s stock price is the net result of all investors’ decisions. We’re really asking if a single purchase has a significant effect. This is like asking if throwing a hamburger wrapper out our car window makes a difference. It’s wrong, regardless of if the road is covered with trash or pristine.  A litterbug may be subject to legal fines, but the limited liability structure of modern corporations protects investors from the legal (but not financial) consequences of corporate behavior.  If there is such a moral structure, it is the belief that our investments don’t make a difference in corporate behavior.

How much a company’s stock price affects its behavior depends on how much it needs money. Certain types of companies, like Master Limited Partnerships and Real Estate Investment Trusts must return profits to investors. Others are not profitable enough to fund planned investments. If such companies want to survive or grow, they must obtain the funding from investors. The stock price is always important to such companies because it determines how much control and what share of future profits they must exchange for the needed funds.

For all companies, including profitable ones, a high stock price increases management pay via share options and stock ownership. A low stock price makes a company vulnerable to activist investors and hostile takeover bids. These seek to influence management, or replace it altogether. Managers like high pay, autonomy, and keeping their jobs. If they expect a business decision will cause investors to sell, they will avoid it.

In short, our investments collectively set the stock price, and the stock price influences corporate behavior.  The same applies to bonds and other securities, through the interest rates companies pay.

We may be tiny actors on a giant stage, both in our personal lives and our financial lives. We don’t litter even if we think no one will notice, and we shouldn’t buy companies that do harm even if we think our a single purchase won’t get management’s attention.

Collectively, we have power.  With collective power comes collective responsibility.

This article was first published on the author's Forbes.com blog, Green Stocks on March 16th.

March 15, 2014

A Dangerous Game Of Us vs. Us Played With Our Life Savings

Tom Konrad CFA

US law requires that money managers put their clients’ interests first.

Investment advisers and money managers almost universally assume this means that they must try to make as much money for clients as possible. If your job is all about money, this can seem like a natural interpretation. More money is better, right?

For others, equating making money to serving clients’ interests seems like a very narrow view of the world.

If Tracy is saving for retirement, she obviously wants to have enough money to pay for it. She also wants to be healthy enough to enjoy it. If her money manager invests in a company which poisons her drinking water to increase returns for its shareholders (including Tracy), she probably won’t be very happy about it, no matter what the gains in her 401(k). Her adviser’s pursuit of profit has clearly not served her very well.

This scenario may seem far-fetched: What’s the chance that Tracy is directly harmed by a company she owns?

In truth, that scenario is not at all improbable. It happens all the time. Most investors own slices of most large, publicly traded companies. 44% of US households owned mutual funds in 2012. Whenever a large public company harms more than one household through its actions, it’s probably harming a shareholder. Only our hands-off approach to our investments, often through multiple intermediaries like advisers and mutual funds, keeps us from thinking about the harm we’re doing to ourselves.

Some might justify this harm by saying that other shareholders’ gains outweigh the harm to one or two families. But what about climate change? When a company emits greenhouse gasses, it’s harming all its shareholders. And their children.

When it comes to companies polluting, it’s not us vs. them.

It’s a dangerous game of us vs. us. And it’s played with our life savings.

This article was first published on the author's Forbes.com blog, Green Stocks on March 5th.

March 09, 2014

Watt's Watt?

by Debra Fiakas CFA

In the earlier post on Brightsource Energy and its Ivanpah solar thermal power plant in California cited costs for the plant as well as costs for nuclear and conventional power sources.  A reader pointed out a discrepancy in those figures and it prompted me to look more closely at various sources and citations on power plant costs.  Even within one design or fuel category, costs for power plants are exceptionally site specific.  In particular variance can occur in labor, site preparation, and interconnection requirements.  Certain material and equipment costs are more volatile than others.  For example, high temperature- high-pressure pipe, electrical transformers and copper wire are high in demand in the oil and gas market as well as the power market.  When both industries are busy, costs increase dramatically.  So investors should expect quite a bit of variance across power sources and from region to region.

It is also easy to get tripped up in the power industry vernacular.  (This is where the cart left the path in the earlier article.)  Back in the 1700s when the steam engine was being perfected a smart Scotsman named Watt came up with a measure of energy conversion.  The measure became standard and of course it had to be named after him.

Yet, one Watt is not enough. In very large power complexes, it becomes unwieldy to discuss power generation in terms of Watts.   Here the Watt siblings come in handy to keep the digits at a reasonable number.  You can choose Kilo’s or Mega’s or Giga’s.  If a power plant has a capacity to produce 2,000,000,000 Watts and you want to shed all those zeros, you can choose among “2.0 billion watts” or “2,000 Megawatts” or “2.0 Gigawatts.” 


1 Joule Per Second

1 Watt

1,000 Watts

1 Kilowatt

1,000,000 Watts

1 Megawatt

1,000,000,000 Watts

1 Gigawatt
 
Watts are standard, but the way we talk and write about them is not.  The U.S. Energy Information Administration is among the most cited sources for Capital Cost Estimates for Utility Scale Electricity Generating Plants.  This is probably because they have a fairly detailed report by that name.  The report was most recently updated in April 2013 and expresses all costs per kilowatt.  For example, the nuclear power plant cost is listed in the EIA report at US$5,533 per kilowatt.

The Nuclear Energy Agency also provides information on nuclear power plant construction costs, but uses megawatts as their basis.   The NEA says “a typical cost for construction of a Generation III reactor between 1400 - 1800 MW in OECD countries might be in the region of USD 5 - 6 billion.”

Comparing the two sources requires some math.  First, let’s get the average for that range of sizes and costs provided by the NEA.

1,400 Megawatts

US$5 billion or US$5,000,000,000

US$3.6 million or US$3,571,429 per Megawatt

1,800 Megawatts

US$6 billion or US$6,000,000,000

US$3.3 million
US$3,333,333 per Megawatt

Average
1,600 Megawatts

US$5.5 billion or US$5,500,000,000

US$3.4 million or US$3,437,500 per Megawatt

 
Now we need to either re-express the EIA numbers in Megawatts or the NEA numbers in Kilowatts to compare the two sets of numbers.


  Original Cost Equivalency Translation New Measure
EIA US$5,333 per Kilowatt 1 Kilowatt = 0.001 Megawatts US$5,333 / 0.001 US$5,333,000 per Megawatt
         
  New Measure Equivalency Translation Original Cost
NEA US$3,438 per Kilowatt 1 Megawatt = 1,000 Kilowatts US$3,437,500 / 1,000 US$3,437,500 per Megawatt

That was exhausting.  In the end, the two are so far apart as to bring into question the value of the cost benchmarks in the first place, from either source.  Did I mention regional variances and how power generation costs can be quite site specific?  It is also helpful to know that the EIA has recently updated it benchmark power plant costs, but the NEA’s numbers appear to be a bit older.

The EIA report on power plants cites costs for a collection of conventional fossil fuel plants.  Natural gas power plants are among the fossil fuel-type power sources.  The average is US$1,137 per kilowatt with a range of US$676 per kilowatt for an advanced conventional combustion turbine to US$2,095 per kilowatt for a conventional combustion plant outfitted with carbon capture technology.  If fuel cells using natural gas were also included in this category, it would hold the dubious record as the most expensive at US$7,108 per kilowatt.

The EIA report also indicates a cost of US$5,067 per kilowatt for solar thermal power which we could have compared to our source for the cost of BrightSource’s Ivanpah power plant.  It would have been a tip-off that the cost of US$5,500 per megawatt cited in the article on Brightsource was “off.”  The Ivanpah facility has a capacity of 377 Megawatts and a cost of US$2.2 billion. That is a cost of US$5.8 million per megawatt or US$5,836 per kilowatt (since 1.0 Megwatt = 1,000 Kilowatts).  Indeed, it appears there could be more to the discrepancy.  The Brightsource website indicates the plant has a 377 megawatt capacity, but planned capacity is apparently 392 megawatts.  Using 392 megawatts leads to a lower cost figure of US$5.5 million per megawatt.

For investors, the comparison of costs from one plant to another or even across categories has some informative value.  Yet there are limitations.  A resource poor region might find the construction of a nuclear facility compelling even if the cost per kilowatt is high in comparison to other energy sources.  It is all relative.  What is important for investors is whether future cash flows from the sale of electricity will be sufficient to allow investors to receive a return on their investment.


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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

February 05, 2014

Renewable Energy Finance Outlook for 2014: Where Will the Cash Flow?

By all accounts, more money will be invested into renewables in 2014 than was invested in 2013. Our experts lay out where, why, when and how.

Jennifer Runyon

The world of renewable energy finance is vast: encompassing everything from venture capital funding for innovative start-ups, to research and development (R&D) and manufacturing expansion spending, to project finance and all the way through to investing in clean energy companies on the stock market. Because of that, for the general public, predicting where money will flow over the course of the next year is a shot in the dark at best. But there are finance experts who spend their lives tracking where the money is and where it isn’t and here we offer you their expert opinions on renewable energy cash flow in 2014.

Funding Innovation: Venture Capital Dollars No Longer Available

Renewable energy finance experts describe the early days of clean tech venture capital (VC) investment as being one fraught with “exuberance” and “frothiness.”  Investors were eager to fund what they believed would be the next big thing and clean tech aka green energy aka renewable energy was where the action was.  Dallas Kachan of boutique cleantech research and advisory firm Kachan and Company points to biofuels as a technology that received billions of dollars of investment capital in 2007 and 2008 and now has very little to show for it. Not a good result for an early-stage investor.

Kachan said that in 2014 VCs will be funding what he called “capital efficient plays,” for example, “energy efficiency or efficiency in general…so-called cleanweb investments,” he said.  Cleanweb refers to the intersection of IT and sensors and big data, i.e. products and services that drive efficiency in homes by using the cloud (think nest thermostats) or drive efficiency in workflow or access to capital such as crowdfunding.  “There has been an emphasis on capital efficient initiatives as opposed to 2007 and 2008 and the massive billions of dollars that we saw go into biofuels, for instance,” he explained.

(Image, right: Global Total Investments in Clean Energy (2004-2012). Credit: Bloomberg New Energy Finance)

VC investment in renewable energy has been trending down for the past two years in fact and it will continue to do so in 2014 and beyond, said Kachan. “We predict that in 2014, we will continue to see companies having a harder and harder time raising venture capital,” he said, “but that’s not necessarily a bad thing.” 

Kachan, a seasoned cleantech investment advisor, believes that 2014 may actually be the year that renewable energy expectations and deliveries begin to match.  In other words, the technology is mature enough that investors understand what it is capable of providing and invest accordingly.  In addition, major corporations are getting into renewable energy. “The largest companies in the world are taking a more active, aggressive role than ever in wanting to profit from clean energy,” said Kachan who explained that renewable energy and clean tech are still following the same trajectories of those technologies that came before them. “This is representative of the overall lifecycle of the maturation of the clean tech space,” he said.  “If you look at other technology revolutions in the past where venture capital played a dominant role in the early days, sources of capital diversify over time,” he explained. 

“That is clearly underway in cleantech,” he concluded and we need not worry about it. “It’s important to remember that this doesn’t mean the sky is falling, it just means that we are following the same trends, the same waves that happened in other industries.”

Project Finance: Utility-Scale Wind and Solar Still Grabbing the Lion’s Share

With five solid years of installed capacity growth coupled with steady cost reductions, it’s no surprise that renewable energy finance experts agree that large-scale wind and solar projects will receive the biggest portion of renewable energy dollars in 2014.

“Utility scale solar, mainly photovoltaic solar, and utility-scale wind will continue to be active in their growth in particular outside of the U.S.,” said Adam Umanoff, partner with Akin Gump law firm. Lynn Tabernacki, managing director of renewable and clean energy at Overseas Private Investment Corp. (OPIC) agreed.  “In 2014, solar and wind will remain the mainstay of renewable energy investments because of sustained cost reductions for plant construction using these technologies,” she said.

Umanoff pointed to the Middle East as a region that is looking to tap renewable energy as an electricity source in the coming years. He said that Middle Eastern countries would like to dramatically reduce the amount of oil they use a fuel source for electricity generation so that they can garner more profits from selling their oil on the open market.  “That’s what we’ve seen in the past year,” he said, mentioning, “the Saudis came out with a huge 5-GW plus mandate for solar.” Umanoff believes that CSP plus storage will play a role in building up that supply of renewable energy capacity.

Large energy end-users are also becoming more interested in renewable energy, said Umanoff. He said that the industry is active in Latin America. “In Chile, we’ve got very high power prices, relatively unreliable supply, and yet active commercial activity,” he said. And the same goes for Africa, “especially around the mining industry. There we are seeing both wind and solar looking very attractive,” he explained.

Tabernacki agreed and pointed to an uptick in public/private partnerships in developing nations as helping give rise to more renewable energy projects. “From the public side for example, the Power Africa Initiative has marshaled U.S. government trade and development resources for the specific purpose of energy development in six pilot countries in Africa,” she said.  Specifically those countries are Kenya, Liberia, Ethiopia, Nigeria, Ghana, and Tanzania. Tabernacki also sees these types of partnerships in Asia. “There is a similar program directed to South-East Asia under the US-Asia Clean Energy Partnership,” she explained. 

“Mobilization of grant funding, technical assistance, transaction advisory services, and project financing from these public sources is expected translate into an increase in renewable energy investments in these regions next year,” Tabernacki concluded.

Umanoff summed it up nicely, “as you go around the world: Latin America, parts of Asia, the Middle East are very attractive markets for renewable energy growth [in 2014].”

In the U.S., the story might be slightly different. Umanoff predicted explosive growth in the distributed solar industry as more customers see the financial benefits of putting solar panels on their roofs or in ground-mounted arrays close to their commercial facilities. He also pointed to incidents in the past where large industrial power users were without power for extended periods as drivers for renewable energy adoption, particularly in the form of micro-grids. “Industrial consumers who, on the heels of hurricane sandy were out of power for 4-5 days, they take a look,” he said.

In addition, in 2014, expect to see more solar installation companies tap into the burgeoning innovations in how to offer their customers low-cost financing options or attractive leasing models to help offset the cost of going solar.  (More on financial innovations in the section below.)

The U.S. wind market will flourish in 2014 as companies work steadily to complete construction on projects they began in late 2013 (wind project developers had to start construction by the end of 2013 in order to take advantage of the Production Tax Credit (PTC)).  But since the PTC officially expired in 2013, don’t expect to hear about too many new wind power projects being commissioned in 2014 and beyond. Umanoff predicted that the U.S. will install upwards of 9 GW of wind power in 2014 and even more in 2015 as companies build out their planned projects.

Most experts agree that other renewable energy technologies will hold steady in 2014.  Geothermal will continue to make progress in areas with good resourced such as the Philippines.  “Large hydro continues to be very attractive but mainly in developing economies and new markets,” said Umanoff.  “It’s very, very hard to permit a large hydropower facility in a mature, industrial democracy,” he said.  Biofuels and biomass projects will make headway as well but in terms of gaining marketshare, the winners will be wind and solar. 

Optimism Dominates the Investment Space

While investors will give many concrete reasons that they chose to invest in a technology, project or a company, one very important reason often overlooked and difficult to quantify is consumer sentiment.  In others words, investors usually have positive or negative feelings about technologies, industries or companies and invest accordingly, whether they are aware of their emotional assessment of it or not. 

Navigant consulting has been examining consumer attitudes towards clean energy since 2009 and published its latest report “Energy and Environment Consumer Survey” in December 2013.  The report is a summary of a survey conducted among 1,084 U.S. adults based on a “nationally representative and demographically balanced sample.”  The survey asked for consumer attitudes towards 10 clean energy topics and the results are shown in the chart below.

Overall consumer sentiment toward solar and wind energy was up significantly in 2013 over 2012, indicating that in general, U.S. residents feel positive about clean energy.  And when investors are looking for investment opportunities, it follows that they put their money into technologies, products, services and companies that they feel good about.

Perhaps that’s why all of the finance experts that we spoke to for this article said they were “optimistic” about the 2014 outlook for renewable energy finance.

“I remain optimistic that renewable energy investments will continue to gain ground in 2014,” said OPIC’s Tabernacki.  “I think, without question, more money will be invested into renewable energy in 2014 than was in 2013,” said Akin Gump’s Umanoff.  “I’m more optimistic than ever about the health of the clean-tech space,” stated Dallas Kachan. “I think that overall, we’re going to have a really good year,” said Tom Konrad, a private money manager who writes about clean energy investing.

Konrad believes that 2014 will be a great year for renewable energy finance, he said.  He said that we saw the beginning of it in 2013 with the securitization of a bond by Solar City and pointed to Hannon Armstrong’s securitization of an energy efficiency bond in late December 2013 as another indicator that renewable energy financing is on track to take off in 2014. 

“I think that we will see a few publicly traded ‘yield cos’ (yield companies) in solar listed in 2014,” he said.  A yield co is a publicly traded company that is oriented towards income as opposed to growth.  This type of investment opportunity is a major switch, said Konrad.  “Any stock you have ever written about pretty much has been a growth stock,” he explained.  “Tesla (TSLA) is a growth stock.  People buy Tesla because they think the company is going to keep on gaining market share,” he clarified.

“Now there are some new income stocks that came public last year: Hannon Armstrong (HASI), Pattern Energy Holdings (PEGI), NRG Yield (NYLD) and Brookfield Renewable Energy (BEP), so there are four, I would say, renewable energy income stocks on U.S. exchanges.”

Further, Konrad expects to see at least one renewable energy income mutual fund unveiled in 2014 “because there are lots of things to put into it,” he said.

It makes perfect sense.  Once renewable energy assets are operating efficiently, they generate payback for their investors.  Now that the technology has matured enough to gain the trust of some of the more reticent, risk-averse investors like corporations and banks, expect to see lower cost of capital for projects and greater interest in renewable energy stocks, bonds and mutual funds.

Other newer financial innovations will expand in 2014, said Dallas Kachan, pointing specifically to crowdfunding.  “When the equity-based crowdfunding systems start taking hold, that really stands a chance of unlocking large sums of hitherto unavailable capital for the whole cleantech space,” he said.  Solar Mosaic, for example, which launched in officially in August of 2011 gained a lot of visibility in 2013.  The company allows individuals to invest in solar projects and offers attractive returns to investors.

Kachan expects to see more innovative funding opportunities like Mosaic in 2014. “You will also see new systems, new initiatives targeted at the space, many of which, for the first time offer investors the chance to make money at making small investments in projects or innovation,” he said.  Kachan cautions that he has some reservations about the long-term viability of equity-based crowdfunding – he worries what will happen when investors lose money, which undoubtedly will occur at some point. “I think it’s not going to take too many of those squeezes, those so-called down-rounds, and the requirements for pro rata investment.  These things are going to potentially bite investors and it might turn off people from equity-based crowdfunding,” he explained.  But nonetheless, he’s certain that we will see lots more in the financial innovation space in 2014.  “That said, some people will make some money in doing this [equity-based crowdfunding]  and that will encourage others to start doing this.”

Konrad agrees that financial innovation in renewable energy is probably going to be THE story of 2014. Ever the mathematician, Konrad guesses that about 60-75 percent of renewable energy investment will be driven by financial innovation, with the remainder being driven by policy, which he also feels will be favorable, at least on the state level, in 2014.

“I see 2014 as the year that renewable energy finance comes of age,” said Konrad. 

This article is part of th Renewable Energy World January/February Annual Outlook Issue for 2014, which will be published on February 10, 2014. The issue includes our Global Directory of Suppliers.  If you are not already a subscriber, why not subscribe now?

Jennifer Runyon is chief editor of RenewableEnergyWorld.com and Renewable Energy World magazine, coordinating, writing and/or editing columns, features, news stories and blogs for the publications. She also serves as conference chair of Renewable Energy World Conference and Expo, North America. She holds a Master's Degree in English Education from Boston University and a BA in English from the University of Virginia.

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

January 17, 2014

Google's Renewed Cleantech Investment Binge

James Montgomery

google earthday06
Google Doodle for Earth Day 2006
This week the Internet giant Google revealed that in December it invested $75 million in Pattern Energy's (NASD:PEGI) 182-MW Panhandle 2 wind farm in Carson County, Texas, northeast of Amarillo, expected to be operational by the end of this year. Pattern will hold an 80 percent stake in the project, whose owners also include Google and two institutional tax equity investors, with Morgan Stanley providing construction and equity bridge loans and a letter of credit.

Google certainly has displayed a healthy appetite for Texas Panhandle wind energy. Last fall it committed to purchase all the output from EDF Renewable Energy's 240-MW Happy Hereford wind farm southwest of Amarillo. A year ago it plunked down $200 million in EDF's 161-MW Spinning Spur Wind Project in Oldham County, Texas, also west of Amarillo, which went operational in late 2012. (Note that EDF is taking over Spinning Spur III from Cielo Wind Power, in case Google is eyeing more investments for power circa 2015.)

This new deal adds yet another renewable energy feather to Google's cap, spanning projects and procurements from Texas to Finland. To date the company has committed more than a billion dollars in 15 renewable energy projects totaling more than 2 GW of electricity annually. That's enough to power all public elementary schools in New York, Oregon, and Wyoming, or 500,000 US homes, the company points out. Last year the Internet giant purchased over 727,000 MWh of renewable energy via long-term contracts, covering 22 percent of its total electricity consumption.

"We believe that corporations can be an important new source of capital for the renewable energy sector," writes Kojo Ako-Asare, Google's senior manager for corporate finance, in a blog post announcing the investment.

That's a neat segue to our next Google news item. While the company continues to lunch on renewable energy deals, this week it swallowed its biggest meal yet: $3.2 billion for Nest Labs, maker of the Nest smart thermostat and a newer line of smoke/CO2 alarms. (Sorry, anyone who predicted Nest as one of the most anticipated 2014 IPO offerings.) Here's a bit of sunshine for other cleantech investors: the deal means Nest's early VC investors are exiting with 15-20× multiples, including a $400 million payday for Kleiner Perkins Caufield & Byers.

Google has had an investment say in Nest since 2011, and the firm "has the business resources, global scale and platform reach to accelerate Nest growth across hardware, software and services," writes Fadell in a blog post. "Google will help us fully realize our vision of the conscious home and allow us to change the world faster than we ever could if we continued to go it alone. We've had great momentum, but this is a rocket ship." An Apple-watching news site explores why Google, not Apple, is buying Nest: ultimately managing data about home usage is more in line with Google's business, while smaller hardware plays like chips has become Apple's pursuit. And Google's cash warchest gives it the freedom and wherewithal to take big shots like this.

The deal is the latest showcase in a $17 billion two-year push out of its core Web search and advertising platform and into hardware and software. It also underscores the increased competition between Google and Apple: the two already were at odds over smartphone platforms (iOS vs. Android), and nearly a third of Nest's 300 employees are Apple expats, including founder Tony Fadell who helped design the iPod. (One report suggests there's been even more direct competition and recruitment.)

Jim Montgomery is Associate Editor for RenewableEnergyWorld.com, covering the solar and wind beats. He previously was news editor for Solid State Technology and Photovoltaics World, and has covered semiconductor manufacturing and related industries, renewable energy and industrial lasers since 2003. His work has earned both internal awards and an Azbee Award from the American Society of Business Press Editors. Jim has 15 years of experience in producing websites and e-Newsletters in various technology.

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

January 14, 2014

Alternative Energy Stocks In 2013: Winners And Losers

By Harris Roen

Alternative energy stocks had an epic year in 2013. The widely watched Ardour Global Alternative Energy Index Composite (AGIGL) was up 53% in 2013. That’s double the 26% return for the S&P 500. In fact, 2013 marked the largest annual return for the AGIGL since 2007. In January 2013, I predicted 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.” That forecast turned out to be true and then some.

This report drills down into the data to better understand what happened to alternative energy stocks in 2013, and considers where cleantech investments may go in 2014.

Alternative Energy Stock Returns for 2013

ten.jpg

For all of the +/-250 alternative energy companies that the Roen Financial Report tracks, stocks were up an average of 59% in 2013. The highest returning stocks did exceptionally well, with the top ten companies averaging a gain of 414% for the year! More than half of the top ten gaining stocks are in solar.

Canadian Solar Inc. (CSIQ) was by far the largest gainer, up almost 800% in 2013. This solar cell and module company has been rebuilding its capacity over the past year, with choppy but growing sales. It also posted its first profitable quarter since 2010. Though Canadian Solar is technically based in Ontario, all of its manufacturing facilities are in China.

Of the bottom ten stocks, the worst performer was Ecotality (ECTYQ), which went bankrupt in September. Three other of the lowest performers were delisted to the pink sheets.

Half of bottom ten returns are in different business segments of the fuel alternatives industry. One is a biofuel company, BioFuel Energy Corp (BIOF), a former ethanol producer that has been selling plants and reducing its workforce. Chilean-based Sociedad Quimica y Minera (ADR) (SQM), the world’s largest producer of lithium for batteries, suffered from massive insider selling back in August. Cereplast Inc (CERP) is a very volatile startup with flagging sales. CERP develops bio-based resins as a renewable substitute for petroleum-based plastics.

industry.jpg

Comparing returns of the various alternative energy industries confirms that solar was the best performer in 2013. The average return for the 67 solar stocks that the Roen Financial Report tracks was an impressive 81%. Solar investing has taken off for several reasons, rising impressively from its oversold lows in August 2012.

Energy efficiency stocks were the next best performers on average, up 60%. The market likes a business that can reduce a client’s fossil fuel consumption, curtail pollution and save money. When executed well, this business model is low hanging fruit in the alternative energy world.

region13.jpg

When looking at returns globally, Asia was by far the most profitable region for alternative energy stocks. Though North America and Europe also had respectable returns on average, the Asian region was lifted mightily by Chinese solar stocks.

size13.jpg

The above chart shows average alternative energy stock returns by size. Smaller companies did better overall, with a sweet-spot in the mid-cap companies. We define mid-cap as companies with annual sales between $1 billion and $10 billion.

spec13.jpg

Stocks that were the most volatile had the best returns in 2013. This is not surprising, since in a robustly up market year, volatile stocks will swing way above the averages. Conversely, stocks with the lowest volatility had lower average returns.

spec13.jpg

This next chart shows how stocks did when looking at sales compared to the same quarter last year. The graph clearly illustrates that the stocks with the highest sales growth had the best performance on average. Lowest sales growth companies had smaller average returns by a huge margin compared to the highest sales growth stocks.

What to Look For in 2014

The economy is setting up 2014 to be another good year for the stock market. Profits remain adequate, interest rates are low, and most importantly, the U.S. housing market continues to improve. Additionally, price momentum in the stock market is very good, so I expect additional money that retail investors have been keeping on the sidelines to flow in. I doubt growth will match that of 2013, however, since prices and valuations are not as depressed as they were a year ago. This means that even if a company continues to have a good year, comparisons to previous years data will look less impressive.

Since 2014 should be a year of steady growth, larger cap stocks that are lower on the speculative level will likely be the best performers. It is often the case that in the maturing stages of a bull market, large cap stocks do better. If the stock market falls dramatically, I would expect the more volatile stocks to experience accelerated losses, but I do not believe this will be the case in 2014.

Energy efficiency should continue to be a high returning industry for the reasons mentioned above. A. O. Smith Corp. (AOS), the Milwaukee-based water heating company, is one of my favorite picks in this industry.

Solar should also continue to be strong, especially for the upstream companies involved in installation. The two strongest choices here are SunPower Corp (SPWR) and the much ballyhooed SolarCity Corp. (SCTY). Of the two I think the stock price of SCTY has gotten ahead of itself, so SPWR may be the better choice at current prices.

Picking the right stocks will remain important in 2014, so investors are urged research alternative energy stocks carefully to ensure the best returns.


IMPORTANT INFORMATION

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. 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.

January 13, 2014

60 Minutes Reply: Cleantech Rocks

On Sunday, January 5, 60 Minutes aired a piece on the cleantech space. In the days that followed, I have had interesting conversations with clients about what was broadcast to 7.4 million viewers.[1] Those discussions reinforced my belief that 60 minutes missed the mark and inspired me to write this blog on why cleantech is essential, massive, vibrant, and desired.

Cleantech is essential.

We recently took fifteen clients to China on our annual tour, and the Beijing Air Quality index (AQI) of PM2.5 read above 200 on multiple days. The average AQI in Los Angeles, California, through 2009 was 19[2]. As CBS News has reported, the health and economic implications of severe pollution are significant. Kids with asthma flood hospitals. Flights are canceled. Schools are closed. Concerts are postponed. People wear masks and stay indoors.

The cause for China’s dirty air is not a mystery. The country’s coal-fired power generation, rapid industrial growth, and significant increase in vehicles all contribute to poor air quality. The costs are not trivial: The Beijing Municipal Bureau of Environmental Protection has estimated it will cost China $817 billion to clean its air, and $163 billion for Beijing alone to do so.[4]

It’s just not air; let’s consider water. Only half the water sources in Chinese cities are safe to drink. Seventy percent of the groundwater in the north China plain is unfit for human contact.[5]

While air and water quality in the US are better than in China, we too have been impacted by a changing climate. Hurricane Sandy caused $50 billion worth of damage, and Katrina caused $128 billion (in equivalent dollars); and we can’t place a value on the loss of lives.[6] California just experienced its driest year on record.

By 2030, nearly 4 billion people will live in emerging market cities.[8] Over time, their consumption patterns will approach wasteful American practices. The world’s natural resources simply cannot support this consumption without significant changes to how we produce and use energy, water, transportation, food and products. In other words, the world needs cleantech.

What is cleantech? Cleantech represents new technological and business model innovations that empower us to use natural resources more productively and responsibly, to do more with less: less energy, less water, less waste, less land. Cleantech includes solar, wind, biofuels, energy efficiency, smart grid, energy storage and fuel cells, transportation, agriculture, advanced materials, water, and waste solutions.

The world needs cleantech.

Cleantech is massive.

Cleantech products and services are disrupting massive global industries. In 2014 alone, the US is projected to spend about $1.3 trillion on energy.[9] As costs of clean technology have declined, adoption is increasing rapidly. Let’s look at solar photovoltaic (PV) as an example: Since the beginning of 2011, the average price of a solar panel has declined by 60%[10]. As we look further back in time, the declines are more impressive. The price of PV cells has dropped from $76.67 per watt in 1977 to $0.74 per watt in 2013.[11] This has led to a significant increase in PV deployments. PV installations in the US have grown approximately 50% per year from 2011 to 2013.[12] In 2012, renewable energy sources (biomass, geothermal, solar, water, wind) represented half of all new capacity in the US.[13] Towards the end of 2013, BrightSource Energy’s Ivanpah Unit 1 connected to the grid.

Cleantech
rocks - 3b

Photo: BrightSource Energy

Demand-side markets are also very large and growing significantly. In the US alone, we consume approximately 70 quadrillion BTUs of energy per year across transportation, industrial, residential, and commercial applications.[14] US buildings alone consume about 33.5 quads annually, representing over $420 billion in annual spend.[15] Cleantech solutions are making buildings smarter and more energy efficient.

The global lighting market is approximately $100 billion[16]. While the overall market is growing modestly (~5% per year) the market for LEDs is growing rapidly. Prices for LEDs have similarly come down significantly over the past few years – prices have declined at ~15% per year. Cree (and other manufacturers) are now offering sub $10 prices for 40-watt equivalent LED light bulbs.[17] This allows for improved payback for customers and results in rapid adoption of LEDs across many lighting sectors.

These are massive markets.

Cleantech is vibrant.

If you watched the 60 Minutes piece, you might think all cleantech companies have failed. This is not true. Yes, companies have failed, but all emerging markets are volatile. Let’s remember that 75% of all startups fail.[18] Over time, more than 600 US automobile companies have failed.[19]

In addition to the highly publicized failures, we (via our i3 data platform) have also tracked many successes. Tesla is perhaps the best example of a company that has achieved great commercial success and is being rewarded for this in the financial markets. The company was founded in 2003, went public in 2010 and today trades with an $18 billion market capitalization. Let’s compare this with the value of an established car company: Peugeot was founded in 1810 and produced its first automobile in 1889. The company currently trades at a market capitalization of $3 billion, one-sixth of Tesla’s value. The Model S was named the Motor Trend Car of the Year, and Elon Musk was recently named Fortune’s Business Person of the Year.

Is Tesla the only cleantech public market success story? No, not at all. In 2013, we tracked 14 cleantech IPOs including Marrone Bio Innovations (MBII), Silver Spring (SSNI), Control4 (CTRL), BioAmber (BIOA), and Evogene (EVGN). These IPOs and other cleantech public companies have performed exceedingly well. We recently analyzed the 2013 performance of stocks within the Russell 3,000 diversified index and were pleased to discover that Revolution Lighting Technologies (RVLT), SunEdison (SUNE), Solar City (SCTY), and Tesla (TSLA) were among the very top performing stocks in the index:

Cleantech
rocks - 4

Source: i3, Google

 

What about cleantech venture capital (VC)? While some VCs have indeed lost money in cleantech, other VCs are getting good returns. DBL Investors invested in both Tesla and SolarCity. Generation Investment Management invested in Nest and SolarCity. I don’t have insight into their specific returns but believe their funds will perform very well. EnerTech, Westly Group, Braemar, and BDC all recently raised new funds. In 2013, our i3 market intelligence platform tracked $6.8 billion dollars of investment across 18 sectors of resource innovation. We tracked a 38% quarterly increase in funds invested from Q3 2013 ($1.5 billion) to Q4 2013 ($2.1 billion).[20]

Cleantech financing is broader than venture capital. Investment firms are investing in cleantech via debt, project finance, and public securities. There has been much discussion and progress towards using traditional energy and financial vehicles such as Master Limited Partnerships (MLPs) and securitization to finance cleantech. While certain vehicles have yet to be applied to cleantech, financial companies are already investing heavily in cleantech. Goldman Sachs recently invested $500 million into a SolarCity lease-financing agreement that will help the company deploy about 110 megawatts of solar.[21] Goldman also pledged to invest $40B into cleantech over 10 years.[22]

Did the government lose some money in cleantech? Yes, it did. However, from a portfolio perspective, the losses (less than 3%[23] of the aggregate) are far smaller than they were portrayed on 60 Minutes. The DOE has also done many positive things. The ATVM Government loan guarantee program (derided in 60 Minutes) provided $5.9 billion to Ford Motor Company in 2009, $465 million to Tesla (which repaid 9 years early), and $1.5 billion to Nissan NA. [24] Via ARPA-E, the DOE has stimulated innovation in important ways with relatively modest amounts of money.[25] Governments are investing in cleantech in a number of other constructive ways not mentioned on the program. For example, the US Military is deploying cleantech to achieve greater energy security and flexibility. Cities all over the world are racing each other to use cleantech solutions to address traffic, pollution, and resource challenges.

While I find most attempts to count jobs created from specific government programs confusing, readers might be surprised to learn that the solar industry currently employs more workers than the coal industry. In 2012, the solar industry employed 119,000, and the industry is growing rapidly. In 2012, the coal industry employed 89,800, and the industry is contracting.[26] [27]

When we consider the critique we witnessed one week ago, it’s important to reflect on the role government has played in other industries. The government provided significant support to conventional energy industries via policy, direct investment, and allowing for exploration on federal lands. As DBL Investors reported, California’s nuclear energy industry has received four times more federal support than the state’s solar builders.[28]

Big corporates are actively investing in cleantech to drive growth and competitive advantage, differentiation and to further their sustainability goals. As noted in our recent report, “Partnering with Corporates,” energy companies have been among the leading investors. The chart below shows the most active corporate investors between the third quarter of 2011 and the second quarter of 2013. Over that period, GE, ConocoPhillips, Total, and BP all ranked highly with more than 10 deals. Shell recently launched a new venture fund, Shell Technology Ventures. And it’s good that the oil and gas majors are innovating.

Corporate Investors in Cleantech:

Cleantech rocks - 5

 

Big IT companies (Google, Apple, Microsoft, Facebook) are purchasing clean energy in impressive quantities. Facebook’s new Iowa data center will be fully powered by wind power.[29] Facebook worked closely with MidAmerican Energy to secure land and develop a 138 MW wind farm adjacent to the data center. Apple’s new North Carolina data centers are powered by custom built solar and fuel cell farms.[30] Google has invested over $1 billion in cleantech through power purchasing contracts and also via equity and debt investments. Microsoft is actively exploring powering its data centers with fuel cells in a disruptive, decentralized architecture. eBay has partnered with Bloom to use fuel cells as the primary power source for its Utah data center.[31] Why are these internet companies driving hard into cleantech? We believe the youth of their employees and end-customers and their values are one critical factor.

The levels and types of activity in this market are inspiring.

Cleantech is desired.

Every survey I have read confirms that people (especially young people) want cleantech. For example, in its most recent annual National Solar Survey, the SEIA found that nine out of ten Americans (92%) think that the United States should use solar.[32]

More importantly, when companies (or people) develop awesome products, people want to buy them. For example, Nest Labs has built a learning thermostat that people all over the world want to install in their homes. Their thermostat consistently results in 20% energy savings, but I suspect it’s their phenomenal design and ease-of-use that’s really driving adoption. Nest is a young company – launched in 2011 – yet has grown tremendously and is now selling ~50,000 thermostats per month. Impressively, there is evidence that people have been “smuggling” Nest thermostats outside of the US before the company was officially shipping to those countries.[33]

Cleantech
rocks - 6c

Photo: Heather Matheson, Cleantech Group

Homeowners want solar on their roofs. Drivers want Tesla cars.

I believe that as consumers engage with great products and services that have a positive impact on the planet, they will want more. Or less. In some cases, cleantech solutions are allowing consumers (and businesses) to own fewer resources. AirBNB is increasing the efficiency of our housing stock by allowing people to rent out their homes when they are not there. i3 tracks 113 car, taxi, or ride sharing/renting companies. We recently hosted Zipcar at one of our events, and participants were eagerly boasting how they had abandoned their cars. They were proudly showing each other their ZipCar cards.

Cleantech
rocks - 7b

Photo: Millen B. Paschich, Cleantech Group

This consumer pull reminds me of the role consumer choice has had in disrupting other industries. For example, the cell phone industry was not particularly exciting back in 1983, despite the launch of the DynaTAC. As cell phones penetrated the work place, they were very much part of a company’s IT system. Companies selected which employees would be eligible for a cell phone and which devices it would support. Then an interesting thing happened: employees started to care about their phones. They started lobbying their IT departments for iPhones. The top-down decision making process was no longer tenable. Employees insisted on choice. Why couldn’t their IT departments just figure out how to support whatever smart phone they wanted to own? As you probably know, this led to the decline of Blackberry (current market cap of $4.5 billion) and the rise of Apple (current market cap of $480 billion[34]).

This is what happens when industries get disrupted. It’s not just cell phones. How many people are still reading paper-based newspapers?

Before I sign off, I want to thank 60 Minutes. Last week’s program sparked many interesting discussions. It forced me and my colleagues in the industry to step back and reflect on our work. While I disagree with the way 60 Minutes characterized the story as being over (I believe we are in the early innings of cleantech), I did appreciate the emphasis on China’s impressive role in scaling cleantech. I also loved the reminder that progress will depend on bold actions by entrepreneurs like Pin Ni who are embracing capitalism and cleantech.

If you liked this piece, please pass it along.

Thank you and remember: People desire cleantech. It is essential, massive, and vibrant.

Onwards,

Sheeraz Haji

CEO, Cleantech Group

[1] http://tvbythenumbers.zap2it.com/2014/01/07/sunday-final-ratings-family-guy-60-minutes-the-simpsons-bobs-burgers-the-best-of-jimmy-fallon-betrayal-adjusted-down/227214/

[2] http://www.usa.com/los-angeles-ca-air-quality.htm

[3] http://www.cbsnews.com/news/china-air-pollution-season-kicks-off-with-a-cough-and-a-wheeze-as-coal-plants-turn-on-for-the-winter/

[4] http://world.time.com/2013/09/25/the-cost-of-cleaning-chinas-filthy-air-about-817-billion-one-official-says/

[5] http://www.economist.com/news/china/21587813-northern-china-running-out-water-governments-remedies-are-potentially-disastrous-all

[6] http://www.huffingtonpost.com/2013/02/12/hurricane-sandy-second-costliest_n_2669686.html

[7] http://www.cbsnews.com/pictures/hurricane-sandy-slams-northeast/74/

[8] http://www.bcg.com/expertise_impact/Capabilities/Strategy/PublicationDetails.aspx?id=tcm:12-60476

[9] http://www.eia.gov/totalenergy/

[10] http://www.seia.org/

[11] http://cleantechnica.com/2013/05/24/solar-powers-massive-price-drop-graph/

[12] http://www.seia.org/research-resources/solar-industry-data

[13] http://www.renewableenergyworld.com/rea/news/article/2013/01/renewable-energy-provides-half-of-all-new-us-electrical-generating-capacity-in-2012

[14] https://www.llnl.gov/news/newsreleases/2013/Jul/images/28228_flowcharthighres.png

[15] http://buildingsdatabook.eren.doe.gov/TableView.aspx?table=1.1.3

[16] http://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/automotive%20and%20assembly/lighting_the_way_perspectives_on_global_lighting_market_2012.ashx

[17] http://www.greentechmedia.com/articles/read/10-LED-Price-War-Heats-Up-The-Lighting-Market

[18] http://online.wsj.com/news/articles/SB10000872396390443720204578004980476429190

[19] http://en.wikipedia.org/wiki/Category:Defunct_motor_vehicle_manufacturers_of_the_United_States

[20] http://research.cleantech.com/front_page

[21] http://research.cleantech.com/company/solar-city/transactions

[22] http://www.goldmansachs.com/our-thinking/focus-on/clean-technology-and-renewables/park/index.html

[23] https://lpo.energy.gov/our-projects/

[24] https://lpo.energy.gov/

[25] http://arpa-e.energy.gov/?q=arpa-e-site-page/view-programs

[26] http://www.eia.gov/coal/annual/

[27] http://www.mnn.com/earth-matters/energy/stories/america-now-has-more-solar-energy-workers-than-coal-miners

[28] http://www.dblinvestors.com/2013/08/report-nuclear-received-4-times-more-subsidies-than-solar-in-ca/

[29] http://www.wired.com/wiredenterprise/2013/11/facebook-iowa-wind/

[30] http://www.apple.com/environment/renewable-energy/

[31] http://www.forbes.com/sites/heatherclancy/2013/10/02/new-ebay-data-center-runs-almost-entirely-on-bloom-fuel-cells/

[32] http://www.seia.org/research-resources/america-votes-solar-national-solar-survey-2012

[33] http://www.slideshare.net/MarioAugustineAvila/nest-lab-presentation20130306

[34] http://finance.yahoo.com/q?s=aapl&ql

 

 

November 16, 2013

Graftech Manages the Heat of Competition

by Debra Fiakas CFA
Graftech+Ultra-Thin+Heat+Spreader[1].png
Products like Graftech's ultra-thin heat spreader help customers manage the heat. Investors think restructuring will help Graftech do the same.

Feeling the heat of competition, graphite materials supplier Graftech International Ltd. (GTI:  Nasdaq) has initiated a restructuring of sorts.  The company’s two highest cost graphite electrode plants will be closed.  Those are located in Brazil and South Africa.  A machine shop in Russia will also be shuttered.  Locks will go on the doors in these locations by the end of June 2014.

Downsizing capacity is expected to yield substantial savings.  Total production capacity will be reduced to about 60,000 metric tons, which eliminates fixed plant costs.  More importantly the closures are expected reduce inventory requirements.  The company has stated that working capital improvements should reach $100 million over the next year and a half.

What is more, about 600 employees or about 20% of the company’s workforce will be getting pink slips.  The company estimates annual savings of $35 million.  That represents about 3.6% of annual direct costs, which should drop right to the gross profit margin.

The savings will come in handy as the company turns from older, declining markets to new, more lucrative sources of demand.  Graftech staged a major media event in August this year to publicize the opening of a new manufacturing facility in Ohio.  That new plant, which was purchased last year for $3.0 million, is dedicated to the production of a thermal management product intended for smartphones and tablets.

Of course, the restructuring effort comes with its own price tag.  Graftech management says they need to use about $30 million in cash over the next three quarters.  There is another $75 million in non-cash expenses related to the write-down of certain assets.  Shareholders have already seen about $18 million of these write-off expenses pass through Graftech’s income statement in the third quarter.  The rest will follow in the next two quarters.

So far investors have reacted with great enthusiasm to Graftech’s strategy.  The stock climbed 29.5% in the first week following the restructuring announcement.  No one would blame shareholders from taking some profits at the current price level near $11.36.  Price oscillators such as the Residual Strength Index suggest the stock has for the time being entered over bought territory.  Just the same we do not believe the last chapter has been written in the Graftech story.  If the stock retraces to the pre-announcement level, investors would have compelling chance to build positions in what is arguably a stronger, more competitive operation.
 
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

November 11, 2013

What Do The New Crowdfunding Rules Mean For Renewables?

James Montgomery
bigstock-Crowd-Funding-Road-Sign-Illust-48607115.jpg
Crowdfunding illustration via Bigstock
 
The SEC has finally proposed its rules to allow crowd-funding under the Jumpstart Our Business Startups (JOBS) Act. What do they mean for small-scale investments in renewable energy companies and projects?

Title III of the JOBS Act created an exemption under securities laws for crowdfunding, which set the table for its regulation by the SEC -- that was supposed to happen by the end of last year. Two weeks ago the SEC finally issued its proposed rules on crowdfunding (summary here, full 500+-page PDF here). Here are the highlights:

  • Companies are capped at raising $1 million cap per year through crowdfunding.
  • Investors with less than $100,000 annual income and net worth, could invest up to $2,000/year or 5 percent of annual income or net worth (whichever is greater).
  • Investors with at least $100,000 annual income and net worth, investment amount levels rise to 10 percent of annual income or net worth (whichever is greater), and purchase no more than $100,000 of securities through crowdfunding.
  • Non-U.S. companies are ineligible for the crowdfunding exemption, as are companies that already report to the SEC, some investment companies, those who aren't compliant with certain reporting rules, and others with no business plan or pending M&A deals.
  • Securities purchased via crowdfunding can't be resold for a year.
  • Under the proposed rules, issuers publishing notices advertising an offering can include terms: the nature and amount of securities offered, their pricing, and the closing date of the offering period.

So how do these proposed rules affect companies seeking to get funded by the masses? "Renewable energy companies seeking to enter the new territory of offering a security legally may find it easier to raise start up capital or additional capital because they can offer investors a return on investment" such as stock or debt with interest payable, explained Debbie A. Klis, attorney with Ballard Spahr. "It would not be difficult to create a compelling campaign to raise funds for renewable energy products especially if it brings revenue and jobs to areas of the U.S. (and abroad) that it need it the most."

For small businesses and entrepreneurs seeking to raise capital, the rules "may be a God Send" to help solve delays common in formal full-blown SEC registration and disclosure, observed Lee Peterson, senior tax manager with CohnReznick. Some entrepreneurs dream of building the next Apple or HP on the renewable energy side; others might see crowdfunding as a way to bridge the "valley of death" in startup-up financing to bring their company to market. "So as long as folks act smart and understand the investment risks," he added, "it may be a good thing."

Of course there's a difference between crowdfunding as a donation, and microfinance as a path toward ROI. SEC's proposed rules address the latter, as a way to opening doors to much more private capital. Selling securities to the public generally requires SEC compliance, and has been allowed until now only if it involves donations with no return on investment (ROI). Sites like Kickstarter and Indiegogo might choose not to help companies issue securities and just continue to facilitate donations, with investors assuming that the company raising money is playing by the rules. Indiegogo, EquityNet, and RocketHub reportedly are interested in pursuing equity crowdfunding, while Kickstarter is not.

One of the early renewables crowdfunding success stories has been Mosaic, which has amassed investments for projects totaling $5.6 million in value and "tens of millions of more dollars in the pipeline," according to a company spokesperson. It has pitched 25 offerings in over 19 projects, with 2,500 investors spanning nearly every U.S. state, and roughly half its projects sell out within a week. Its newest offering is a 12.3-MW installation across more than 500 homes at Joint Base McGuire-Dix-Lakehurst in New Jersey. The company has been working with the SEC as the agency wrestles with understanding how crowdfunding meshes with traditional finance, though it claims it doesn't and won't rely on the JOBS Act for its business. "There are different provisions of the securities laws that we have relied on in the past, and I would expect that this would continue to be the case in the future," noted Nick Olmsted, Mosaic's general counsel and corporate secretary.

The Natural Resources Defense Council (NRDC) recently announced its own crowdfunding plan, to build an online platform to help organize and direct groups how to put solar on schools: site assessment, approvals, funding, the RFP process, etc. "Like most NGOs, we go out to big donors and foundations," explained Jay Orfield, environmental innovation fellow in NRDC’s Center for Market Innovation. This effort, though, means going to "people who are going to use and benefit" from such solar installations, getting them to fund this $5, $10, $50 at a time, he said. "That market validation is specifically what we find really exciting about crowdfunding."

Needs Some Tweaking

Not that the SEC's proposed crowdfunding rules are without criticism. Capping fundraising at $1 million over a 12-month period might be too low of a threshold for many companies. "I think the gist will be that crowdfunding has some very low limits on how much you can raise," said John Marciano, partner at Chadbourne & Parke LLP. "[It] raises the question of whether it is really a viable financing option for building and owning projects, except maybe very small projects." Some companies could be motivated "to create many subsidiaries so each entity can raise money independent of the other," though "we have not heard about rules on aggregation yet," added Debbie A. Klis, attorney with Ballard Spahr.

Another potential sticking point in the rules: Anyone investing more than $500,000 has to provide audited financial statements. Small investors might balk at that, since in some cases that could be part of why they went the crowdfunding route in the first place vs. a more formal investment plan.

These proposed rules now move into a 90-day comment period, which will almost certainly be voluminous, and likely will be extended by the SEC, with final rules coming after that -- likely late 2014 or even 2015, points Adam Wade, associate at Foley Hoag. With that much time, there could be significant difference between these preliminary rules and what gets finalized.

Marciano likens the crowdfunding discussions as similar to those around real estate investment trusts (REIT) and master limited partnerships (MLP), two other potential avenues for funding renewable energy ventures, particularly at smaller scales. "It has the promise of raising cash equity, but not tax-equity. Time will tell whether it is a viable option, but I'm guessing it may be difficult to implement."

The topic will be presented in depth next week at Renewable Energy World Conference in session 17B - New Sources of Low-Cost Capital for Solar Projects.

Jim Montgomery is Associate Editor for RenewableEnergyWorld.com, covering the solar and wind beats. He previously was news editor for Solid State Technology and Photovoltaics World, and has covered semiconductor manufacturing and related industries, renewable energy and industrial lasers since 2003. His work has earned both internal awards and an Azbee Award from the American Society of Business Press Editors. Jim has 15 years of experience in producing websites and e-Newsletters in various technology.

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

October 24, 2013

6 Reasons Why Stock Markets Are No Longer Fit For Purpose

A new investment architecture is set to emerge

By John Fullerton and Tim MacDonald

Stock markets are not as portrayed on TV, the nerve center of capitalism.  Stock markets are nothing more than tools to facilitate the exchange of stock certificates that represent contractual rights that have little to do with real ownership. Today’s stock markets are primarily about speculating on the future prices of stock certificates; they are largely disconnected from real investment or what goes on in the real economy of goods and services.  It’s time for real investors such as pension funds and endowments to reconnect with business enterprise in long-term relationship through a new investment architecture:  the Evergreen Direct Investing (“EDI”) method.

Stock exchanges were originally conceived for the public interest and had a clear public purpose:  to allow companies to raise equity from a large pool of investors and to provide a market for investors to later sell their shares in those companies.  The promise of a liquid secondary market lowered the cost of that equity to enterprise thereby increasing economic growth and, theoretically at least, shared prosperity.

But capital formation is only a small part of what happens on stock markets today.  Yes, successful stock offerings provide the avenue for venture capitalists to recycle investments made in private markets back into new, innovative young enterprises.  But it is short-term speculation in stocks, aided by the increased speed of information flow, that has grown like a cancer into a big business of little real value and now dominates stock market activity. 

Keynes quote

Too-big-to-fail bank (and whale-scale speculator) CEO Jamie Dimon extols liquid capital markets as one of America’s greatest strengths in his latest letter to shareholders.  But many who sing the praises of market liquidity are more often than not just self-interested speculators.   Indeed, recent history has shown that our world leading liquid markets are as well the source of extreme global instability with dire and ongoing consequences.  Nonetheless this trader ideology remains stubbornly at the heart of our short-term-obsessed finance capitalism which, left unchecked, surely will lead us to economic, social, and ecological collapse.  

Six reasons combine to make our equity capital markets no longer fit for purpose:

  • The privatization of stock exchanges, destroying their public purpose mandate and instead making the growth of trading volume their single-minded goal and high-frequency traders (computers programed to trade) their preferred customers;
  • The unrestrained technology arms race in computing power combined with the adoption of technology-driven information flow spurring the rapid acceleration of trading volume, which at critical times can be highly destabilizing;
  • The misguided ascent of “shareholder wealth maximization” (at the expense of all other stakeholder interests) in our business schools, board rooms, and the corporate finance departments on Wall Street;
  • The well-intended but equally misguided practice of using stock-based incentives, and stock options in particular, as the dominant form of senior management compensation, which incentivizes them to focus only on short-term results at the expense of the long-term health of the enterprise, people and planet;
  • The misalignment of interests between short-term focused Wall Street intermediaries and real investors such as pension funds whose timeframe should be measured in decades;
  • Regulators’ lack of courage and confidence to counter the trader-driven paradigm and institute substantive structural reform such as a Financial Transactions Tax and other reforms that would penalize excessive speculation while incenting long-term productive investment.

Rather than limit themselves to this deeply flawed system, real investors can build direct relationships with enterprise in negotiated, innovative, mutually beneficial partnerships that are truly aligned with both parties’ long-term goals including the harmonization of financial, environmental, social, and governance imperatives.

The Evergreen Direct Investing Method

Private direct investment in enterprise (in contrast with trading in the stock market) with a long investment horizon, even an “evergreen” horizon, is nothing new.  As described in detail in Capital Institute’s fifth installment of its “Field Guide to Investing in a Regenerative Economy,” the EDI method enables long-term investors like pension funds to share in the cash flows of mature stable businesses.  Financial returns are earned through these planned cash distributions rather than through a hoped-for sale of the stock at a higher price than originally purchased. Stakeholder interests can be truly aligned, with environmental and social, and governance values negotiated into the partnership up front.

Buffett Quote

EDI investors will want to target mature, stable, low-growth businesses, often unappreciated by growth-obsessed equity capital markets.  They will thus disprove the myth that growth at the expense of the environment or employees is the only path to adequate financial returns.  The cash flows of mature, stable businesses may not exhibit the (in our view often unsustainable) growth characteristics equity investors have been trained to desire, but they are far more dependable sources of financial return than speculation-driven capital markets.  That resiliency is what stewardship investors will value most in an increasingly uncertain future with growing resource and fiscal constraints hampering economic growth, particularly in the developed economies.

In fact, investing in mature, low growth sectors in which companies pay out rather than retain most of the cash flow they generate (energy infrastructure MLPs, REITs, utilities) is a proven formula for dependable, long-term investment success as the table below reveals:  

While the EDI method involves taking businesses or subsidiaries of public companies private, its returns to the investor are not conditional on sales.  It thus differs significantly in approach and intention from conventional highly leveraged and therefore less resilient, exit-driven private equity with its excessive fees.

Can EDI be scaled up as an alternative vehicle for investment in large, mature businesses of the mainstream developed economies, while also providing a more effective way to embed ESG values into their investments and the economy in aggregate?  It will require a fresh look with a critical eye at the failed promise of modern portfolio theory, and the self-serving interests of our short-term-driven Wall Street trading paradigm.

This is the great promise of Evergreen Direct Investing.

Earlier versions of this post previously ran on The Guardian's Sustainable Business Blog and on Capital Institute's Future of Finance Blog."

John Fullerton is the founder and president of Capital Institute, and a recognized New Economy thought leader. He is also a leading practitioner of "impact investment" as the principal of Level 3 Capital Advisors, LLC.  He was previously a Managing Director of JPMorgan, where he worked for over 18 years.
 
Tim MacDonald, Capital Institute Senior Fellow, is a theorist-practitioner in the evolving new field of purposeful investment by stewardship investors, and the principal architect of the Evergreen Direct Investing method.  He was previously a tax partnership lawyer.

October 10, 2013

Graftech: On Graphite Coattails

by Debra Fiakas CFA

Graphite_crucible_image[1].jpg
Graftech makes graphite
products like this crucible for
traditional industries, and
is expanding its products for
alternative energy industries
.
Photo by Vladnov
Graftech International Ltd. (GTI:  NYSE) has been in business over a hundred years, supplying graphite materials and products to the steel industry and other manufacturers.  Most investors would put Graftech on a list of ‘dirty’ companies, not with alternative energy leaders.  However, with technological innovation Graftech has found new customers for its graphite materials.  Fuel cell components, wind turbine blades, energy storage devices, and electronic thermal management components are just a few of the products critical to the establishment of alternative energy sources.

Graftech has struggled some in recent months to keep momentum going at this top-line, but long-term the company has experienced strong growth.  The addition of new customers in the alternative energy industry has been a part of that growth.  In the most recently reported twelve months Graftech recorded $1.3 million in total sales and delivered $66.9 million in net profits.  Operating cash flow was $144.5 million.

GTI is trading at 17.4 times trailing earnings, which is just under the average price/earnings ratio of its industrial peer group.  There is a 30% differential between the trailing and forward price/earnings ratios, suggesting an impressive appreciation potential. A beta of 1.40 means relatively low volatility for the holder waiting for a price increase.

Of course, the half dozen analysts who have published earnings estimates for Graftech could be all wrong in their predictions of future earnings.  That would cast doubt on the anticipated ramp up in stock price.  One thing for certain is that graphite has a compelling future in the alternative energy sector and it seems reasonable Graftech will be a beneficiary.  
 
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

October 06, 2013

New Energy IPOs

by Debra Fiakas CFA

IPO wordcloud.jpg
IPO Wordcloud photo via BigStock
Investors looking for a piece of the public offering action from the alternative energy industry have been sorely disappointed in recent months.  The last big initial public offering in the sector was SolarCity, Inc. (SCTY:  Nasdaq) in December 2012.  Then in April 2013, there was an initial public offering of the REIT Hannon Armstrong Sustainable Infrastructure Capital (HASI:  Nasdaq). 

Anyone looking for bragging rights to IPO shares will have to look to the conventional energy market.  Last week Valero Energy (VLO:  NYSE) filed to raise as much as $300 million in a new master limited partnership it is forming called Valero Energy Partners, a logistics-based business.  The partnership is to own oil and refined petroleum pipelines and terminals in the Midwest and the Gulf Coast.  Valero has a handful of ethanol plants and a wind-farm as well as the Diamond Green Diesel joint venture with Darling International (DAR:  NYSE).

Cheniere Energy, Inc. (LNG:  NYSE) is undertaking a bit of reorganization.  A new holding company has been organized  -  Cheniere Energy Partners LP Holdings  -  that will own a 56% stake in a Cheniere master limited partnership.  The underlying assets are regasification facilities at the liquid natural gas terminal Sabine Pass in Louisiana.  It will be a very large offering of $690 million and it will give investors a stake in proven, stable assets and a flow of business in the burgeoning U.S. natural gas market.

By comparison the $100 million offering planned by EP Energy Corporation is chicken feed.  However, the preliminary valuation of the company is $8 billion, implying a nice step up for it owner private equity group Apollo Group.  It was just last year that Apollo had taken the company private as a maneuver to enable in the sale of parent El Paso Corp. to Kinder Morgan.  Apollo paid $7.15 billion.  The ‘new’ EP Energy is expected to trade under the symbol EPE.

A stake in any of these deals means predictable earnings and cash flows, something alternative energy companies have been slow to deliver. SolarCity is still operating in the red and Hannon Armstrong reported a whopping $5.7 million loss on $3.4 million in sales just in the June 2013 quarter alone.  Perhaps a stake in one of these cash generating gas companies on the current IPO calendar can help investors wait out ramp to profitability in the alternative energy plays.
 
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has a Buy rating on DAR shares. 

October 04, 2013

Investor Enthusiasm for Graphene: Strong as Graphene

Tom Konrad CFA


Graphene is going to transform clean tech in less than five years.


Graphene Timeline - Poll.png

That, at least, is the opinion of the majority of the respondents to my reader poll about how graphene is likely to affect clean tech stocks.  This is in marked contrast to the caution expressed by the the responses from my panel of professional money managers who invest in clean tech stocks. (Their responses are the subject of a previous article on graphene investing.)

I think Shawn Kravetz, President of Esplanade Capital,  LLC, and manager of solar-focused hedge fund Electron Partners, LP exemplifies the panelists’ attitude towards greaphene’s likely impact on their investments: “I must respectfully pass on this one.  Ignorance is indeed bliss in this case.”  Technologies, like graphene, which are still in the lab, won’t have much impact on stocks’ performance until they are commercialized and can start contributing to a company’s revenue.  Commercialization usually takes much longer than innovators and many investors think.

Timeline

Flexible-Graphene-Sheet-300.jpg
Flexible Graphene Sheet image via BigStock

In my research, I found many companies which are developing graphene applications, and rushing to patent the results.  Most of these applications are still years from producing measurable revenue.  One example from my previous article was Lockheed Martin‘s (NYSE:LMT) patent on graphene water filters in March.  Lockheed clearly has the financing and brand name needed to commercialize this application quickly, but only says that it aims to have a prototype ready for testing by 2014 or 2015.  That puts the launch of a commercial product at least another three years beyond that, to give time for adequate testing an manufacturing scale-up at least five years out.

Perhaps other applications can be commercialized more quickly, but the “less than a year” or “1 to 2 years” responses to my poll seem very unrealistic, unless we are talking about inks and other applications of graphene powder, which is just normal graphite exfoliated into tiny molecule-thick sheets, lacking many of the properties of large graphene sheets which make graphene exciting in the first place.

Graphene… From Graphite Flakes 

I was contacted by the Corporate Communications officer of Grafoid, Inc in response to my poll and upcoming articles, and later did a short interview with its CEO, Gary Economo.  Grafoid describes itself as “a privately held Canadian graphene development and investment company,” 21% owned by Focus Graphite, Inc. (TSX-V:FMS, OTC:FCSMF,) a junior mining firm which owns the high grade Lac Knife graphite property  in Quebec, Canada.  It was previously known as Focus Metals, but changed its name to Focus Graphite in 2012.

Grafoid’s signature product is MesoGraf™, a range of trademarked bilayer and trilayer graphene product created from graphite ore using a “novel chemical exfoliation and transformation process.”  I am skeptical of graphene refined from graphite, because most of the potentially revolutionary applications for graphene require the use of large sheets of graphene, and established companies and researchers seem focused on creating graphene by vapor deposition.

In terms of applications, Grafoid’s projects are in the laboratory stage, and they include a graphene cathode for a patent-pending improved lithium ferrophosphate (LFP) battery developed Hydro-Quebec.  Grafoid is also doing research into highly conductive, energy absorbent, and strong plastics made using graphene as an additive. Grafoid has applied for patents on its mixing process, which Economo says is the key to getting high quality graphene infused plastics.

He also told me that Grafoid is able to create large, (“as big as a table”) well structured sheets of graphene from MesoGraf, although he did not mention any applications of MesoGraf using large sheets made in this way.  If scalable and the sheets are of controllable quality, such sheets would open the door to most graphene applications.

My reaction to Grafoid is “too good to be true.”  It’s my experience that the time between success in the laboratory (which is where both companies seem to be with their graphene) and a commercial product is measured in years.  The road to commercialization is long (unless it is a dead end) and typically requires repeated rounds of financing which often leave small investors owning little of the final product.

A similar company to Focus Graphite, Lomiko Metals Inc.  (TSX-V:FMS, OTC:FCSMF) was recently in the news for having turned graphite into “graphene oxide.”  (Grafoid also says it can also easily oxidize MesoGraf.) The graphene supercapacitors which made headlines last March were made from graphene oxide using the laser from a DVD burner.

A company representative left a comment on my previous post saying the company is

[W]orking closely with Glabs [Graphene Laboratories of Calverton, NY] to develop supercapacitors and other devices and ideas using graphene converted from natural flake graphite we find in Quebec.  The connection between graphite and graphene on a scientific level is large.  However the some of the amazing properties of graphene can be found in graphene nanoplatelets.  Imagine graphene to be a pristine, smooth plywood sheet and nanoplatelets a particle board or cork board formation.  This structure may increase conductivity but reduce strength and make the substance useful in battery and supercapacitor applications (which we are working on).  As you know, there are more than 9000 patents for graphene.  There is enough flake graphite resources to supply the creation of an industry based on graphene.  But few are working on the pinch point of the hourglass – the conversion technology.  That is what Lomiko and Glabs would like to create graphite and graphene substances that focus on one or two of the qualities of graphene – strength, conductivity, or elasticity and produce it for pennies per gram.  Current costs of $ 100 – $1000 per gram are prohibitive for production purposes.

According to my professional investor panel and several respondents to my poll, suppliers of graphene like Lomiko and Focus Graphite, as well as associated production equipment such as Aixtron (NASD:AIX) and CVD Equipment Corporation (NASD: CVV) because of their ability to benefit from a broad range of commercial applications.

However, given the early stage of Grafoid’s and Lomiko’s research, I believe these two companies should only be considered as investments on the basis of the value of their graphite mines. Graphite will have value whether or not it turns out to be a practical source of graphene feedstock.  If these companies can be bought at attractive valuations based only on their mining assets, then graphene may provide a potential long-term upside.

As with commercial graphene applications discussed in the previous section, investors need to realize that the commercialization of graphene from graphite technology will be a very long haul if it is not a dead end, and invest accordingly.

Effects on Cleantech Stocks

Graphene Sectors - Poll.png

Considering the effect on an industry’s competitive landscape is very useful to understanding have a new technology might affect stocks in that industry.  An industry will benefit if the technology makes its suppliers’ markets more competitive, while they will be hurt if new competitors are likely to emerge using this technology, making the markets for its products more competitive.

Many investors tend assume that if a new technology has application to an industry, it will help the stocks in that industry.  This is seldom the case.  Consider, for instance, the effect of First Solar’s (NASD:FSLR) thin-film CdTe photovoltaic technology on incumbent solar companies.  By producing solar panels at a lower cost per watt than its competitors, First Solar reduced the margins of these competitors as it scaled up production by pushing the price of solar panels down.  Meanwhile, all solar manufacturers’ customers benefited.  The market for solar exploded as solar installers, developers, and their customers took advantage of rapidly falling prices.

In the case of graphene, the top applications suggested by readers were Solar Cells, Ultracapactiors, Batteries, Electronics, protective coatings, and water filtration. If this is correct, the biggest beneficiaries should be those industries which use these products.

Cheaper and better ultracapacitors and batteries should help electric vehicle companies, their customers, while likely harming electricity storage incumbents (competitors.)  Poll respondents identified electric vehicles as the most likely sector to be helped (88%) and least likely to be hurt (0%), but were also bullish about utracapacitor stocks (83% helped, 8% harmed) and battery stocks (70% helped, 18% harmed.)

Variable electricity generation technologies such as Solar and Wind might be helped by cheaper energy storage which could make it easier to integrate these resources into the electric grid, but wind stocks are much more likely to be helped than solar stocks.  Wind companies, unlike solar companies, are unlikely to see new competitors emerge using graphene based technology, but ultracapacitors are used in the electronics of wind turbines.

Companies which may supply companies using graphene technology may also benefit from new markets for their products.

With wind and solar sectors, my respondents seem to have the relative effects of graphene reversed (after correcting for the general bullishness.)   Most (79%) of my poll respondents thought solar stocks would be helped, compared to only 10% who thought they would be harmed, while 30% thought wind stocks would be helped compared to 26% who thought they might be harmed.

These poll results most likely arise from the assumption that a technology which helps an industry produce better products will help the existing companies in that industry.  As I discussed above, this assumption is most likely false.  A new technology only helps existing companies is when they manage to commercialize the new technology before start-ups or competitors from other industries do. But existing companies tend to be bad at such innovation because of a reluctance to undercut their existing lines of business.

Stock Picks

Given my skepticism of my poll respondents’ accuracy in picking cleantech sectors, their stock picks should be approached with caution.  Below are their suggestions, organized by sector, for those looking for ideas and ready to do some serious due diligence.

Companies with graphene patents:

  • BASF (OTC:BASFY)
  • Lockheed Martin (NYSE:LMT)
  • IBM (NYSE:IBM)
  • Nokia (NYSE:NOK)
  • AT&T (NYSE:T)
  • Verizon (NYSE:VZ)
  • Tesla Motors (NASD:TSLA)
  • Maxwell Technologies (NASD:MXWL – Note: I am short this stock.)

While these companies may be helped, the effect on their stocks is likely to be small because of their large and diverse existing operations in other businesses.

The exception in this group is Maxwell – it might be helped a lot if it can commercialize graphene capacitors before anyone else does, but it could also be harmed if another company gets there first.  Maxwell has been an active researcher in the graphene space, but management does not typically mention graphene in its MD&A, which leads me to believe that any graphene ultracapacitor from MXWL is years away. On the other hand, Maxwell’s management tends to play things very close to the chest.  They may surprise me.

Potential Graphene and Equipment Suppliers

  • Aixtron SE (NASD:AIXG)
  • CVD Equipment Corporation (NASD: CVV)

I consider this group the best bets, if bought at reasonable valuations based on their current businesses.

Graphene from flake graphite suppliers

  • Lomiko Metals (TSXV:LMR, OTC:LMRMF)
  • Focus Graphite (TSX-V:FMS, OTC:FCSMF)

Best bought only based on mine valuations.  Graphene might eventually provide some upside.

Conclusion

I think the strongest take-away from my reader poll is that cleantech investors expect too much from graphene, and expect it too soon.

Even more than the sector breakdown, the number of poll respondents who think existing cleantech stocks will be helped rather than harmed or unaffected by graphene technology should be a warning sign to prospective graphene stock market investors.  Investor enthusiasm often draws stock promoters, so a company branding itself as a “graphene stock” should be a warning sign in and of itself.  Even if a company has a real way to profit from graphene technology, that technology’s popularity is likely to mean the stock will be overpriced.

DISCLOSURE: Short MXWL

This article was first published on the author's Green Stocks blog on Forbes.com on September 24th.

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.

September 28, 2013

Graphene Stock Investing: What The Pros Think

Tom Konrad CFA

Flexible-Graphene-Sheet-300.jpg
Flexible Graphene Sheet image via BigStock

 Graphene is a crystalline form of carbon in which carbon atoms are arranged in a regular hexagonal pattern. It is very strong, light, and an excellent conductor of heat and electricity. It is also nearly transparent. New laboratory  techniques for creating large sheets of graphene, including a roll-to-roll production process, have triggered an explosion of research into new practical applications taking advantage of graphene’s unique properties.

Some potential cleantech applications are solar cells, ultracapacitors, water filtration and desalination, and electronics including touch-screens and better transistors. Graphene’s high electrical conductivity and near-transparency make it a good candidate for solar cells. Researchers have demonstrated the use of graphene conductors for dye-sensitized, organic solar cells, and silicon nanostructures.

While roll-to-roll production processes have yet to move out of the lab, researchers continue to improve the quality and size of graphene sheets produced in this way.  The most advanced version of the technology seems to be vapor deposition of carbon on copper sheets.  Other substrates have been used, but copper’s flexibility makes it uniquely suitable for roll-to-roll production.  Lockheed Martin announced that it has obtained a patent for perforated graphene nanopore-based water filters in March, and also produces its graphene on copper sheets.  The company has not yet commercialized the technology, however, saying that it is still figuring out how to scale up production.  Lockheed aims to have a prototype for testing in a desalination plant by 2014 or 2015.

One of the closest applications to commercialization is graphene ink used to lay down circuitry.  BASF SE is experimenting with graphene ink for printing flexible circuitry on car seats, something it hopes to commercialize in a few years.

Last week, I asked my panel of green money managers for their thoughts on investing in graphene, as well as polling my readers.  I’ll relay the professional’s ideas in the rest of this article, and then take a look at my readers’ responses in a follow-up article.  The reader poll is ongoing (you can take it here.)

Green Mutual Fund Managers

I received thoughtful responses from two managers of green mutual funds, Garvin Jabusch and Frank Morris.  Jabusch is co-founder and chief investment officer of Green Alpha Advisors and co-manager of the Shelton Green Alpha Fund (NEXTX.)  NEXTX invests in companies focused on solutions to the world’s key climatic-macroeconomic issues such as climate change, resource constraints and global production capacities.

Morris is co-founder of Ecologic Advisors and manages the Epiphany Global Ecologic Mutual Fund EPENX.  EPENX has a more diversified focus, and concentrates on companies that provide goods and services that maintain the ecologic health and viability of the Earth, or remediate damage already done.

I asked them each which graphene cleantech applications they thought were most promising, the commercialization timeline, and their ideas for stock market investments.

Top Applications

Jabusch says “[I]t’s hard not to be bullish on the long term prospects for graphene as a material.”  In particular,

Graphene has unmatched capabilities in both electronic and material/mechanical capacities. For example, it has the ability to convert almost every photon that it absorbs into direct current, meaning theoretically it could be used to make the holy grail of solar cells – one that is 100% efficient. This unmatched conductivity also means it could greatly improve energy storage and transmission, meaning everything from EVs (batteries and super-capacitors, etc.) to large-scale grid storage to transmission efficiencies of power and optical communications, and other infrastructure components may become so much better as to be disruptive to existing approaches to all these things. Graphene’s ability to be formed into nanowires means it may provide the smallest and most size and speed efficient circuitry for electronics and LEDs to date, by far. Graphene is the strongest material ever measured, ~200x stronger than steel, making it extremely light and resilient, offering the possibility of making many things we use, from vehicle chassis to airframes both lighter and more durable, like carbon fiber did decades before.  At one molecule thick, it is also transparent, meaning it offers possibilities in touch screens and displays and means that windows may become PV modules in time.

Morris focused only on its energy storage applications, and thinks that three firms in his Global Ecologic Mutual Fund are all researching its potential: EnerSys (NYSE:ENE), Tesla Motors (NASD:TSLA,) and Johnson Controls (NYSE:JCI.)

From my recent reading, I’m most optimistic about graphene’s applications as a thin, transparent conductor in solar and LED lighting applications.  Its ability to both conduct electricity and dissipate heat seem likely to be very useful for LEDs.  Graphene circuitry in devices where size and weight are critical also seems likely to be an early application, but are more likely to bring incremental improvement than revolutionary change.

Commercialization Timeline

Both Morris and Jabusch were cautious about predicting any commercialization timeline.  Jabusch said,

[W]idespread commercial viability of [graphene's] properties may still be further off than many  investors seem to be hoping. This is mainly because a lot of its benefits are paired with limitations that to greater or lesser degrees, still need to be overcome. For example, even though it has 100% energy conversion rate for absorbed photons, it only absorbs ~3% of photons striking it. There is a lot of research going on addressing this such as with dye-sensitized cells and other ideas, but all of this is primarily still in the lab and not ready for widespread use. Keep in mind, graphene was only discovered in 2004. Something we’ve been aware of for less than a decade will necessarily have a long way to go in terms of our understanding how to best unlock its potential.

This caution fits well with the results of my research.  A Wall Street Journal article printed cautionary notes from two industry experts,

Graphene faces hurdles. It is still far too expensive for mass markets, it doesn’t lend itself to use in some computer-chip circuitry and scientists are still trying to find better ways to turn it into usable form. “Graphene is a complicated technology to deliver,” says Quentin Tannock, chairman of Cambridge Intellectual Property, a U.K. research firm. “The race to find value is more of a marathon than a sprint.”

One factor holding graphene back is cost. Some U.S. vendors are selling a layer of graphene on copper foil for about $60 a square inch. “It needs to be around one dollar per square inch for high-end electronic applications such as fast transistors, and for less than 10 cents per square inch for touch-screen displays,” estimates Kenneth Teo, a director at the Cambridge unit of Germany’s Aixtron SE  (NASD:AIXG) that makes machines to produce graphene.

Top Stocks

While Morris mentioned three companies he thought might be researching graphene, he was cautious not to predict any near-term measurable benefits.  With all of us expecting commercialization timeliness of at least three years, it’s premature to start picking stock market winners.  Jabush likens it to investing in biotech in the early 1990s, saying that it makes more sense to hold a basket of the most promising companies, especially those hedged by not having graphene as their entire business.

He said his basket might “include Aixatron (NASD:AIXG; also makes deposition and other equipment used in making PV and LED), Samsung (OTC:SSNLF; has many other well-known businesses, many of which may directly benefit from graphene integration), and Graftech International (NYSE:GTI; legacy graphite and coke-needle business now focusing more on patenting graphene IP, and production of the material).  We’re long AIXG and GTI, and may initiate an SSNLF position.  Note: I’m also long GTI.

Proceed with Caution

Graphene is undeniably exciting, and has the potential to transforms a number to cleantech industries.  The timeline for that transformation, however, is likely to be slower than investors bidding up graphene-related stocks today.  The only reason I own Graftech, mentioned above, is because I think it is undervalued on the basis of its existing businesses: manufacturing graphite electrodes for energy efficient electric arc furnaces, and its existing Engineered Solutions business which sells a variety of graphite based solutions to a range of cleantech businesses.

Jabush is more optimistic, and thinks “careful investments in the best graphene producers and even more careful selection of companies making early efforts at application of the material have outstanding long term growth potential.”

Note the double use of the word “careful.”

This article was first published on the author's Forbes.com blog, Green Stocks on September 18th.

Disclosure: Long GTI

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.

September 20, 2013

How to Read a Sustainability Report: Five Tips

Five tips to help you make sense of the next sustainability report you read

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Reading Sustainability Reports photo via BigStock
 
By Marc Gunther. This article was first published on Ensia.com.

Corporate sustainability reports have been around since … well, it’s hard to say.  The first report may have been published by “companies in the chemical industry with serious image problems” in the 1980s, or by Ben & Jerry’s in 1989 or Shell in 1997. No matter — since then, more than 10,000 companies have published more than 50,000 reports, according to CorporateRegister.com, which maintains a searchable database of reports.

But who really reads them? As a reporter who covers business and sustainability, I do. Maybe you do, too — as an employee, investor, researcher or activist.

Here, then, are five tips to help you make sense of the next report that lands on your desk or arrives via email. They were developed with help from Steve Lydenberg of Domini Social Investments — the principal author of How to Read a Corporate Social Responsibility Report, an excellent 2010 study from the Boston College Center for Corporate Citizenship — and Bill Baue, a consultant and leader of the Sustainability Context Group, an organization working to improve corporate reporting.

1. Pay attention to what’s in the report — and what’s left out. Lots of companies fill their sustainability reports with anecdotes, but these are often off point. Chevron’s 2012 corporate responsibility report says a Chevron executive in Angola is part of “a team that protects endangered turtles that come ashore to breed, dig sandy nests and lay their eggs on the beaches at Chevron’s Malongo oil production facilities.” And we learn that the company has partnered with the Wildlife Conservation Society to “introduce passive acoustic monitoring in the south Atlantic Ocean to assess humpback whale breeding activity” as it explores for oil.

That’s nice, but environmentalists will want to understand what the giant oil company (2012 revenues: $234 billion) is doing about climate change, if anything. Figuring that out from the report is hard, if not impossible. Chevron reports that its 2012 emissions from operations were 56.3 million metric tons of CO2 equivalent, down by about 3.5 million metric tons from 2011, and below its goal of 60.5 million metric tons. That sounds like progress. But you have to read the footnotes to learn that the decline was largely caused by the sale of one refinery in Alaska and “decreased production” from a second refinery in Richmond, Calif., where an August 2012 fire sent thousands of people to hospitals and later led Chevron to pay $2 million in fines and restitution.

What’s more, emissions from operations account for only part of Chevron’s impact. The company’s report says, “combustion of our products resulted in emissions of approximately 364 million metric tons of CO2 in 2012, approximately 8 percent less than the 396 million metric tons emitted in 2011.” Why the decline? Is the fact that people are burning less gas and oil good for the planet but bad for Chevron? The report doesn’t explain.

A good sustainability report should focus on those company activities that have the greatest impact.More importantly, is Chevron trying to move away from fossil fuels and develop cleaner forms of energy? It doesn’t seem to be, since the word “renewable” appears nowhere in the body of the report.

2. Follow the (big) money. A good sustainability report should focus on those company activities that have the greatest impact. So, for example, what matters most in the financial services industry is not paper consumption, LEED-certified work spaces or direct greenhouse gas emissions, but lending and investment practices. Citi’s most recent report says it opened 23 LEED-certified branches in 2012 — a data point that is hard to put into context (since the report doesn’t say how many branches the company operates) and not very meaningful, in any event. What we want to know about Wall Street is how the big banks are taking environmental issues into account in their lending and investments. “No other industry has as much ability to affect the environmental and social practices of other industries as financial services does,” says Lydenberg.

Bank of America tackles the big question better than most. In its report, BofA says it has committed $70 billion over 16 years to “address global climate change and demands on natural resources,” and it describes the goal as “the largest among our peers.” That’s helpful. The bank also tallies where the first $21 billion of its climate-friendly financing has gone. To its credit, BofA also tries to explain why it does business with the coal industry in the face of criticism from environmental groups. “If large financial institutions were to unilaterally discontinue financing the coal industry, it would have negative consequences for the U.S. and global economies,” the BofA report says. The bank also notes, helpfully, that it supports government policies to tax or regulate carbon emissions.

Like most banks, however, BofA doesn’t provide an accounting of its loans to or investments in fossil fuel companies. (According to the Rainforest Action Network, BofA finances Coal India, one of the world’s biggest coal mining companies, which has displaced forest communities and destroyed critical tiger habitat.) How do Bank of America’s investments in fossil fuels, which aggravate climate change, compare to the $70 billion it has pledged to finance, in part, climate solutions? Is the bank making the climate crisis better or worse? Good luck finding out.

You can be confident that most companies present their data in the most favorable light.

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Sustainability via BigStock

3. Think about context.  When trying to understand a company’s impact on climate or energy usage or water, a single number or two won’t help. You’ll need to look at absolute numbers (how much energy did the company use, in total), normalized numbers (adjusting for acquisitions or divestitures), and numbers that reflect energy or water intensity (how much was used per unit of product or dollar of revenues). These numbers only become meaningful when they are accompanied by year-over-year comparisons, or when set against previous goals. You can be confident that most companies present their data in the most favorable light.

The concept of context-based sustainability is designed, in part, to cut through obfuscations and generate meaningful sustainability goals and targets. The idea is elegant: Companies should measure their impacts against science-based sustainability thresholds and resource limits. Is Coca-Cola only using its fair share of the water supply in India? What should Ford’s carbon reduction target be? These aren’t easy questions, but Baue and Mark McElroy of the Center for Sustainable Organizations — leading advocates of context-based sustainability — say answers can be found. Companies, for example, could for reporting purposes be allocated a share of greenhouse gas emissions based on their contributions to gross national product; they would then set emissions reduction targets that are deep enough to meet global climate goals, and report on their progress against those targets.

Several companies are experimenting with context-based sustainability, including the Vermont dairy company Cabot Creamery Cooperative, EMC and Mars. BT (British Telecom) has developed a methodology to determine its share of GHG emissions, as has the California software company Autodesk, which makes its tool, called C-FACT (Corporate Finance Approach to Climate-Stabilizing Targets), available for free.

4. Read more than one report at a time.  How many glasses of water does it take to brew a gallon of beer? I have no idea either, so reading that New Belgium, a Colorado brewing company, wants to reduce its water use per barrel to 3.5 to 1 by 2015 doesn’t tell me much. In 2011, the ratio was 4.22 to 1.

New Belgium has a well-deserved reputation for sustainability but when it comes to water, the brewer lags behind its bigger competitors. MillerCoors’ latest sustainability report says it achieved an average water-to-beer ratio of 3.82 to 1 across its major breweries, while the world’s biggest beer company, Anheuser-Busch InBev, does even better, reporting a water-to-beer production ratio of 3.5 to 1.

Good sustainability reporting, above all, needs to be credible.Reading the Coca-Cola and PepsiCo reports side by side is more enlightening than reading one at a time. The same with UPS and FedEx. But be aware that peer-to-peer comparisons are inexact. New Belgium explains that a practice called “dry hopping” has increased the water intensity in the brewing process. A bottle of Fat Tire is not the same as a Bud or a Coors Light, as any beer drinker knows.

5. Look for all the news that’s fit to print.  Good sustainability reporting, above all, needs to be credible. It’s not easy to decide whether to trust what a company is telling us, but one sign is whether companies deliver the bad news along with the good. In the Chevron report, the refinery fire in Richmond, as well as a fire on an offshore oil-drilling rig near Nigeria, get only a passing mention. “These incidents do not reflect the expectations we have of ourselves,” the report says. We should hope not.

By contrast, Gap has been more willing than most companies to air its dirty linen (pun intended). The company has been forthcoming about what it calls “the severity of worker safety issues in Bangladesh” since 2010. When it comes to the environment, the company is clear about where it will exert its influence — over its supply chain and its own operations — and where it will leave the problems for others to solve.

At the end of the day, the most important thing to know about corporate sustainability reports may be that they almost inevitably raise more questions than they answer. A report cannot, by itself, be relied upon to explain a company’s environmental impact. It’s a useful starting point, at best.


Marc Gunther writer for Fortune, GreenBiz and Sustainable Business Forum co-chair, Fortune Brainstorm Green 2012 and a blogger at www.marcgunther.com.  His book, Suck It Up: How capturing carbon from the air can help solve the climate crisis, has been published as an Amazon Kindle Single. You can buy it here for $1.99.

September 04, 2013

Insiders Are Buying These Five Canadian Cleantech Stocks

TSX Logo

Tom Konrad CFA

In the US insider trades are easily found on the SEC website, stock exchange websites, and financial aggregation sites.  No so in Canada.  A search for insider trades for a Toronto-listed stock on Google will turn up all the financial aggregation websites, but they don’t have any data.

The TSX has more clean technology listings than any other exchange worldwide, many of which are truly international.  I follow several, so I was thrilled when I came across CanadianInsider, where anyone can peruse recent insider trades for Canadian listed companies.

Of the 14 Canadian clean technology companies I own, here are the ones that have seen recent insider buying.

Company: New Flyer Industries Inc.

Canadian Ticker: TSX:NFI

US Ticker: OTC:NFYEF

Business: The largest manufacturer of heavy-duty transit buses in North America.

Who’s Buying: 

  • President and CEO Paul Soubry bought 14,400 shares at C$10.80 and C$10.64 on August 20th and June 25th
  • Board Member Wayne McLeod bought 3,200 shares at C$11.25 on August 14th
  • Executive Vice President Wayne Joseph bought 9688 shares at C$11.25, C$10,90, and C$10.75 on August 13, June 28th and June 26th.
  • Major Shareholder Coliseum Capital Management, LLC bought over 42,600 shares during the last two weeks of August at prices from  C$10.76 to C$10.80.

Company: Ram Power Corp.

Canadian Ticker: TSX:RPG

US Ticker: OTC:RAMPF

Business: Geothermal Power developer and operator with main projects in Nicaragua and the US.

Who’s Buying: Director Alistair Sinclair bought 1,100,000 shares at C$0.15 on June 18th.

 

Company: Alterra Power Corp.

Canadian Ticker: TSX:AXY

US Ticker: OTC:MGMXF

Business: Renewable Energy Developer and operator with a diversified portfolio of geothermal, run of river hydropower, wind and solar assets on three continents.

Who’s Buying: Executive Chairman and founder Ross Beaty bought 37.6 million shares at prices between C$0.29 and C$0.32 in April and June.  He has hinted that he might buy the entire company if the stock price does not recover.

 

Companies: Renewable Energy Developers (ReD) and Capstone Infrastructure Corp. 

Canadian Tickers: TSX: RDZ and TSX:CSE

US Ticker: OTC: STWPF and OTC:MCQPF

Business: Canadian Renewable Energy and Clean infrastructure developer and operator Capstone is in the process acquiring smaller ReD in an all-share deal.  Each ReD share will be worth 0.26 Capstone share.

Who’s Buying: Director of both firms Uwe Roper bought 39,000 shares of RDZ at C$0.99 on July 31st, and 25,000 shares of Capstone at C$3.85 on July 13th.


Company: Innergex Renewable Energy, Inc.

Canadian Ticker: TSX:INE

US Ticker: OTC:INGXF

Business: Canadian power producer Innergex owns 23 run-of-river hydro plants, 5 wind farms, and one solar farm.

Who’s Buying:

  • CFO and SVP Jean Perron bought 2,000 shares at C$8.89 on June 25th.
  • President and CEO Michel Letellier bought 3,000 shares at C$8.95-9.20 in June.
  • Director Richard Laflamme bought 1,000 shares at C$8.85 on August 13th.
  • Corporate Secretary and director of legal affairs Nathalie Théberge bought 500 shares at C$9.64 on June 6th.
  • Director John Hanna bought 5,000 preferred shares at C$18.75-18.80 on July 16th and 18th.

Conclusion

Insiders can be as bad at timing the market as anyone, but insider buying can be a useful indicator that the people in charge of the company think it’s undervalued.

Few insiders need to buy their own stock to get exposure to the company:  Share and option grants are standard in most compensation packages.  When you see insiders buying shares in the open market in addition to these grants, it’s often a good time to consider buying yourself.

Disclosure: I own all these stocks.

This article was first published on the author's Forbes.com blog, Green Stocks on August 23rd.

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.

July 18, 2013

Energy Efficiency and Solar Lead Alternative Energy Stocks Skyward

By Harris Roen

Industry Day Week Qtr Year
Energy Efficiency -0.3% 2.3% 18.7% 49.9%
Environmental -0.2% 1.1% 9.8% 11.8%
Fuel Alternatives -0.3% 1.3% 19.6% 29.2%
Smart Grid -0.1% 2.4% 9.5% 31.9%
Solar 0.5% 6.8% 40.3% 52.8%
Wind 0.0% 2.1% 9.7% 21.6%
Average -0.1% 2.7% 17.9% 32.9%
Data as of: 7/17/2013

Alternative energy stocks are up over 30% on average for the year, reflecting impressive gains off of widely oversold lows in 2012. Almost three-quarters of stocks have been gainers, and two-thirds have seen double-digit price growth in the past 12 months. Solar and energy efficiency stocks in particular have done extremely well, both up over 50% annually.

Solar

The run-up in solar stock prices exhibit strength and breadth. For example, almost four out of five solar stocks are up in both the past three-month and 12-month time periods.

The best performer is SunPower Corp (SPWR), up 505% for the year! This vertically integrated, California-based solar company works at all levels of the photovoltaic business: from manufacturing to installation to service; and from rooftop residential to commercial to utility-scale. Caution is advised, though, since SPWR is still in negative earnings territory. Because SunPower is well positioned in the growing solar installation market, however, we believe that this energy stock is a good long-term prospect.

Energy Efficiency

Energy efficiency stocks have also done extremely well, with over 70% of companies posting annual gains in the double digits. The return leader here by far is Revolution Lighting Technologies Inc. (RVLT), a company that is worth 20 times what it was a year ago. Investors see RVLT as a strong play in the push for increasing efficiency in electric consumption by greater adoption of LEDs.

As with SPWR, it is hard to suggest investing in this and other high flyers except for a speculative portion of one’s portfolio. Having said that, these and other high-quality green investments will more than likely pay off as a buy-and-hold for the long-term.

Market Bottom?

On a technical basis, alternative energy stock prices look like they have formed a bottom. The chart below shows the WilderHill New Energy Global Index (NEX), which after flying high for a couple of years dropped 66% off its peaks in 2007. The downward pattern, however, shows a clear triple bottom. Three times, a new low occurred below the previous downward trough creating a wave-like pattern. This typically happens in three or four waves before a significant upturn begins.

In addition, the 200-day moving average crossed the 50-day moving average in December 2012, and the NEX has been trading above the 200-day moving average since that time. This can be an early sign of a prolonged upswing, as occurred in September 2006. The crossing marked the start of a 15 month, 83% surge.

Investors should be vigilant and monitor to see if the two moving averages cross again. This can indicate a false bull, as happened with the run between May 2009 and February 2010. Alternatively, it can signify the start of decline. This was foretold by the two moving averages crossing in February 2008, which preceded the precipitous drop later that year.

Unless the NEX starts forming a short-term top, we believe the two moving averages should remain widely apart as the recovery in clean energy continues.

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. 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.

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.

July 07, 2013

The Next Tesla Or SolarCity

Tom Konrad CFA

AndrewShapiro_sq.png
Andrew Shapiro

Speaking at the Renewable Energy Finance Forum – Wall Street this morning, Andrew Shapiro, the Founder of Broadscale Group, presented his ideas on how small clean energy companies can succeed: Collaborate with big corporations.  That does not mean going cap in hand looking for the cash those companies can bring, but forging collaborative partnerships where interests are aligned with a corporate investment, and leveraging the reach and scale of those companies to rapidly achieve scale that entrepreneurs have trouble finding on their own.

Stock Market Implications

If you’re wondering how this is relevant to clean energy stock market investors, you need look no farther than the recent blistering performance of Tesla Motors (NASD:TSLA) and SolarCity (NASD:SCTY), two examples he used in his presentation.

Shapiro sees a new stage in the approach of large corporations towards the clean energy space, one which he dubs “transformative.”  Corporations are now looking for new business models of open collaboration, not just in clean energy, but throughout the corporate world.

For small, innovative companies, large corporations can help with what Shapiro says is their greatest need: commercialization and scaling.  Scaling is key to mainstream success.  Without rapid scaling, we may continue to increase investment in clean energy but not fast enough to bring down worldwide carbon emissions.

He sees Elon Musk-backed Tesla and SolarCity as examples of this collaboration with large, established corporations.  Musk realized he needed major strategic partners to make his ideas reality, while the big corporations were able to tap into the small companies’ innovative talents.  For Tesla, Musk brought in Daimler with a 10% stake, Toyota (NYSE:TM) with a $50m investment, and Panasonic  (OTC:PCRFY) with a $30m investment.  These were self-interested investments: Toyota has collaborated Tesla on the technology of its new Electric RAV-4.  Panasonic also collaborated with Tesla on new battery technology, and is now benefiting from Tesla’s rise.  Panasonic will is expected to ship 100,000 automotive grade lithium-ion battery cells to Tesla by the end of the month.

SolarCity (SCTY) also worked in collaboration with big corporate partners. SolarCity’s financing partnerships with Google (NASD:GOOG) and Goldman Sachs (NYSE:GS) are well known, but Shapiro highlights its lesser-known partnership with Honda as the most innovative.   Honda is not only seeking cost savings and green credentials by installing SolarCity systems on its dealerships, but it is also lending SolarCity some of its marketing muscle.  Honda and Acura car owners get a $400 discount on SolarCity systems.

Conclusion

Want to find the next IPO like SolarCity or Tesla?  Look for the company with established corporate partners that are committed to the success of their clean energy partners.

Disclosure: No position in any of the companies mentioned.

This article was first published on the author's Forbes blog on June 25th.

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.

May 19, 2013

Does Buying Green Stocks Do Any Good?

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.

March 27, 2013

The iCloud's Green Lining

Meg Cichon

hp_photo_solar_federal_ornl[1].jpg 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.

February 20, 2013

China: The Rise of the Global New Energy Scavenger

Doug Young

400px-King_vulture_portrait[1].jpg
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 .

February 01, 2013

Earnings Season – Alternative Energy Stocks to Watch

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.

January 25, 2013

Alternative Energy Investing for 2013

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.

net-profit-300x218[1].jpg

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.

wind02[1].jpg

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.

corr02[1].jpg

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.

annual_gain[1].jpg

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.

inflation[1].jpg

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.

January 24, 2013

Inevitable Shifts and Indispensable Technologies

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." 

January 20, 2013

The Next Economy in 2012: Progress Towards Inflection

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 8th, 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 30th 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.  

Client letter 2012 chart
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 31st 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,

January 15, 2013

Earnings Are Mixed for the New Year

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. 

Date
DayStar Technologies Inc. (DSTI)
More Info
1/7/2013 Revenues remain elusive for this thin cell PV producer. EPS dropped about 10%, and gross losses doubled. The stock is down 35% for the year, but has bounced up 20% for the quarter. SEC Filing

Acuity Brands, Inc. (AYI)

1/8/2013 Revenues for Acuity Brands are flat for the year, but down for the quarter, as are profits. EPS remains razor thin but is up slightly. Still the stock has dropped 4% for the week, since actual earnings came in about 15% below street estimates. The stock is considered at fair value by the Roen Financial Report. Press release

Mistras Group, Inc. (MG)

1/8/2013 A positive earnings report showed a 21% increase in revenue and a doubling of net income for the quarter. Mistras Group also raised the low end of its range of earnings expectations for FY 2013. The report is in line with analyst estimates, but the stock price has remained flat. Reuters Article

Schnitzer Steel Industries (SCHN)

1/8/2013 EPS turned slightly negative for this salvage company on dropping revenue, down 22% from the previous quarter. The stock gave up about 8% for the week on the news. Press release

AZZ Inc. (AZZ)

1/9/2013 Revenues were basically flat for the quarter, but up 28% from the same quarter last year. Similarly, EPS were down slightly quarter, but up over 50% year over year. Earnings were in line with analysts expectations, and AZZ has slightly raised guidance for 2013. The stock price has been stair-stepping up nicely, with a gain of 70% for the year. Press Release

SemiLEDs Corporation (LEDS)

1/14/2013 Revenues picked up for this Taiwanese LED company, gaining 14% for the quarter. Revenues for the year, however, are still down 8%. EPS remains negative, missing analyst estimates by about 25%. The companies stock price continues to fall, down 52% for the quarter and 77% for the year. Press release

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.

January 06, 2013

2013: Green Economy Inflection Point

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."

December 19, 2012

Energy Trends That Matter For Investors

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. fig1.jpg
Figure 1: Global Per Capita Energy Use

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.

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Figure 2: Total Energy Consumption

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.

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Figure 3: Percent Consumption by Fuel Type

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.

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Figure 4: Production Net Consumption

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).

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Figure 5: Average Annual Growth in Renewable Electric Generation

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.

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Figure 6: Solar Stocks

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.

December 05, 2012

SEC Charges Chinese Units of Five Accounting Firms; Chinese Cos Defect

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 .

November 25, 2012

Seven Indian Clean Energy Stocks

by Sneha Shah

170px-Ravi_Varma-Lakshmi[1].jpg Raja Ravi Varma's portrait of the Hindu goddess of wealth, Lakshmiലക്ഷ്മി 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.

November 15, 2012

Why Alternative Energy Stocks Are Down Despite An Obama Victory

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.

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 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.

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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.

October 16, 2012

2013 Alternative Energy Stock Predictions

Will Natural Gas Crush Alternative Energy in 2013?

By Jeff Siegel

bigstock-The-Swami-2749929.jpg
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...

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

July 20, 2012

Next Economy and Faith for Empiricists

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.

 

Zorblaxians
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."

June 08, 2012

Three Things Goldman Sachs' $40B Greentech Investment Means, and Two it Doesn't

Tom Konrad CFA

goldman sachs tower
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.

May 06, 2012

Top Questions to Ask a Venture Capitalist in the First Pitch

David Gold

Katherine Connors ceremonial pitch 8
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.

April 19, 2012

Report: US Re-takes Lead In Clean Energy Race from China... But Not For Long

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.

Investment by Country and Financing Type.png

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.

Financing Types
and Trends.png
Current Boom and Coming Collapse

Expired incentives.png 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.

April 11, 2012

Five More Winners of the Clean Energy Race

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.

Investment by Technology.png

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.
Investment by Country and Sector.png

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

Rapid
transformation.png 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.

VC and PE Financing.png

#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.

Asset Finance.png

#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.

March 29, 2012

Six Questions to Ask a Venture Capitalist in the First Five Minutes

David Gold

Ask First.png 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.

March 08, 2012

Sages and Seers: Warren Buffett, Bill Clinton, Oxford University Prof. Nick Bostrom, and the Next Economy

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."

Warren-buffett-wind-power-turbine-photo (1)
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."

January 26, 2012

Minimizing a Key Threat: State of the Union Address 2012

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.

Obama_SOTU_2012
President Barack Obama delivers the 2012 State of the Union Address (Image source: whitehouse.gov)

Two years ago, President Obama in his State of the Union Address said, "The nation that leads the clean energy economy will lead the global economy and America must be that nation." So how are we doing?

From a next economy point of view, the critical parts of last night's State of the Union Address were:

  • Oil and gas development are the centerpiece of the administration's energy plan
  • Natural gas is the primary to the 'clean energy' part of the energy plan
  • America is the leader in battery technologies
  • The president attempted to encourage more development in wind, solar, and other renewables by encouraging clean-energy tax breaks and the removal of subsidies to profitable oil companies
  • The president attempted to leverage American competitive spirit: "I will not cede the wind or solar or battery industry to China or Germany because we refuse to make the same commitment here."
  • "Differences in this chamber may be too deep right now to pass a comprehensive plan to fight climate change, but there’s no reason why Congress shouldn't at least create a clean energy standard."  So,
  • Major new renewable standards by executive order were announced, three million homes' worth via government land and private development and 250,000 homes' worth per year to be purchased by the Navy
  • Efficiency and conservation were mentioned as easy and as job creators, so the president proposed incentives to businesses to become more efficient, and asked Congress for legislation to that effect

Unfortunately, a lot of these fall more on the rhetorical side, although we do welcome the few specifics that were offered. Unquestionably, it is a partial contrast with the rhetoric coming from Republicans' campaigns, which exclusively pander to big oil and Wall Street by pretending climate change and resource scarcity do not exist, so they can pursue their depletist, dangerous, destabilizing policies.  But, sadly, it’s not nearly enough.

Here's what the president didn't say.  He didn't say that the climatic and resource challenges facing America are the most long-term economically destabilizing risks that exist. He didn't say that three million homes' worth of renewable energy is a good start but tiny next to the progress required to avoid financially disastrous resource scarcity and climate change, and he didn't mention a time frame for that.  He didn't acknowledge that the climate disinformation campaign causing all the disastrous pandering, policy stagnation and partisan gridlock is, in the words of NASA's James Hansen, America's foremost climate scientist, a "crime against humanity."

Since the possibility exists that this could be President Obama's last State of the Union Address, the president should want to make his most full, complete case for his legacy, for what he wants his administration to stand for.  It's easy to see why he would fear taking on the most profitable companies in the history of humankind in a larger way than merely proposing taking away their tax welfare, but he should have wanted to make his strongest case on all fronts. We can only hope the economic realities of pursuing a clean efficient future will speak for themselves, because our policymakers, even the good ones, are way behind.

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."

December 30, 2011

Energy in the Great Depression

Energy in the Great Depression

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:

bretton woods bubble

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:

stern finance pay
Source: Thomas Philippon (2008)
finance american gdp
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:

global debt 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:

solar supply 2012

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:

energy consumption in the great depression
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.

December 28, 2011

2012 Energy Stock Predictions

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...

Dortmund iMiEV charging
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...

 signature

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

December 01, 2011

Delusions: The Secret to Lost Opportunities

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...

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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.

November 14, 2011

Feeling Feeling Blue About Green? Reasons for Cleantech Optimism...

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.

November 05, 2011

Could The G20 Deliver A Growth and Clean Energy Pact?

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. 
  • In terms of electric vehicles, the most interesting play remains Tesla (TSLA). For a broader discussion see here

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.

September 26, 2011

Top 5 Things Cleantech Entrepreneurs Fail to Understand About Raising Capital

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.

September 08, 2011

Chaos Theory, Financial Markets, and Global Weirding

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

Poisson Saturne AttractorThe 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.
 

Lorenz AttractorStrange 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?

July 29, 2011

Are the Declines in Solar and Wind Stocks Structural, or Cyclical?

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."
PBW PZD PUW.png
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."  
Gas and Oil vs
ECO and HAUL.png
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.


July 01, 2011

Growing Clean Energy Through Business Model Innovation

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.

May 22, 2011

Japan Wants to be World Leader in Rare Earth Recycling

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

May 17, 2011

If Energy Were Free and Unlimited…

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 water30% 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.

May 13, 2011

The Rare Earth Supply Chain: Ores, Concentrates, Compounds, Oxides and Metals

REE Refining 101
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

May 11, 2011

Carbon War Room CEO: "Radical Incrementalism Will Fail"

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.

April 17, 2011

Who's Winning the Clean Energy Race?

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 11th 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.

    • 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.

April 14, 2011

How to Measure the Next Economy?

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.

April 13, 2011

The Water Food Energy Climate Nexus (Pt. 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 food nexus

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.

water for energy

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.

water for electricity

Part 2 will look at the food-water nexus.

March 30, 2011

Clean Energy M&A: Is the Glass Half-Empty or Half-Full?

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.

March 24, 2011

Clean Energy Stocks to Fill the Nuclear Gap

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.)Poll results

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,

The nuclear reactors that have recently gone off-line in Japan and Germany accounted for roughly 125 TWh of electricity production last year. In comparison, global electricity production from wind and solar power in 2009 was 269 TWh and 21 TWh, respectively. In other words, we just lost base-load power that represents 43% of the world’s renewable electricity output. The gap cannot possibly be filled by new wind and solar power facilities.

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.)
ETF returns 3/10 thru 3/21

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.)
World wind installed capacity

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.


February 20, 2011

Still Renewable, Still Paying Good Dividends

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.

February 14, 2011

The Renewable IPO

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.
 

December 22, 2010

Critical Energy Metals - A One Way Bet?

Global Technology Metals 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:

criticality matrix

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.

November 28, 2010

Can America Regain the Rare Earths Crown?

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)

November 01, 2010

Alternative Energy: The Paradigm is the Problem

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. 

Fuel cost per mile
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.

Electric Vehicle Paradigms

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.

September 24, 2010

Cleantech Stimulus Still Not Stimulating

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.

September 23, 2010

Will Rare Earths Cripple the Green Economy? Part 3

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
global forecast

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
surplus and deficit
Terbium and dysprosium are displayed on their own in Figure 17 for clarity.

Figure 17: Surplus and Deficit for Dysprosium and Terbium in 2014
terbium dysprosium

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
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
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
electric car additions
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.

September 22, 2010

Will Rare Earths Cripple the Green Economy? Part 2

Eamon Keane Rare Earths 2 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
2008 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
2010 Estimated Rare Earth Flows
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
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
Approximate percentage content
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
dysprsoium, terbium

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
nechalacho revenue

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]
kvanefjeld

Continued in Part III. References are available here.

September 21, 2010

Will Rare Earths Cripple the Green Economy? Part 1

Eamon Keane Rare Earth Elements 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”
Google Search

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]
Rare earth elementsRare Earth - I just want to celebrate

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)
Map of production
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?
Baiyun-obo

Figure 6: Global REE Production 1986-2009
Global REE Production

Figure 7: Rest of World Demand for RE Salts, Oxides & Metals
china export limit

Continued in Part II..  References are available here.

August 29, 2010

Seven Greentech "Experts" and Their Stock Picks

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.

May 12, 2010

DOE Questions the Presumption of Plenty

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.

January 15, 2010

Will 2010 Be the Year of Cleantech Revenues, IPOs and, Maybe, Even Profits?

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.

January 02, 2010

Why Oil & Shipping Firm A.P. Moller-Maersk and Steelmaker POSCO Are 'Green' Investments

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.

December 23, 2009

REDI-ing Your Portfolio for a Low-Carbon Economy

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.

December 10, 2009

Feel-Good Government Grants Leading Cleantech Astray

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.

December 08, 2009

EnviroStar: A Clean Laundry Stock For Your Portfolio

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

November 30, 2009

Green Energy Investing For Beginners: Index

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.

November 11, 2009

Electricity and Water– Can We Have Both? 

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

November 02, 2009

Cleantech Venture Capitalists are Human Too

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

November 01, 2009

Human Capital, Not Venture Capital, the Biggest Cleantech Challenge

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

October 07, 2009

Crude Oil & Alt Energy: The Non-Relationship That Just Won't Go Away

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).             

Oct 7-09 Chart 1_2.bmp

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. 

Oct 7-09 Fig 1_2.bmp

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.


Oct 7-09 Fig 2.bmp

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

September 24, 2009

Climate Change & Corporate Disclosure: Should Investors Care?

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

September 20, 2009

Book Review: Investment Opportunities for a Low Carbon World (Cleantech Indexes, Funds and ETFs)

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

September 14, 2009

Book Review: Investment Opportunities for a Low Carbon World (Geothermal + Efficiency)

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

September 10, 2009

Book Review: Investment Opportunities for a Low Carbon World (Wind + Solar)

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*. 

Sep 10-09 book review.bmp

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    

July 02, 2009

Money Is Flowing Into Alt Energy Again, But We Are Not Out Of The Woods Yet

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       
            

June 07, 2009

What Does Clean Energy Cost?

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:

 Click to open in new window

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 cofiringCovanta 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

Click to Enlarge  

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.

May 05, 2009

Financing Clean Energy: Perspectives

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.

April 26, 2009

The Obama Effect: Is Clean Energy Outperforming?

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.

March 28, 2009

Do You Need To Invest In Oil To Benefit From Expensive Oil?

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.

March 25, 2009

How Likely Is A Big Rally For Alt Energy Stocks?

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.

March 16, 2009

The Ontario Feed-in Tariff For Alternative Energy

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...

March 08, 2009

The Buffett Shareholder Letter & Alt Energy

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.

February 25, 2009

The Ontario Green Energy Act: What Can Alt Energy Legislations Do For Investors

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 criti