Garvin Jabusch

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

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

Eamon Keane

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

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



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

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


Source: Thomas Philippon (2008)

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

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

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

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


Source: Business Insider

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



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


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

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

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

By Jeff Siegel

Domestic Oil to Reign in 2012

Last December, I made three predictions for 2011:

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

Well, two out of three ain't bad!

A Sad Season for Solar

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

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

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

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

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

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

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

That never happened.

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

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

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

4.3 Billion Barrels

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

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

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

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

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

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

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

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

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

Not the Failure They Hoped For...

By Rudko [CC0], via Wikimedia Commons

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

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

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

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

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

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

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

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

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

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

Predictions for 2012

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

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

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

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

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

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

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

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

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

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

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

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

Where Natural Gas is King

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

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

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

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

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

So to recap...

2012 will bring us:

• More domestic oil and gas production

• More installed wind capacity

• More electric car production and sales

Also worth noting:

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

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

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

Overall, I'm cautiously bullish on 2012.

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

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

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

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

 

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

Posted by Guest Contributor at 11:52 PM | Permalink | Comments (0)

By Jeff Siegel

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Clean Energy Illusion

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

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

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

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

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

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

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

Irrelevant Perceptions Won't Help You Profit

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

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

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

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

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

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

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

Wu also went on to say:

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

A Bigger Piece of the Pie

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

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

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

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

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

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

But don't kid yourself.

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

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

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

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

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

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

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

 

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

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

Posted by Guest Contributor at 07:37 AM | Permalink | Comments (0)

David Gold

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

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

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

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

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

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

We Never Had to Import Liquefied Natural Gas

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

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

Disruptive Lighting

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

The Population Bomb Didn’t Explode

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

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

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

200 Countries, 200 Years…

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

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

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

by Clean Energy Intel

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David Gold

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

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

Technology is necessary, but not sufficient.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

Posted by David Gold at 07:25 PM | Permalink | Comments (2)

Tom Konrad Ph.D. CFA

In my bio, I usually state

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

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

Chaotic Systems and Feedback

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

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

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

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

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

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

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

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

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

Global Weirding

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

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

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

Conclusion

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

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

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

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

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

What tiny change are you making?

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

Tom Konrad, CFA

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

Commoditization in Clean Energy

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

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

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

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

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

Other Structural Problems

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

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

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

The Cyclical Case

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

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

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

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

Conclusion

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

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

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

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

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

DISCLOSURE: No positions.

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

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

David L. Levy

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

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

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

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

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

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

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

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

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

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

by Kidela Capital Group

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

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

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

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

Recycling proves expensive but profitable

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

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

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

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

Rare Earths from old air conditioners to computers

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

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

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

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

A revitalizing new industry

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

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

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

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

—–

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

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

David Gold

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

 “What if energy were free and unlimited?”

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

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

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

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


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

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

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

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

by Kidela Capital Group

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

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

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

Step 1: Mining the Ore

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

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

Step 2: Producing RE Concentrates

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

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

Step 3: Producing RE Compounds

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

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

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

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

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

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

Step 4: Producing RE Oxides

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

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

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

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

Step 5: Producing RE Metals

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

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

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

—

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

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

Tom Konrad CFA

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

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

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

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

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

The Investing Angle

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

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

But first, a note about what to avoid.

Radical Incrementalism

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

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

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

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

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

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

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

Tom Konrad CFA

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

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

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

Clean Energy Sectors

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

  • Up 30% over 2009

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

  • 17 GW of solar was installed in 2010

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

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

• Wind grew 34%

  • 40 GW added in 2010

• Biofuels slumped

  • Lowest investment since 2005

  • Some markets are oversupplied with conventional biofuels

  • Next generation biofuels are not ready

• Solar thermal was not tracked by the report.

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

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

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

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

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

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

Country Rankings

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

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

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

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

• The United States fell to third in total investment.

  • Investment in wind power dropped 50% from 2009 levels

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

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

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

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

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

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

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

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

  • Solar PV dominated Japanese clean energy investment in 2010.

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

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

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

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

What I Hope For in the 2011 Report

• Tracking Solar Thermal and Geothermal investment.

• More complete tracking of investment in alternative and efficient transportation

• Some measure of the effectiveness of clean energy investment

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

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

Lessons Learned

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

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

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

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

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

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

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

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

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

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

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

Garvin Jabusch

In search of a sucessor to the Global Industry Classification Standard

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

But that was then.

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

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

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

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

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

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

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

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

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

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

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

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

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

by Eamon Keane

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

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

 

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

Peter Braebeck-Letmathe, Chairman, Nestle Group

 

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

UN FAO Agricultural Outlook 2010-2019

 

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

The Economist special report on feeding the world

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

Energy-Water Nexus

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

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

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

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

Part 2 will look at the food-water nexus.

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

Dana Blankenhorn

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

But is it?

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

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

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

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

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

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

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

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

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

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

Tom Konrad, CFA

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

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

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

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

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

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

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

The Conversation So Far

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

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

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

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


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

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

Market Reaction

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


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

Linear vs. Geometric Growth

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

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

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


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

Variability

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

Geographic Dispersion

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

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

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

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

The Japanese Grid

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

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

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

The First Fuel

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

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

Filling the Gap

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

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

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

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

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

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

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

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

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

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

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

DISCLOSURE: None.

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

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

Tom Konrad CFA

Income investors can also invest in clean energy.

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

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

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

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

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

DISCLOSURE:  Long AQUNF, NPIFF.

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

Posted by Tom Konrad at 12:42 PM | Permalink | Comments (0)

By Greg Pfahl

Renewable IPOs in 2010

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

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

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

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

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

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

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

How to Plan an IPO

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

Start early

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Eamon Keene

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

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

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

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



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

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

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

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

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

by Kidela Capital Group

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

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

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

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

American rare earth dominance ends only recently

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

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

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

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

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

Whether focusing on REEs was a deliberate and clever trade strategy or a happy accident, China now had firm control of the world supply of REEs. And while demand remained stable and China exported its REEs at low price points, the US became complacent. Remaining REE stockpiles around the country were sold off and the US as a whole let the REE market completely get away from them.

Scrambling to catch up

Fast forward to 2010, and we find that the demand for rare earths has risen considerably given all of the recent discoveries of additional technological uses for the minerals. Just as REE demand has started to ramp up, China began to restrict exports. The US, like other nations, is scrambling to react and get back in the game. However, ramping up a dormant industry is costly and requires a great deal of time. Obtaining a mining license and the associated environmental permits can be described as a regulatory equivalent of a very long cross country steeple chase.

“When you stop mining in this country, as investment goes down, expertise
on cutting-edge technologies is exported as well.”
Carol Raulston, National Mining Association.

Restarting a mine is no easy task. Environmental regulations in 2010 are considerably more stringent than they were back in the 1970s, costs are multiples of what they were and there is also the challenge to find the expertise needed to mine and process these elements.

While there may be a number of prospective rare earth element sites around the world, the challenge mining companies have is that they have to pay for and put the infrastructure and processes into place necessary to mine and process them.

Until that time, relying solely on Chinese exports does not seem to be an option for the US any longer. The supply chain for a number of commercial and defense related industries has already begun to break down. A Government Accountability Office (GAO) report from April 2010 identified four rare earth element shortages that have already caused some kind of weapon system production delay.

The US government is examining its options. Some of these include: stockpiling REEs supplies, securing other suppliers from around the world and allocating and redirecting REE purchases for defense and national security purposes.

US mining industry lobbies for domestic support

Given its past dominance, it is argued the US has the reserves and capacity to more than meet its domestic needs. Similar efforts have been undertaken in Canada and Australia and both countries are in the early stages of rebuilding the necessary infrastructure.

According to the U.S. Geological Survey, there are 13 million tons of extractable rare earths in the United States, 5.4 million in Australia, and 19 million in Russia and neighboring countries. In 2009, China had 36 million tons.

The US mining industry is acutely aware of the challenges in restarting the US rare earth industry including securing large amounts of investment capital in this rough economic climate. Other challenges include the need to develop and implement advanced mining techniques, and the need to meet stringent environmental impact stipulations. There is also a pressing need for greater domestic research and development efforts related to refining techniques. The process will be a long one and it is has been expected that the return of the US REE industry to former levels will take a decade or more.

“I would say conservatively the earliest that we could open a mine has to be six to seven years.”
Edward Cowle, President and CEO U.S. Rare Earths

Not your grandfather’s rare earth mine

MolyCorp’s rare-earth separation plant at Mountain Pass, resumed operations in 2007. This year, MolyCorp began using stockpiled rock that was mined under a previous permit and employed new separation technologies. The company expects to sell 3,000 tons of rare earths in 2011 and by 2012. MolyCorp expects to eventually produce 20,000 tons a year, and produce rare-earth products at half the cost of the Chinese. However, the company cannot use the processes used in the mine’s heyday: processes that are both economically and environmentally unsustainable. According to the company, their new techniques are both more environmentally sound and save money, techniques such as eliminating the production of waste saltwater. MolyCorp will use a closed-loop system, converting the waste back into the acids and bases required for separation and eliminating the need to buy and transport dangerous chemicals. The company will also install a natural-gas power co-generation facility on site to cut energy costs.

“We want to be environmentally superior, not just compliant.
We want to be sustainable and be here for a long time.”
Mark Smith, CEO MolyCorp

MolyCorp is upbeat, but there are still challenges in getting the mine up and running. Memories of the poor environmental record are long and environmentalists state that they and the regulators will be looking long and hard at their start up plans. There is also the key problem that processing the raw product is a costly time consuming exercise. MolyCorp claims it spends only about 10 percent of its budget on actual mining. The big cost is in the process to chemically separate the rare earths from the minerals that carry them. Rock is milled first into gravel, then sand, and then must be separated by repetitive mixing with solvents sometimes tens of thousands of times. Rare earth oxides are useful in some industries, but items like magnets require pure metals which requires even more processing and which can produce even more environmentally hazardous by-products.

To help fund its quest to reestablish a rare earth mining industry in the US, MolyCorp went public this year and has also appealed to the US government for loan guarantees, and financial assistance for research and development.

MolyCorp expects to reach its peak production capacity by producing 20,000 metric tons of cerium, lanthanum, praseodymium, and neodymium. The mine will also produce small amounts of other critical rare earths – samarium, europium, gadolinium, terbium, dysprosium, and erbium. This production output may be enough to sustain many of the domestic needs of the U.S. MolyCorp is also planning to re-establish domestic supply chains by partnering with domestic magnet producers.

The US mining industry is poised to ramp up its domestic rare earth production but the question remains; can the US wait for the 10 to 15 years it will take to bring the rest of the REE industry fully online in the US? Even with support from US lawmakers, will the broader industry be able to be internationally competitive? The costs might be too high for some in this industry. For example, Molycorp has to pay some $2.4 million a year on environmental monitoring and compliance, costs. Until monitoring and regulations to curb their negative environmental impacts take effect in China, Chinese companies do not have these same cost burdens.

Much is riding on how the US weathers the next couple of years. Get it wrong and it could prove to be very rough going. Get it right, and the vast majority of people will never know they almost ran out of vital commodities that are at the very heart of the technology that keeps the world humming and their homeland safe. As we type this, there are many dedicated and talented people who are taking great strides to rebuild their country’s REE infrastructure and knowledge base in hopes of once again becoming a world leader in REE production.

Disclosure: No Positions.

Kidela Capital Group Inc. is a diversified research, consulting, communications and investor relations firm. We are dedicated to assisting early to mid-stage companies achieve their goals by delivering a range of innovative and effective value added services.

Related articles:

Will Rare Earths Cripple the Green Economy? Part 1 and Part 2 (Eamon Keane, September 2010)
Rarer Rare Earths Are Not Going To Sink The Wind Power Sector (Charles Morand, Aug 2009)

Posted by Guest Contributor at 02:38 PM | Permalink | Comments (0)

Tom Konrad CFA

Can We Afford Alternative Energy?

Most serious critiques of alternative energy boils down to, "it costs too much."

True, detractors of wind power sometimes point to the number of birds and bats killed, and some people worry that electric vehicles (EVs) are so quiet that they pose a danger to blind pedestrians. 

While such critiques are legitimate in that they are real problems, they can also be alleviated.  Avian fatalities can be greatly reduced by more sensitive siting of wind turbines, and even painting turbines purple.  Nissan has installed an electric noisemaker in the Leaf to warn pedestrians of its approach.  More to the point, such problems do not come close to outweighing the benefits of the technologies.  Bird and pedestrian deaths from collisions with wind turbines and EVs are likely to be much lower than pollution-related illness and death that both technologies reduce by replacing pollution sources. 

Such arguments are more relevant to the question of how we should be pursuing alternative energy, rather than the much more important question of should we be pursuing alternative energy at all?

"Does Alternative energy Cost too Much?" is a much more relevant question.  If an alternative energy technology really costs "too much," then we should probably be spending our money on other methods of reducing pollution, such as research into more affordable alternatives, or ways to clean up the mess that "cheap" conventional energy leaves behind, such as Carbon Capture and Sequestration.

The problem with the cost question is that not only does the answer depend on a large number of assumptions (interest rates, where and when the power is delivered, and the changing costs of fuel, feedstock, and operating and maintenance costs.)  We also need to decide what "too much" means. 

What Do We Want Energy For?

Before we try to answer the cost question, we need to take a step back, and ask if it's really the right question.  What do we need energy for?  A modern economy runs on energy, but it's the services that energy provides that are important, not the form of energy itself. 

Take a new home as an example.  We can heat it with natural gas, wood pellets, fuel oil, electricity, solar thermal panels, or even passive solar design.  When we decide between this multitude of options, we're not interested in the cost per Btu, but rather how much it will cost us to keep our home comfortable for the year.  We may also be interested in the potential variation from year to year: an average heating cost of $1,500 per year may be desirable, but not if the cost is low most of the time, and it occasionally costs $15,000 in a single year because of volatile fuel prices or unreliable equipment.

Which fuel can keep the home warm at a dependably low cost depends as much on the design and construction of the house as it does on the fuel needed to heat it.  Generally, electric heat is the most expensive way to heat a home, but a well-designed passive solar house needs so little added heat to remain comfortable that a pellet stove may end up being a more expensive option because the heat loss through the flue even when the stove is not in use may cost much more than the little bit of electric heat that will be needed on the coldest of winter nights.

The example of a home shows that the design of a house is at least as important as the choice of heating fuel in determining the overall cost of maintaining comfortable winter temperatures. 

It Costs Too Much for What?

When we assess the true cost of alternative energy, we also need to assess system design. 


Consider electric vehicles.  As the chart above shows, the fuel cost for an electric vehicle (Battery EV) is much lower than the other alternatives.  Yet any serious look at the life cycle costs of electric cars shows them to be uneconomic under any reasonable assumptions of daily commutes and gasoline prices.  Each mile of range for a battery electric vehicle durable enough to last ten years will cost between $150 in the most optimistic case, and $300 to $400 under more realistic assumptions.  If the car is charged at most once per day (at night), that mile of range will be used for at most 300 miles of driving per year.  If gasoline is $5 per gallon, and electricity is 10¢ per kWh, that will produce 10¢ fuel savings per mile (over a standard hybrid), or at most $30 of annual fuel savings.  If we assume the batteries last for ten years under these very strenuous driving conditions, we can come up with a decent 20% Internal Rate of Return (IRR), but under more realistic assumptions we'll get our money back (0% IRR) over ten years, or even end up losing money.

While we can conclude that electricity is too expensive a way to power a car, electricity can make sense in other transportation systems.  The number of times the battery is charged per day (battery cycles) is crucial.  While multiple charges per day are impractical for most commuters, multiple charges may be practical for fleet vehicles with regular routes.  Electric trains and trolley buses can bypass the expense of batteries all together by drawing their power from lines along their routes.  A Battery-electric bus with this capability would be able to drive on ordinary roads for part of its route, recharging while still on its route when external power from overhead lines was available.



In other words, the electric car paradigm is the problem.  Electric transportation, with the right paradigm, can make a great deal of sense despite the high cost of batteries.

Wind and the Grid

The dominant paradigm for electric power holds that electric consumption, or demand cannot be influenced by the utility, so electric utilities should manage their generation assets to meet that demand.  Furthermore, electric transmission is built to bring power from generation (which can be placed nearly anywhere there is water for cooling and the neighbors are unlikely to protest.) 

Wind and Solar power do not fit well into this paradigm, because generation from solar and wind depend on the weather and cannot be controlled by the utility.  These problems are exacerbated by the lack of robust long distance transmission, which would reduce the variability of wind and solar by diversifying away local variations in weather.

Therefore wind and solar are square pegs that do not fit in the paradigm's round holes.  For those who accept the paradigm, solar and wind are "unreliable," and require massive investments in dispatchable generation that can replace their output at any time.  Some opponents even claim that wind power does not lead to any decrease in pollution, because wind forces natural gas and coal plants to cycle more often in order to compensate for the increased variability of wind.  Coal power plants are particularly bad for backing up wind because they operate best a constant power, and a coal-only system will have higher emissions when wind is added.

Such critiques of wind power's variability implicitly assume that nothing can be done to make the electric system more accommodating to wind, when in fact there is much that can be done.  One widely quoted study (paid for by the natural gas industry) showed an increase in pollution per MWh of generated electricity in Colorado.  But Colorado is currently in the process of decommissioning or converting to natural gas most of the coal plants that caused the extra pollution.  With this change to the system, the pollution reducing benefits of wind will be much more strongly felt. 

Even without replacing coal plants, the grid can change to better accommodate wind power.  A May 2010 report from the National Renewable Energy Laboratory, the Western Wind and Solar Integration Study (WWSIS), looked at the system improvements needed to allow 35% wind and solar integration in the Western grid.  Many of these require changing the current paradigm of meeting local demand with local resources. 

While the WWSIS does call for increasing the flexibility of dispatchable reserves, most of the recommendations take the form of changing the paradigm. 

• The areas over which power supply is aggregated to meet demand, called balancing areas, should be expanded.
  
• The expansion of balancing areas should be supported by more robust transmission.
  
• The use of more accurate weather forecasting will not reduce the variability of wind or solar, but it can make them seem more reliable, since they will be available when expected.
  
• New and existing demand response programs should be used to accommodate demand to the increased variability.  In other words, electricity supply cannot solely change to match demand, demand must also change to accommodate supply.

With these changes to the paradigm, the integration of wind and solar are not costless, but the cost is much lower than it would appear from the perspective of someone operating only within the old paradigm.

Implications for Investors

Why should investors care? 

First, any change in the prevailing paradigms to incorporate alternative energy will reduce the future cost of alternative energy.  If most investors do not yet see beyond the current paradigm, the market is probably underestimating the potential for alternative energy.

Second, stocks involved in the transformations necessary to shift paradigms are likely to be unanticipated winners.  In the case of transport, alternative transportation stocks are likely to greatly outperform efficient vehicle stocks as our transportation paradigm shifts away from the car to other forms of transportation that can better leverage the advantages of electric drive.  In the case of the electric grid, smart grid stocks and electricity transmission stocks may also reap unanticipated windfalls as solar and wind increase their share of electric generation.

DISCLOSURE: None.

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

Posted by Tom Konrad at 01:40 AM | Permalink | Comments (13)

David Gold

The stimulus bill along with the $31B cleantech element focused on grants and loan guarantees through the Department of Energy was passed into law over 18 months ago.  About a year ago I wrote about how the cleantech stimulus was not very stimulating to our economy. I suggested at that time that the goals of stimulus and of long-term investment are largely incompatible, and the evidence is bearing that out.  At the time, I felt like a bit of an outcast for having such a critical view and yet being an ardent supporter of clean technologies and the need to wean our nation off fossil fuels. On the anniversary of my first post on this topic it seems appropriate to take a fresh look at where things stand.

While stimulus supporters and the press love to focus on the selection of award winners for grants and loans, funds appropriated but sitting in the U.S. Treasury have zero potential to stimulate the economy irrespective of whether a winner has been selected.  As of September 10, 2010 and about 19 months after the stimulus became law, according to the Obama Administration’s Recovery Act web site, recovery.gov, the Department of Energy had paid out just over 23% of the $31B of funds appropriated to the department for various cleantech activities under the stimulus bill.  At that rate it will take roughly six years for all funds to be dispersed. According to DOE’s more detailed numbers, in the past 12 months, the department has awarded (i.e. selected winners) for about $14B in grants.  Less than 10% of that amount has actually been disbursed to date.  In addition, there are over 730 awards representing $1.2B that were made in 2009 for which no funds have been paid out at all.  Many of these likely still are trying to get their contracts in place, an often-arduous process that can take many months.

In the Smart Grid segment of stimulus, where stimulus actually slowed spending because utilities stopped work to wait and see whether they would win a grant, less than 8% of the over $4B appropriated has been paid out.   People in the utility industry who have received grants have told me about calls from DOE staff “virtually begging them” (in the words of one source) to spend money against the grants that have been awarded more quickly.  In other words, the government seems more concerned about optics of getting the money spent than having it spent wisely.

As stated on recovery.gov, the goal of the Recovery Act was to “… jumpstart our economy, save and create millions of jobs, and put a down payment on addressing long-neglected challenges so that our country can thrive in the 21st century.”  It’s amusing that the recently released Administration Report on the Recovery Act emphasized that its focus would be only on “the ‘Reinvestment’ part of the Recovery Act” and completely avoids any comment on the stimulus’ impact on the economy or jobs.  Seems like quite a testament to failure of the recovery spending to provide stimulus in any meaningful way.  

If the focus of the cleantech “stimulus” was really on reinvestment, then the government would be careful and diligent about naming grant/loan winners rather than rushing to make awards as fast as possible (which is motivated by stimulus).  Yet, while money has been slow to flow from DOE, award winners have been selected for virtually all of the $31B from the recovery program.  As I said earlier this year in a Cleantech Forum debate with DOE Renewable Energy Grants Advisor Sanjay Wagle, the government is simply incapable of both getting grant/loan money out the door quickly and spending it wisely.  I still maintain that programs like Cash for Clunkers and energy efficiency tax credits (whether you agree with the specific policy or not) have a rapid positive impact on the economy.  The evidence on the government’s own recovery site seems to bear that out:  by comparison, 77% of all tax-related stimulus benefits (only some of this cleantech-related) have been paid out to recipients in the form of reduced tax obligations.   While one can debate the degree of impact those funds may have, funds awarded but not transferred from the federal treasury have no chance of stimulating the economy. 

Much of the press focus on the cleantech stimulus has been on the Advanced Research Projects Agency – Energy (ARPA-E) funding into early stage cleantech technologies with “game changing” potential.  The government has long played a role in funding early stage research and such a program has worthy goals.  Yet, ARPA-E represents only about 1.3% of DOE’s stimulus funding with most other funding going to much less disruptive grant/loan programs in which the government is trying to play business person and has a notoriously bad track record of doing so.  And ARPA-E’s appropriation for 2011 is likely to be less than 2010 with the House number passed at a 50% reduction.   

The unfortunate reality is that by using the stimulus bill as a vehicle for pushing funds through the slow and ineffectual government bureaucracy rather than focusing on stimulative policies that would have had greater impact on the economy, the Administration may very well have lost the opportunity to enact macro-economic policies affecting the cost structure for energy that could have had much more far-reaching and long-term positive impacts on the goal of reducing our consumption of fossil fuels. I believe time will bear out that many of the grant/loan awards made in such a hurry will turn out to be a waste of money.

Conversely, the macroeconomics of energy are certain to change as finite fossil fuels continue to be consumed… it is only a question of over what time period. It is that reality which is driving the private sector investments that must be the backbone of any sustainable change in our energy economy.  Careful federal policy around carbon-based fuels could have provided greater visibility into the time frame and degree of increase in the market cost of fossil fuels even if there was a very slow phase in of such a policy to avoid collapsing the economy.  The result would have been greater clarity of when (and shorter time horizons for when) clean technologies could become cost competitive.  This would have resulted in a corresponding increase in investment by the private sector in building those businesses to profit from the impending change.  And that would have been extremely stimulative to our economy without needing to borrow a penny to fund it. 

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

Posted by David Gold at 11:41 PM | Permalink | Comments (0)

Eamon Keane

This is Part Three of a three part series based on a rare earth elements (REE) review which is available for download at slideshare, where references can be viewed.
Part 1 is an introduction to REEs. Part 2 analyzes REE consumption and refining and Part 3 looks at how REEs might affect the green economy.

There have been several forecasts made for future demand. Approximate data was derived from Byron Capital Market’s own estimate [18] and the data contained in Oakdene Hollins’ May 2010 report “Lanthanide Resources and Alternatives” for others [34]. Figure 15 displays these demand forecasts in the context of historic demand, using global mine production as a proxy.

Figure 15: Forecast Global REE Demand 2010-2014


From Figure 15 it can be observed that while the range of projections is 160-200kt/year, if demand follows its historic pattern, it would only reach 140kt/year. Faster demand growth is expected principally due to the requirements of the “green economy”.

Based on their respective assumptions about which mines became operational, and those mines’ constituents, Figure 16 shows the respective surpluses and deficits forecast.

Figure 16: Surpluses and Deficits by Element in 2014

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

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


From Figure 16, it can be seen that one element about which hands need not be wrung is cerium. This is good news for, from Figure 9, glass additives, automotive catalysts and polishing powder. In all but Lynas’ conjecture, lanthanum will be fine also. This is reassuring for NiMH batteries, mischmetal for flint and ceramics.

But what about those pesky elements terbium and dysprosium? GWMG, for example, forecasts a deficit of 800 tonnes for dysprosium, or half what is consumed currently. IMCOA projects a deficit of 200 tonnes of terbium, or 67% of 2010 demand. Will they strangle the green economy in its crib?

6.     Will the shortfall strangle the green economy?
6.1.          Dysprosium
Dysprosium is essential to give neodymium magnets resistance to demagnetisation at high (120-180°C) service temperatures. The seminal 1984 paper announcing neo magnets was recently republished [40]. Figure 18 shows the demagnetisation curve contained in [40]. The effect of dysprosium is to weaken the magnet slightly (y axis), but to increase its intrinsic coercivity significantly (x axis). In enclosed spaces where it is difficult to cool – such as motors in cars – this is very important. However there is still uncertainty as to the mechanism by which dysprosium imparts this higher intrinsic coercivity [48], and a greater understanding may allow for reduced use of dysprosium.

Figure 18: Demagnetisation Curve With and Without Dysprosium

6.2.          Rare Earths and Wind
Vestas, which had a 36% market share of the European 2010 H1 offshore installations [49], is stated by the New York Times to use dysprosium in its upcoming direct drive model [50]. However this is likely a design oversight, because in an excellent article at renewable energy world [51], it is stated of wind generators:“operating temperatures inside the generator rotor must be limited to a maximum of 80°C in order to retain magnetic properties”. Dysprosium will boost this range to 120-180°C, and thus the article implies that other operators do not require dysprosium, indicating that Vestas can adapt.

Direct drive generators increase the reliability of turbines as they reduce the number of parts by up to 50% [52]. This is very useful for offshore turbines where maintenance is costly and there are narrow weather windows for servicing. Whether Permanent Magnet Generators (PMGs) increase power efficiency is debatable. Adolfo Robello of Indgar’s study comparing traditional DFIGs with the permanent magnet variety concluded [51]: “The study was performed for a client and results clearly indicated that the DFIG combination showed superior total efficiency performance over the entire speed range.” Nevertheless, PMGs as an engineering solution are very elegant and more compact than their counterparts. The Chief Technology Officer of Siemens thinks they are “the future” [52]. However wind companies are all fully aware of supply issues, and are reluctant to move to China as they would be forced to partner with a Chinese company.

There are many figures quoted regarding how much neodymium a wind turbine contains. I am going to go with what renewable energy world [51] says:

“Industry sources quote, for instance, that the 60 kW fast speed electric motor fitted in a Toyota Prius hybrid vehicle contains at least 0.5 kg of NdFeB magnet material. For a PM-type generator fitted in a 5 MW direct drive wind turbine, these same sources quote a figure of up to 200 kg of NdFeB per MW power rating, around one tonne per machine. This is a much higher quantity compared to the relatively light and compact fast speed systems.”

Two-hundred kg NdFeB per MW translates into approximately 70kg Nd2O3/MW, or 70 tonnes per GW. Up until now, very few turbines have used permanent magnets, with demand of only 3 or 4 tonnes [17], suggesting present demand of less than 100MW per year. Figure 19 shows the historical and projected wind turbine additions [53, 54]. In 2014, if half the wind turbines were PMG, a requirement of 2.1kt/yr of neodymium oxide would be required (70*30). From Figure 9, this is 10% of current neodymium production capacity. Wind turbine demand for neodymium is highly unlikely to have a 50% market share by 2014, as it takes time to build factories and road test the technology. 20% may be a realistic figure, which only entails a requirement of about 1kt/yr. Furthermore, there is always a backstop technology – the traditional DFIG – which can, and I argue will, step in should any shortfall in neodymium appear.

Figure 19: Annual Wind Additions


6.3.          Rare Earths and Hybrid/Electric Cars
From the quote above [51], electric vehicles require “at least 0.5kg NdFeB” for a 60kW motor. Using 0.6kg NdFeB for a 60kW motor, this translates to a requirement of 10g NdFeB/kW, or 3.5gNd2O3/kW. The limiting material here will be dysprosium, which is added at about 5% by weight [55]. Hence this translates to a requirement of 0.5g Dy2O3 /kW (600*0.05/60). 2009 production capacity of 1.6kt dysprosium would hence allow for approximately 3.2billion kW of motor (1.6*1000*1000*1000/0.5). A million cars, at an average 70kW motor, require 0.07bn kW, or 2% of dysprosium supply. Figure 20 shows the historical sales of hybrid electric vehicles [56]. In 2014, electric sales of 3.5m vehicles may require 7% of dysprosium production capacity.

Figure 20: Historical and Projected Electric Drivetrain Sales

Furthermore, Hitachi, on September 10th 2010, announced they have developed an alternative motor with ferrite which “works at almost the same performance level - but with power consumption running at 10 percent lower” [57].  It still has to be scaled up to the 50kW size, but in time it will. Additionally, there is the same technology that was used in the EV-1 and is used in the Tesla Roadster [58] -  the humble AC motor.

6.4.          Rare Earths and Energy Efficient Lighting
In fluorescent light bulbs, the red, green and blue phosphors contain rare earths. The red phosphor is almost entirely yttrium and europium. The green phosphor contains approximately 10% terbium, while the blue phosphor contains less than 5% europium [6]. The DOE has introduced a standard for fluorescent lightbulbs. Its analysis shows that at most 11% of global terbium, europium and yttrium supply would be required to meet the standard in the United States in 2012 [6].

This is a significant amount, in the region of 30 tonnes terbium and 30 tonnes europium, which will clearly be in short supply if Figure 17 is correct. A more detailed analysis of what sector has the greatest utility for a short supply is required. From Figure 9, it can be seen that fluorescent lamps account for half of phosphor REE demand, with the rest being screens. It thus seems very likely that energy efficient lighting will have to curtail its projected rapid growth, at least until a mine with high enough terbium and europium is found. Neo Materials’ CEO suggests they have found just such a mine, with “very high concentrates of terbium and dysprosium” [59].

7. Conclusion
A brief survey of the rare earth landscape was undertaken. Following this it is shown that concern over rare earths limiting the development of wind and electric vehicles is overdone because there are clear alternatives to neodymium magnets. A shortfall of terbium and europium, however, may slow adoption of energy efficient lighting.

Comments and corrections are welcome. 
References are available here.

Posted by Eamon Keane at 09:16 AM | Permalink | Comments (0)

Eamon Keane

This is Part Two of a three part series based on a rare earth elements (REE) review which is available for download at slideshare, where references can be viewed.  Part 1 is an introduction to REEs. Part 2 analyzes REE consumption and refining and Part 3 looks at how REEs might affect the green economy. 

So where do all those REEs go? Figure 8 shows the estimated flows for 2008 [15]. Although Chinese consumption is shown as 60%, this is only for the raw elements. Some of the downstream products will still be exported to the west. Japanese industry is a large consumer of REEs, and so they are almost beside themselves over the REE situation [41].

Figure 8: 2008 Estimated Rare Earth Flows

Figure 9 presents a chart I made showing the estimated 2010 global production capacity for each element (from Byron Capital Market’s John Hykawy [18]), together with the rare earth usage demand sectors projected by Lynas for 2010 [15]. You'll have to click to enlarge, a direct link to the photobucket version is here. Christian Hocquard, an economist at BRGM, put together an excellent and comprehensive presentation on rare earths in May 2010 [15]. The breakdown by application for magnets and phosphors comes from that presentation.

Figure 9: Indicative rare earth flows for 2010

Figure 10 shows the data in brackets on the right hand side of Figure 9 in a more readable fashion [15].

Figure 10: REE Composition by End Use


Figure 11 shows the breakdown of ores for most elements for currently producing mines and the assays for mines which are mostly still fishing for capital [18, 39].

Figure 11: Approximate Percentage Content of Current and Prospective Ores

You may have to squint a bit to see the components of dysprosium, terbium and europium. They are shown more clearly in Figure 12.

Figure 12: Europium, Terbium & Dysprosium Content of Current and Prospective Ores


Looking at Figures 9-12, a couple of observations are evident:

·         If the demand for magnets were to double, from the current 31.9kt to 63.8kt, and a 5% dysprosium content is assumed, additional dysprosium demand of 1.6kt would be required. The ore with the highest dysprosium content is Dubbo, at 2%. Therefore, in order to satisfy demand, the other 98% must be mined also. In the case of Dubbo, this would release onto the market: 16kt lanthanum, 30kt cerium and 11kt neodymium. Hence a market for an additional 50% of cerium would have to be found. Based on the prices in Figure 9, while dysprosium provides 13% of the mine’s revenue, cerium provides 31%. So, for the mine to be viable, either growth in the use of cerium is required or else the price of dysprosium must appreciate. For example, if the price of dysprosium triples to $900/kg, then the share of dysprosium in overall revenue increases to 31%.
 
·         If the demand for phosphors doubles, from the current 8.1kt to 16.2kt, and a 4.6% terbium content is assumed, additional terbium demand of 373 tonnes would be required. The only mine with any appreciable amounts of terbium is Nechalacho, at 1.8%. Nechalacho only plans to produce 5kt [18]. Hence this would provide 90 tonnes of terbium per year (5,000*0.018). The breakdown of revenue is better for the specific ore at Nechalacho. This is shown in Figure 13. That still leaves 283 tonnes of terbium required (373-90). The next highest terbium mine content is Dubbo, at 0.3%. For Dubbo to output 0.283kt of terbium, a market for a stonking 94kt of other rare earths is required, or about 75% of 2009 demand.

Figure 13: Nechalacho Revenue Breakdown at September 2010 Prices


4.     Refining
Bertram Boltwood, 1905 [45]:

“In point of respectability your radium family will be a Sunday school compared with the rare earth elements, whose chemical behaviour is simply outrageous. It is absolutely demoralizing to have anything to do with them”

Refining (or reduction in mining lingo) is very important. Figure 11 shows the composition for 14 different ore compositions. Each one requires an individual, detailed flow sheet, their own reagents and refining processes. An investor could do well to read the book “Extractive Metallurgy of the Rare Earths” [11]. This is not your father’s extractive metallurgy. Whereas with gold, for example, you might just add a bit of borax and soda and out it comes, rare earths are much more troublesome. I won’t bore you with the details. Figure 14 shows an example flow sheet. It is dirty, requires lots of water, heaps of chemicals and is very capital intensive. Capital intensive processes can be prone to cost overruns and delays, which should be borne in mind for any companies with mine-to-market strategies.

Figure 14: Kvanefjeld Flow Sheet [20]


Continued in Part III. References are available here.

Posted by Eamon Keane at 04:47 PM | Permalink | Comments (0)

Eamon Keane

This is Part One of a three part series based on a rare earth elements (REE) review which is available for download at slideshare, where references can be viewed. Part 1 is an introduction to REEs. Part 2 analyzes REE consumption and refining and Part 3 looks at how REEs might affect the green economy. 

Rare earths captured the popular imagination a year or two ago. Since then a bonfire of reports, presentations and analyses have been published, with many generating more consulting fees than light [1-45]. Figure 1 shows the uptrend in google entries for “rare earth elements”, and obviously if it doesn’t exist on google, it is irrelevant.

Figure 1: Google results for “rare earth elements”


The rare earth story is compelling. By near unanimous consent, the narrative is that REEs are “essential” [38], “indispensible” [30], or “crucial” [37] to every aspect of the green economy from wind turbines to electric vehicles to energy efficient lighting. Further spice is added by those who see REEs as the “New Great Game” [2]. Many military components require REEs from the M1A2 Abrams tank’s samarium cobalt magnet for navigation to the DDG-51 Hybrid Electric Drive Ship Program’s reliance on neodymium magnets for electric assist propulsion [10]. And China controls the supply. This leads to much hand-wringing, some based on mercantilist sentiment, others geo-strategic, and yet more on envy of China’s autocratic regime.

Figure 2: Top 6 Rare Earth Elements [46]    Figure 3: Game Over for Whom? [47]


2.     Rare Earth Backrgound
A proviso is required for any figures shown here. Rare earth statistics are always “estimated”, the data is sketchy (not least because some comes from China), and so most data comes with a +-15% band. Figure 4 shows the regions where supply currently comes from [31, 33].

Figure 4: Currently Producing Regions of the World (i.e. Not America)

Figure 5 shows a picture from Google Earth of the mine at Baiyun-Obo [9]. The surrounding area has become poisoned, as the ever reliable Daily Mail reports [5]:

“I was the first Western journalist to set foot inside the mine….. the new-found wealth has come at an appalling environmental price, turning the town and the surrounding areas into a poisoned, arid wasteland littered with unregulated refineries where the rare-earths are extracted from rocks…The land is scarred with toxic runoffs from the refining process and pock-marked with craters and trenches left by the huge trucks that transport the rocks across ice and mud. Rusting machinery lies scattered along the valley floor, giving it the appearance of a war zone.”

China has used this environmental damage as a pretext for stricter export quotas. Production quotas for environmental reasons might be entertained by the WTO, however export quotas are not. In previous years, as a result of the cheaper costs of Chinese REE production, and due to China flooding the market, other REE operators shut down. This is shown in Figure 6 (two data sets were fused: 1986-2002 from [11] and 2002-2009 from [44]).

Figure 7 shows Chinese production along with the declining export quotas. A figure for 2010 expected demand from the west is also shown [39, 42]. It is important to stress that the Chinese export quota is just for the upstream metals. Downstream, processed materials such as Neodymium-Iron-Boron magnets can still be exported. This is part of an effort to encourage foreign manufacturers to locate in China. As Figure 7 shows, however, this year there may be a shortfall in demand for raw REEs in the West. This will be met, at least in part, by drawing down stockpiles [12]. Additionally, some enterprising Chinese may smuggle some out of the country.

Figure 5: Baiyun-Obo, the Black Heart of the Green Economy?


Figure 6: Global REE Production 1986-2009


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


Continued in Part II..  References are available here.

Posted by Eamon Keane at 08:38 PM | Permalink | Comments (0)

Tom Konrad CFA

Not many self-proclaimed Greentech experts know what they're talking about, and fewer can effectively make the case of Greentech investing.

When I attended the MoneyShow last week to moderate a panel, I also stayed around to see what people who held themselves out as Greentech or Cleantech experts were saying.  Since MoneyShow attendees do not pay to get in, all the revenue comes from presenters.  I was asked to moderate my panel because I made it a condition of helping them advertise the show, but many of the presenters I saw were on stage simply because they had something to sell, often a newsletter.  A few had been asked there to flesh out the program, although it was not always clear which was which.  My best guesses as to whether the speakers paid to present are listed below.

In my decision about which sections to attend, I simply tried to attend as many sessions in the show's Cleantech/Greentech track as possible.  All of these presenters chose to represent their presentations as belonging in the Cleantech/Greentech track, although for some it was a real reach.  Here they are, in the order I attended their presentations:

Expert: Susan Preston
Affiliation: CalCEF Clean Energy Angel Fund
Position: Manager and General Partner
Paid Appearance: Probably Not
Cleantech Expertise: Good
Selling: Her book: Angel Financing for Entrepreneurs: Early-Stage Funding for Long-Term Success
Notes: Ms Preston did a general presentation during the opening ceremonies making the case that we should not only invest in Cleantech, but that we needed to pressure government to provide more support for the sector.  She made a strong case that Cleantech was the right thing to do, but did not do as well making the case that Cleantech is a good investment.  I thought her message about needing government support undermined her case for making Cleantech investments.  After all, why would we invest in a sector that needs more government support than it is already getting?

Expert: Jackie Ann Patterson
Affiliation: Back-Testing Report
Position: Trader
Paid Appearance: Probably
Cleantech Expertise: Clueless
Selling: Reports about technical trading strategies.
Notes: I attended Ms. Patterson's session because it was titled "What's Driving CTIUS?" which is the market index underlying the Powershares Cleantech Portfolio ETF (PZD).  I was hoping for a discussion of the relative performance of Cleantech sectors, but instead she did some superficial technical analysis on the stocks in the index.  She also did not think Cree (CREE) the LED lighting leader, had anything to do with Cleantech, which is why I label her Clueless when it comes to the sector.

Expert: Elliot Gue
Affiliation: Personal Finance and The Energy Strategist
Position: Editor
Paid Appearance: Probably
Cleantech Expertise: Weak
Selling: Newsletters.
Notes: This presentation was about oil, and had no reason to be listed as Cleantech/Greentech.  Although Mr. Gue claims to "cover" Alternative Energy, he did not show much sign of knowing much about it, and seemed to conflate Alternative Energy with Solar, a common novice's mistake.  He talks a good line about oil companies, so I decided to look into the one oil stock he recommended shorting - Diamond Offshore (DO).  The reason he gave was that the company had most of its platforms in the Gulf and would soon have to cut its dividend, sending income investors to one of his favorite picks, SeaDrill (SDRL).  That sounded reasonable to me, until I took a look at DO and found out they had already cut their dividend significantly on Apr 22 and July 22.  It's pretty easy to predict a dividend cut when the cut has already happened.

Expert: Paul Dravis
Affiliation: Dravis Group LLC
Position: Consultant
Paid Appearance: No
Cleantech Expertise: Good
Selling: Nothing.
Notes: Mr. Dravis's approach to Cleantech is a good one: look for supporting industries that have less technological risk than the high profile start-ups.  He currently likes Cosan (CZZ), SQM (SQM), General Cable (BGC), and Power-One (PWER) almost all of which I've had good things to say about in the past, for similar reasons (see here, here, and here).  The only one I have not talked about is SQM, which is not green enough for my taste (admittedly a fairly high bar.)  That said, I was more impressed by his feel for market timing than his industry knowledge, so much so that I asked him to send me his weekly newsletter, the Dravis Wealth Advisor, which he does not charge for.  If you're interested in giving his newsletter a try, send him an email at p a u l at d r a v i s dot n e t.  Like me, he's currently quite bearish, so don't rush out to buy his picks unless you're also prepared to hedge them.

Expert: Neil George
Affiliation: Stocks That Pay You
Paid Appearance: Probably
Cleantech Expertise: None
Selling: Newsletters
Notes: Neil brought out the old saw about Alternative Energy (which he also conflates with the highest-profile subsector, solar) being a bad investment because he does not like energy generation that's "heavily subsidized."  Then, in the very next breath, he recommended Nuclear Energy.  In the US, Federal nuclear subsidies account for about 21% of the cost of Nuclear Energy, while Federal Solar subsidies account for about 12% (2006 data.)  State subsidies are probably higher for Solar, but vary by state.  In any case, one thing Nuclear energy clearly isn't is unsubsidized.   One thing Neil George clearly isn't is logically consistent.

Expert: Jeffrey Cianci
Affiliation: Green Science Partners
Position: Cheif Investment Officer
Paid Appearance: Unknown
Cleantech Expertise: Very Good
Selling: His Fund - Green Science Partners (but only to accredited investors)
Notes: Jeff bases his investment decisions on a combination of deep analysis of both the technology and technical analysis of the stocks in question.  He looked at a large number of stocks in his presentation, but his high-velocity trading strategy is such that I don't know if any of the stocks he liked will still be among his favorites a week from now.  In many ways, his investment strategy is the exact opposite of mine: he tries to figure out what the best technology is in any sector, and times his buying and selling using technical indicators in combination with earnings projections.  In contrast, I try to find picks that have solid earnings based on tried-and true technology, and can be bought solely on the basis of fundamentals.  Despite our contrasting approaches, he gave me the impression of someone who knows the sector at a deep level.

Expert: Peter Cox
Affiliation: Greentech Opportunities
Position: Analyst
Paid Appearance: Probably
Cleantech Expertise: Good
Selling: Newsletter
Notes: Peter made the best, most concise case for investing in Cleantech that I heard at the entire show.  He also had a couple of interesting wind picks: Western Wind Energy (WNDEF.PK, WND.V) and Catch the Wind (CTW.V), a pair of Toronto Venture listed firms.  I have a small position in Western Wind, but until his talk, I did not know that Catch the Wind was public, but I'd heard of it and was already enthusiastic about their technology.  Of all the paid newsletters being sold at the show, Greentech Opportunities is the only one I'd sign up for if they were all free.

DISCLOSURE: Long BGC,WND

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

Posted by Tom Konrad at 10:09 AM | Permalink | Comments (1)

John Petersen

    "A man's got to know his limitations ..."
                Inspector Harry Callahan
                    Magnum Force, 1973

Last Thursday the Department of Energy kicked-off a new effort "to develop its first-ever strategic plan for addressing the role of rare earth and other materials in energy technologies and processes" by issuing a Request for Information on resource availability and supply chain security. The information categories covered include short- and long-term:

• Demand forecasts for energy applications and competing issues;
  
• Supply issues including investment trends, processing requirements and future research;
  
• Technology applications, required quantities and purities, processes and innovation;
  
• Costs, availability and impact on energy application costs;
  
• Substitutes for constrained materials;
  
• Recycling opportunities, capacities and challenges;
  
• Intellectual property constraints; and
• Additional information.
  

While it's unsettling to learn that the DOE has adopted major policy initiatives in the past without truly understanding the raw material supply chains needed to support them (think corn ethanol), even a belated recognition that resource constraints matter is better than blind adherence to the presumption of plenty – the blind faith that all life's necessities and most of its luxuries will be available in quantities that are limited only by borrowing power.

A recurring theme in my writing is that six billion people are working very hard to earn a small piece of the lifestyle that 600 million of us have and often take for granted, and that the greatest challenge of this century will be finding relevant scale solutions to persistent shortages of water, food, energy and every imaginable commodity. The challenge is even greater in alternative energy because so many green technologies are voracious users of scarce raw materials.

At a recent conference in Shanghai my friend and colleague Jack Lifton presented a table that summarized global mineral production over the last five years. The following is an abbreviated version that focuses on key minerals for alternative energy, shows annual production for the last five years in thousands of metric tons, and calculates our per capita share of mineral production in 2009 based on a global population of 6.8 billion people.

MINERAL	2005	2006	2007	2008	2009	Per Capita
Crude Oil	4,208,310.0	4,206,900.0	4,201,300.0	4,249,550.0	4,189,210.0	616 kg
Raw Steel	1,130,000.0	1,170,000.0	1,340,000.0	1,330.000.0	1,100,000.0	162 kg
Aluminum	31,900.0	33,100.0	38,000.0	39,000.0	36,900.0	5.4 kg
Copper	15,000.0	15,100.0	15,400.0	15,400.0	15,800.0	2.3 kg
Lead	3,520.0	3,650.0	3,770.0	3,840.0	3,900.0	1.6 kg
Nickel	1,460.0	1,560.0	1,660.0	1,570.0	1,430.0	570 g
Cobalt	58.6	63.4	65.5	75.9	62.0	201 g
Uranium	41.5	39.3	40.7	42.7		6 g
Lanthanum	32.5	32.9	32.9	32.9	32.9	5 g
Silver	20.8	20.4	21.1	21.3	21.4	3 g
Neodymium	18.9	19.1	19.1	19.1	19.1	3 g
Cadmium	20.1	19.9	19.4	19.6	18.8	3 g
Lithium	21.5	24.4	25.8	25.4	18.0	3 g

I have a hard time reviewing global mineral production statistics and accepting the proposition that it will ever make sense to use a 170 kg lithium-ion battery pack in a GM Volt or a 200 kg battery pack in a Nissan Leaf. The bulk of the weight may be relatively plentiful steel, copper and aluminum, but even eight to twelve kg of lithium is massive for a non-recyleable product in a world that only produces three grams of lithium per person. While companies like FMC Corporation (FMC) and Chemical & Mining Co. of Chile (SQM) can significantly increase their production if enough money and time are spent developing new mines, there is no meaningful chance that electric vehicles will ever reach "relevant scale" using current technology. Under the circumstances, I have to wonder whether a lithium-ion business model that depends on substantial short-term cost reductions isn't at least a little optimistic. The bottom line seems to be that we've forged an energy policy without questioning our assumptions and are destined for disaster when the engine of gee-whiz technical feasibility hits the brick wall of natural resource constraints.

The battery industry has known for years that NiMH chemistry was seriously constrained by the availability of the rare earth metal Lanthanum. Over the next couple years we will have to come to grips with the fact that even more daunting constraints are looming for the rare earth metal Neodymium, which is essential for the permanent magnets used in both wind turbines and electric motors. Similar issues exist for a host of other scarce raw materials. At some point in the not too distant future we're going to have to identify the highest and best uses of these scarce raw materials and make hard decisions based on economic reality rather than technical feasibility. The RFI is a good first step.

For as long as I've been practicing securities law a risk factor on raw materials availability has been standard disclosure that all companies included in their SEC filings and most investors dismissed as legal boilerplate. I'm the first to admit that the disclosures were overkill when I was younger. Today the risks are grave and investors who gloss over raw material and supply chain issues do so at their peril.

In recent articles I've shown how plug-in vehicles are unconscionable waste masquerading as conservation and the less glamorous solution of Prius class HEVs is six times more efficient at using batteries to reduce fuel consumption and CO2 emissions. I've also shown why cheaper and simpler efficiency technologies based on readily available materials strike me as a better investment from both a timing and market acceptance perspective.

Over the next few weeks I'll be working closely with Jack Lifton and Gareth Hatch to analyze some of the critical resource constraints in greater depth and provide more specific guidance to investors. It looks like we're entering an era where the environmentalists may have to make peace with the miners. It should be interesting.

Disclosure: Author has no interest in the companies mentioned.

Posted by John Petersen at 03:15 AM | Permalink | Comments (2)

David Gold

As a “gearhead” (engineer) I must admit I truly enjoy looking at all the cool technologies being developed by cleantech companies.  The promise of cleantech hinges, in part, on these innovations.  So it is not surprising that so much focus in the blogosphere and the press is given to the funding and development of these new technologies.  Much like the dot-com buzz in the mid-90s, today we celebrate the amazing innovations that are taking seed.
But for cleantech to avoid the fate of synfuels of the ‘70s or that of many of the early dot-coms, we must create real companies that generate revenue, margins and profit.   

In a tough economic climate some cleantech companies are showing such success.  Demand energy management companies EnerNoc (ENOC) and Comverge (COMV) had exceptional growth in 2009, and EnerNoc turned the corner to positive net income (see data below).  Both are early venture funded cleantech success stories. LED manufacturer Cree (CREE) continued its exciting revenue and profit growth.  And while finances of the much more numerous privately held cleantech companies are typically held close to the vest, I can say that our own LED lighting portfolio company, TerraLux, not only had exceptional revenue growth but also showed its first period of positive cash flow.  

2010 has the potential to be a breakout year for certain categories of cleantech.  The IPO market is heating up and this could be the year where we see our first significant wave of cleantech IPOs.  A123 blazed a trail with its successful IPO during the tough 2009 market.  In 2010 we could see the IPOs of Tesla Motors (electric vehicles), Silver Spring Networks (smart grid), Solyndra (solar), Codexis (biofuels), as well as others.  If we see a string of successful IPOs, momentum for cleantech venture investing should experience further pick-up, and we should see increased interest from institutions willing to back venture capital funds.  

All of this plays out for 2010 to potentially be a big year for real cleantech businesses – those with exciting revenue growth, IPOs and, yes, some even with profits. 

One major variable in the 2010 forecast:  Legislation around cap and trade will undoubtedly be a hotly discussed item this year.  The passage of any legislation that has the impact of increasing the price of fossil-based energy sources will provide additional market momentum and increase the ability of cleantech companies to compete in the open marketplace.  Even if the provisions of such legislation do not go into effect for several years, I suspect the market will begin to react to the pending changes fairly rapidly.  But more on this next time.

EnerNoc


Comverge


Cree



(Financial Data from Google Finance)

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

Posted by David Gold at 10:35 PM | Permalink

by Bill Paul

There's no such thing as an "experienced" alternative energy investor. The sector simply is too new. Also, like an iceberg, most of it lies hidden beneath the surface.

To succeed in these uncharted waters, I believe that alternative energy investors (a group that eventually will include all investors) need to follow a particular set of guidelines that I've started identifying in recent articles. The first guideline is that you must be a long-term investor with a time horizon of at least three to five years. Otherwise, you'll miss out on most of the incredible financial payoff that is to come as the world continues to slowly but surely accept the need to ratchet down greenhouse gas output in ways that don't undermine economic growth.

The second guideline is that to find the best green energy investment prospects, you've got to scour the world, because while Washington continues to waste time fighting over whether climate change is real, the rest of the world is developing the technologies that will become the backbone of a carbon-constrained economy that will continue to deliver solid global growth.

Now here's my third: many of the best long-term green energy prospects are companies whose current operations are "dirty." Two cases in point: Danish shipping and oil group A.P. Moller-Maersk (Symbol AMKAF) and South Korean steelmaker POSCO (Symbol PKX).

The foolish people at the U.S. Chamber of Commerce who think they're helping their constituency by fighting against climate change legislation need to rethink their position, because Maersk and POSCO show how foreign firms that compete with CoC members intend to grow by going green, beating out their U.S. rivals on new multi-billion-dollar business opportunities.

For Maersk, the future involves transporting carbon dioxide gas in specially-built tanker ships from coal-fired power plants where the CO2 is generated to offshore oil drilling platforms where it will be used for enhanced oil recovery (EOR). Maersk recently announced a deal with Finnish power producers that a Maersk official said will be "the first step for us to develop CCS (carbon capture and sequestration) as a business." The executive said that Maersk plans to build a fleet of specially-designed CO2-carrying tankers that will deliver CO2 to oil producers throughout the world.

POSCO, the world's fourth largest steelmaker, is also thinking really big. The company recently said it plans to invest about $6 billion over the next eight years on a variety of green energy technologies. POSCO reportedly believes its $6 billion investment will generate roughly $9 billion in new revenue during the same stretch.

POSCO is investing in wind power, fuel cells, the smart grid, synthetic natural gas and nuclear power. It sees its investment further paying off in a 30% reduction in its own greenhouse gas emissions, which could wind up generating additional revenue by enabling POSCO to sell emission "credits" to other companies.

Who will be buying POSCO's credits? A lot may wind up getting bought by U.S. firms that were led astray by the U.S. Chamber of Commerce.

DISCLOSURE: No position.

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

Bill Paul is Managing Editor of EnergyTechStocks.com.

Posted by Bill Paul at 04:18 AM | Permalink | Comments (0)

Tom Konrad, CFA

Colorado's recently released Renewable Energy Development Infrastructure (REDI) report looks at what the resource-rich state needs to do to accomplish the state goal of reducing CO₂ emissions 20% from 2005 levels by 2020.  Investors who expect the developed world to attempt similar cuts in emissions should take note of the report's conclusions, and invest accordingly.

Since Colorado Governor Bill Ritter recruited my friend Morey Wolfson for the Colorado Governor's Energy Office (GEO) he's had a lot less time to socialize with the rest of us in the clean energy community, but we caught up over lunch during the International Peak Oil Conference in October where I was speaking on investing for a peak oil world, and he is on the advisory board of the sponsoring organization, ASPO-USA.

Morey told me he had spent the last few months working on a report for GEO on the improvements needed in Colorado's energy infrastructure.  Even though Colorado is in the top ten states for several renewable energy resources (Wind, Solar, and Geothermal,) it will be difficult to achieve significant emissions reductions in the fast-growing state, and I find government reports an excellent place to look for a clue to future government action.  

Anticipating government action is critical to any investor, so to the extent that government reports are likely to be used by political decision makers, they are also likely to be useful for investors as well. I've found useful nuggets in similar reports in the past, including The Arizona Renewable Enegy Assessment, and both the California Renewable Energy Transmission Initiative Phase 1A and Phase 2A.  These reports have been the source of the best unbiased assessments of the cost of clean energy I've been able to find.  I used a similar approach in developing the Model Clean Energy Portfolio included in my Green Energy Investing for Beginners series.  No portfolio should be static, however, and allocations should be adjusted to reflect changes in the investment environment and new information we glean from reports such as Colorado's recent REDI report.  The report is also the source of all the charts in this article.

REDI Recommendations

The REDI report has several recommendations to policymakers:

1. Greatly increase investment in demand-side resources (energy efficiency, demand-side management, demand response, and conservation.)
2. Greatly increase investment in Renewable Energy development, particularly utility-scale wind and solar generation.
3. Accelerate the construction of high voltage electric power transmission to deliver renewable energy from Colorado's renewable resource generation areas to the state's major load centers.
4. Strategically use natural gas-fired power generation to provide needed new power to the grid and to integrate naturally variable renewable resources.
5. Consider decreasing the utilization factor of coal-fired generation and/or consider early retirement of the oldest and least efficient of the state's coal-fired generation stations.

What it Means for Investors

Recommendations 1 and 2 are not surprising, but they should be interesting to investors in that energy efficiency gets as much emphasis as renewable energy, even in a renewable-energy rich state such as Colorado.  On a national level, the implication is that energy efficiency should be given more emphasis than renewables if we are committed to achieving aggressive carbon reduction goals.  This conclusion is reinforced when you consider the energy productivity of demand side resources compared to supply side renewables: it takes a lot more energy to build the equipment to produce renewable energy than to install the equipment needed to save the same energy.

Recommendation 3 won't come as any great supply to long time readers; I've been advocating transmission investments practically as long as I've been writing about investing in renewable energy.  As you can see from the electricity cost chart to the right, transmission currently only accounts for 7% of our national electricity bill.  When critics decry the multi-million dollar expense of long range transmission in favor of local generation and distribution upgrades, they seldom put a cost to the upgrades they call for for the simple reason that local renewables without long range transmission will cost much more than building renewables along with transmission to support them and smooth out their natural variability.

 

Recommendation 4 should be good for natural gas producers, pipelines, and suppliers of turbines.  Given the many opportunities in clean energy, I usually don't consider investments in fossil fuels, even relatively clean ones such as natural gas, but this should be a note of caution if you're considering shorting natural gas stocks.

Recommendation number 5 is bad for coal miners.  Either reducing utilization or shutting down of coal plants means less coal being burnt, hurting demand for coal.  Investors in public utilities with a lot of coal fired generation, however, might stand to benefit.  This is because old coal plants are mostly depreciated, and investors have already received the return of their capital.  In order for investors to earn a return from regulated utility operations, they have to invest in new generation or demand side resources.  New investments in demand- and supply-side resources will be higher if old coal plants are shut down or used less, providing more new investment opportunities for utilities.

Coal miners, on the other hand, are not likely to start supplying wind when the utilities buy less coal, so stay tuned for a future installment of my Green Energy Investing for Experts series that takes a look at the downside for coal miners.

DISCLOSURE: None.

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

Posted by Tom Konrad at 09:28 AM | Permalink | Comments (0) | TrackBacks (0)

David Gold

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

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

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

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

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

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

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

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

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

Saj Karsan

EnviroStar (EVI) is a distributor of laundry equipment that has developed a proprietary dry-wet-cleaning machine that avoids the use of perchloroethylene (Perc), a harmful chemical that the International Agency for Research on Cancer has deemed a carcinogen. Perc is also classified as a hazardous air contaminant by the US Environment Protection Agency, and its use will become illegal in the state of California in the year 2023. EnviroStar's patented Green-Jet process uses an environmentally-friendly, water-based solution that is both non-toxic and requires less energy consumption than traditional dry-cleaning methods.

This is currently a tiny company, with a market cap of just $7 million. But for value investors who simply focus on buying businesses that trade at discounts to their intrinsic values (instead of trying to apply small-cap or illiquidity discounts), some of this company's numbers are appealing.

The company's market cap is not much higher than its net cash position of $6 million. Often, a stock with a high cash to market cap ratio is one that is a perennial money-loser. But not in this case. Operating income over the last 7 years stands above the company's current market cap! Demand for heavy-duty equipment has, of course, waned through this recession, but there are two important attributes of this company that reduce its risk: its customers and its suppliers.

The company is not reliant on any one customer, as it distributes its products to over 1700 customers in various industries (hotel/motel, dry cleaners, hospitals etc). A diversified customer base reduces a company's risk, as its revenues/earnings are not reliant on a potential single point of failure.

Furthermore, the company is not burdened with the fixed costs associated with manufacturing this equipment. Instead, the company outsources the manufacturing to various suppliers. By acting solely as a distributor, the company has a more flexible cost structure, allowing it to react quickly to a lower demand environment. As a result, the company should be able to restore margins to previous levels with ease, relative to fixed-cost manufacturers.

The biggest risk to this company may be the way its controlling (and managing) shareholders appear to view public stockholders: as opponents rather than partners. Last December, the controlling shareholders tried to take advantage of a misbehaving market by making a bid for the remainder of the company. The bid, which valued the entire company at $6 million, likely so undervalued the company's assets that it was withdrawn just six days later. Consummation of the deal required a fairness opinion that the price offered was fair for the public stockholders, an opinion no financial advisor could likely offer with a straight face.

Despite this issue, the managing shareholders have done a great job with the company itself. Returns on equity have been commendable over the last few years, despite the fact that the company keeps a fairly sizable cash buffer around. As a result, Mr. Market appears to offer an excellent entry point at these price levels.

Saj Karsan is a guest contributor on AltEnergyStocks.com. Saj manages Karsan Value Funds, and regularly writes for Barel Karsan.

DISCLOSURE: Author has a long position in shares of EVI

Posted by Guest Contributor at 10:32 PM | Permalink | Comments (0)

Tom Konrad, CFA

I write about investing in Renewable Energy, Energy Efficiency, and other green technologies because I'm worried.  I'm worried that the inevitable transition away from fossil fuels driven by peaking supply and climate change could be much more painful than it needs to be because, as a society, we have massively underinvested in the infrastructure that we will need for the transition.

I don't care if my readers are motivated by an altruistic wish to make the world a better place, or they just want to cash in on what promises to be the hottest stock market sector for years to come.   I expect that most of you, like me, have some of both, and hope to do very well while doing good.

Whatever your motivation, I want to give you the tools to accomplish your goal, because, if you invest in the companies in this sector, they will be better able to continue developing and deploying the technology and infrastructure we all will need not too far down the road.  This too is both altruistic and selfish: I don't want to live in a world where we managed the transition badly.

That said, here are your tools.  My intent is that in a few hours of reading these articles, you will know how to prepare your portfolio for the transition and will be able to use that information after taking into account your personal resources, needs, and investing experience.

If you don't feel that you know what you need to do after reading all four, leave a comment.  The answer to your question could very well end up being part five.

Part 3: Before you invest in Green Energy.

Part 1: Choosing between Green Energy Stocks, ETFs, and Mutual Funds

Part 2: How much to invest in Green Energy?

Part 4: Choosing the best Green sectors.

Part 5: The Basics from a Small Canadian Investor's Perspective

Part 6: How Many Stocks Should You Buy?

I've changed the order to give the series a more logical flow.  Part 3 should have really been part 1, but I wrote it at a reader's suggestion, after part 2 was published.  

Stay tuned for a short series on Green Energy Investing for Experts to be published in December.  (The link is to a search, articles will show up as they are published.)

DISCLOSURE: None.

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

Posted by Tom Konrad at 11:03 PM | Permalink | Comments (0) | TrackBacks (0)

by John V. Anderson

The Water-Electricity Connection: Basic Principles

There’s been a lot of discussion – and a fair amount of controversy – lately about water use in power plants. Unfortunately a lot of this discussion is based on an incomplete understanding of the fundamental issues involved. First of all, virtually all of the non-hydro power we consume is generated by heat engines of one sort or another. All heat engines absorb energy from a hot source (e.g. a flame, nuclear core, or solar), and they all reject energy to a cold sink – that is they all need some type of cooling. 

And of course all heat engines are subject to the laws of thermodynamics which dictate that the maximum efficiency a heat engine can achieve is a quantity called the Carnot efficiency. The most important impact of this law for our purposes here is that the efficiency of any heat engine is strongly dependent on the difference in temperature between the hot temperature and the cold temperature. If we can raise the hot temperature relative to the cold temperature, or lower the cold temperature relative to the hot temperature, then we can improve efficiency. Since any energy not converted to electricity must be rejected, increasing the efficiency has the additional salutary effect of reducing the amount of energy that must be rejected. 

Gas Turbines

Now, gas turbines (or combustion turbines) appear to violate this rule since they don’t need water cooling. However, this is deceptive. In fact, they are simply using the atmosphere as their cool reservoir. They pull cool ambient temperature air from the atmosphere and then return it to the atmosphere at a very high temperature (typically 1000 F or more). The maximum temperature inside a gas turbine is limited by materials issues, and is pretty well fixed for the purposes of our discussion. Since the hot temperature is essentially fixed, the temperature difference is driven by the temperature of the inlet air: the cooler the inlet air the higher the efficiency. (You might note that gas turbines are actually running at their poorest efficiency during the very hottest summer days when they are most commonly used for peak generation.) 

Looking at the exhaust from a gas turbine, it is fairly obvious that this very hot air still has quite a bit of energy in it even though it is at too low a pressure to be useful in a turbine. Combined cycles work by using this high temperature exhaust air to boil water and raise steam for a steam turbine, usually referred to as a “bottoming cycle”. It is identical in nearly all respects to any other steam cycle except for the source of heat. 

Steam Cycles & Types of Cooling

In a typical steam cycle (a version of a heat engine called a Rankine cycle) the highest temperature is the steam leaving the boiler to go to the turbine, and the low temperature is in the condenser where that steam is condensed before returning to the boiler. Raising the temperature from the boiler and/or lowering the condenser temperature will increase the efficiency. As before, the hot steam temperature is set by materials constraints and conditions within the system and is pretty well fixed (see below). The condenser temperature is dependent on ambient conditions and on the type of cooling used. 

There are actually three approaches to cooling steam cycles. The first is to draw water from a lake, river or ocean, use it to cool the condenser of the plant, and then return it to its source. Unfortunately this requires pumping a large amount of water and the return water is typically much warmer than the inlet water, leading to undesirable ecological consequences. For these reasons this type of cooling is used much less frequently in the last couple of decades. However, this approach has the advantage that the difference between hot and cold temperatures – and thus the efficiency – is almost entirely independent of ambient temperature. The plant will run at the same efficiency winter or summer. 

Recalculating Cooling

The second cooling approach is called “recirculating” cooling. In this approach, water is circulated between the condenser and a cooling tower. In the cooling tower some of the water is evaporated, and the rest is circulated back to the condenser. New water is added on each cycle to replace the water that is evaporated and to prevent the buildup of dissolved salts in the water. Now as we all know from swimming, evaporating water absorbs quite a lot of energy and can cool things pretty effectively (this is the difference between dry bulb and wet bulb temperatures). Thus the evaporation of some of the water will cool the remainder of water to well below ambient temperature. This is particularly true on very hot, dry days, which create peak loads and the highest demand for power. Using this type of cooling largely relieves the dependence of the efficiency on the ambient conditions. 

Dry Cooling

The third type of cooling is dry cooling. The warm water from the condenser is run through a series of fan-coils (think of a really, really big automobile radiator). Ambient air is blown past the fan coil and the water is cooled to slightly warmer than the ambient air. Now, this approach has been used only rarely for large steam plants (although it is pretty common in some smaller geothermal plants) because it extracts several types of penalty on the cost of energy. First of all, as we have seen above the efficiency of the plant now decreases as the ambient temperature increases. This effect can amount to a 20% or more reduction in the instantaneous output of the plant, and perhaps a 5-10% decrease on an annual basis in hot locations like the Mojave or Sonoran deserts. In addition, the fan-coils used to cool the water are fairly expensive relative to a cooling tower. 

Hybrid Cooling

A new hybrid approach to cooling is emerging which can reduce both the performance penalty of dry cooling and the amount of water consumed by recirculating cooling. This hybrid technique uses dry cooling whenever the ambient temperature and the power demand are low enough. Then as the temperature and the power demand rise, wet cooling is used to supplement the dry cooling and minimize the efficiency penalty on very hot days. Although this approach increases the cost of the system it is likely to see increased use, especially in the southwestern US where water issues are coming to the fore. 

Cost and Water Savings

With this understanding, the issue of cooling becomes one of cost, and we can start to have a rational discussion about tradeoffs and how we value things. Electricity made in dry and/or hybrid cooling plants will cost somewhat more than in a recirculating cooling system, but will use less water. Is the additional water worth enough to justify the additional cost for water? Or is a lower power bill worth enough to justify additional water use for power generation? 

Water Use in Solar Power

This issue of cooling and water use is currently raising lots of questions (and creating lots of confusion!) because of the concern about large solar thermal plants in the deserts of CA and AZ. Today’s reality is that some types of solar plants have material limitations that keep the hottest temperature lower than in a coal or nuclear plant. For this reason, their efficiency is slightly lower (perhaps 28-30% vs 32-34%) and thus their cooling needs are slightly higher. However, please note that the solar thermal technology is rapidly evolving, and there are already several approaches that are likely to eliminate this difference in the hot temperatures in the next generation of plants. 

To some extent, solar thermal is a victim of timing. Earlier coal and nuclear plants routinely purchased water rights which almost no one took exception to. In this regard solar thermal plants are being held to a higher standard than the earlier conventional plants. However, that is the growing reality of life in the southwestern US, and we will all need to adapt to it. 

As an aside, photovoltaic solar (PV) doesn’t require any cooling water. However, it has two other disadvantages relative to solar thermal. The first is cost. The societal cost (total installed cost, not the cost to the owner) of a PV system remains significantly higher than that for a solar thermal plant. Ongoing efforts by the PV industry to lower those costs seem likely to reduce that cost disadvantage, but the non-solar (balance of plant, or BOP) parts of a PV system will still likely cost between $3 and $4 per peak watt regardless of what the panels cost. 

Timing of Solar Electricity

The second disadvantage is more serious from a broader system perspective. PV makes electricity instantaneously as sunlight hits it. If the system doesn’t need the energy at that time, more cost-effective systems must be turned down or the PV energy must be sloughed off. On the other hand, although the peak in PV output correlates fairly well with the beginning of the peak demand periods (usually mid-afternoon on hot summer days in this part of the world), the output from the PV system falls off too early to meet the tail of the peak load that extends into the evening (end of peak on the APS system is now 8:00 PM). 

A further disadvantage is that all the PV systems in a particular geography are likely to turn on and off essentially together. If there are only a few PV systems on a particular power line this isn’t much of an issue. However, as the PV-generated power becomes a larger fraction of the energy on that line the sudden jump -- or drop -- from all the PV systems going on or off simultaneously creates significant difficulty for managing the loads on that line. 

By contrast solar thermal plants can store the hot liquid they generate so that they can “ride through” short periods without sun, or shut down in an orderly manner for longer cloudy periods. In addition, if the storage is large enough the plant can simply collect energy from the sunlight without generating electricity until the grid needs the power. For example, the SEGS plants in CA routinely generate 100% of its capacity through all of Southern California Edison’s peak summer periods. 

Conclusion

In many ways it is unfortunate that these questions don’t behave in a way that allows simple, quick answers. The electric grid is one of the largest and most complicated man-made devices ever assembled, and we are now operating it in ways that weren’t anticipated by its original designers. Despite that, it has provided low-cost and reliable energy that has powered our economy in so many ways that we aren’t even aware of many of them. 

For a variety of excellent reasons we are now starting to re-think how we want this huge device to work and what new services we want from it. In order to make decisions that will work well for us over the long term we need to be smart about how this huge device actually works, what it can do and what it can’t. We all need to learn quickly and think carefully before we make changes.

John Anderson has a 30 year career in clean energy technology, investments and markets. He is currently an independent consultant helping clients with due diligence, project development, and strategic planning in the area of clean energy. His clients include electric utilities, Fortune 500 firms, and individual investors. Previously John served as the Manager of the Energy and Resources practice at the Rocky Mountain Institute, and the founding Managing Director of the Connecticut Clean Energy Fund, as well as the COO of a small fuel cell startup. John began his career at NREL, the National Renewable Energy Laboratory, where he worked on energy in buildings, concentrating solar power, geothermal, and solar chemistry technologies. John received a MSME from the Solar Energy Lab at UW-Wisconsin in Madison, and is a registered Professional Engineer.

John Can be reached at jva1000 [at] gmail,com or 303 885 9264

Posted by Guest Contributor at 07:39 PM | Permalink | Comments (4) | TrackBacks (0)

David Gold

Sectors like solar, biofuels and smart grid have received a significant overweighting of venture capital investment compared to other sectors. Is this because they are better investment opportunities or because venture capitalists (VCs), being human, invest in what they know and who they know? While many entrepreneurs may not believe it, VCs are human, too.

In my last post, “Human Capital, Not Venture Capital, the Biggest Cleantech Need,” I discussed how the greatest challenge today to growing a successful early-stage cleantech business is the shortage of successful, experienced cleantech entrepreneurs. But finding the right human capital to build great cleantech businesses isn’t the only stumbling block: Human capitalists (VCs) have been limited by their own experiences and networks.

At the end of the day, venture capitalists almost always invest first in people. A great, experienced management team can make a business out of an average technology. A bad management team can destroy the most amazing of technologies. Over the past decade, as cleantech VC investment started to expand to more than a handful of specialized funds, VCs naturally turned to their business networks to learn about the sectors, identify opportunities and build management teams. Given that the largest categories of VC investments in the preceding few decades have been in software/web, semiconductors, information technology and pharmaceuticals, these are also the areas where the VCs’ largest network of experienced successful entrepreneurs resided.

As crossover entrepreneurs and crossover VCs started to explore or create opportunities, they naturally looked where their knowledge could be most applied. It should not be surprising that the lion’s share of VC investment dollars have been going into areas that have closely related technology foundations to the traditional areas of VC investment. Sectors like solar, smart grid, biofuels and LEDs have received most of the VC dollars and, as a result, increased press hype. The table below highlights the approximate portion of cleantech VC investments in some of these key areas over the past three years.

No doubt there are exciting investments to be made in these sectors. Our fund, Access Venture Partners, has invested in both an LED lighting company (TerraLUX) and a smartgrid company (Tendril Networks). But what about sectors like green building materials, industrial energy efficiency, geothermal and nuclear? They serve equally enormous markets (if not larger) and at least in some areas (if not most) have equal or greater potential impact on the economy and the environment.

Solar is a particular anomaly, receiving the single largest share of all cleantech venture capital. While sexy because of its elegance, solar is a challenged technology. The economics of solar must struggle against the triple confluence of very low efficiencies, very high costs and the fact the sun simply doesn’t shine much of the time (think night and clouds). No doubt that solar venture investments are targeted at changing those factors – except for the sun, of course. There are limits to what even VCs can accomplish. But even if the cost of solar cells dropped to zero, solar still would find itself challenged to compete with other renewables, let alone traditional energy, because at least half the system cost is outside of the cells.

Geothermal, which unlike solar can be used as “base load” (meaning that it is always on), is at the other end of the spectrum. There have been few geothermal venture capital investments, yet it has some of the most compelling economics at both the utility and home scale. I would highlight both MIT’s 2006 report on the huge potential of geothermal energy and, of more contemporary interest, the October 2009 issue of Consumer Reports, which showed how a geothermal heat pump’s potential economic return usually outperforms that of a home-based solar thermal system.

So why the VC investment preference for solar over geothermal? I’m betting that much of the bias has to do with the fact that not many VCs have strong networks of geologists, drilling technologists, heat pump engineers and steam turbine power generation experts to build great geothermal companies (myself included). While it is certainly important to be knowledgeable and comfortable with the people and technology of a company, VCs must challenge themselves to think outside their own box. If the cleantech market is going to fulfill its full business potential, VCs must push themselves beyond the normal human inclination to stick with what’s familiar. A comfortable investment may not be a great investment. Cleantech VCs need to take a peek over the side of our box. What we see and what we can learn may surprise us. 

Cleantech Segment	Traditional VC Corollary	Estimated % of Cleantech VC Investment $’s 2006-2008
Solar	Semiconductors	33%+
Biofuels	Biotech	20%+
SmartGrid	Software, Web, Information Technology	14%+
LED Lighting	Semiconductors and Information Technology	5%+
Geothermal	None	<2%
Nuclear	None	<2%
Building Materials and Efficiency	None	<2%
Industrial Energy Efficiency	None	Not tracked… likely <2%

Data aggregated from sources including NVCA, PriceWaterHouse Coopers MoneyTree and Greentech Media. Data from these organizations use different sources that yield different totals and each has different categories they track with cleantech funding.

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

Posted by David Gold at 07:41 PM | Permalink | Comments (0)

David Gold

Building great businesses typically requires three key ingredients: phenomenal people, compelling technology and investment capital. Cleantech companies are no exception. While cleantech venture capital investments have expanded rapidly, averaging an annual growth rate of 65% over the past five years and now representing over 15% of all venture investments, the compelling technologies are mostly early in their development cycles and the human eco-system for early stage cleantech companies is in its infancy. There is much buzz about the venture capital and government funding that is being invested in cleantech companies, but the immaturity of the cleantech entrepreneurial ecosystem is overlooked as a significant challenge in accelerating the growth of successful cleantech companies. 

In the more traditional areas of VC investment such as software/internet, life sciences, and semi-conductors there are a relatively large number of successful entrepreneurs who have had exit events that made them wealthy. These individuals are the most likely source of smart early angel financing for other start-ups in the same sector. I emphasize “smart” because angel investors who invest in companies within industries that they know well not only make wiser investments but also can add real value to those businesses. And they tend to be more prolific investors within those industries for just that reason. The reality is that the list of successful cleantech entrepreneurs, where success is defined by a healthy exit event, is very short. 

Early stage cleantech companies struggle much more than companies in traditional areas of venture capital to find wise angel investors, or advisors and executives with both industry and entrepreneurial experience. While crossover entrepreneurs – those with success in a different sector who desire to get into cleantech – can be helpful and bring valuable wisdom, nothing can substitute for the valuable knowledge and experience gained by building a company within the same sector. Efforts like the Cleantech Open, some of the emerging cleantech incubators (like CleanLaunch, Austin’s Cleantech incubator and San Francisco’s incubator) and cleantech network groups (like Colorado Greentech Group, the Renewable Energy Business Network and the CleanTX Foundation) can assist in the tough challenge of bringing the right mix of entrepreneurial, business and industry expertise together for an early stage cleantech company. But, in the end, only time will fully cure this problem by generating experienced and successful entrepreneurs who can breed the second generation of cleantech companies. In the mean time, the challenges of growing and investing in early stage cleantech companies are as great as they will ever be. Fortunately, I believe, the rewards will be equally great.

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

Posted by David Gold at 05:37 AM | Permalink | Comments (0)

Charles Morand

The relationship - or lack thereof - between oil prices and the performance of alt energy stocks has been a long-time interest of mine. I discussed it last in late March when I looked at correlations between the daily returns of alt energy and fossil energy ETFs. At the time, I found that only a weak relationship existed between the two and that if someone wanted to make a thematic investment play on Peak Oil, alt energy ETFs were not an ideal way to do so. 

Seeing as the popular press and countless "experts" continue to claim, whenever they get a chance, that the fortunes of alternative energy stocks are closely tied to the price of oil, I figured I would revisit the topic.

Fossil & Alternative Energy: The Relationship That Isn't There

This time around, I took a slightly different approach for my analysis: I correlated the weekly returns for US oil and US natural gas directly (as opposed to through an ETF) with returns for the S&P 500 and four alt energy ETFs. For US Oil and Nat Gas, I used price data provided by the Energy Information Administration here (Spot Price FOB Weighted by Estimated Export Volume) and here (Contract 1), respectively. I got ETF and S&P 500 price and index value data from Google Finance.

For the ETFs, I picked the Claymore/Mac Global Solar Index ETF (TAN) as the solar sector representative, because I took a position in it in March (which I liquidated last week even though I initially claimed I would hang on to it for 18 to 24 months. I have now grown more worried about downside risk than I am optimistic about upside prospects over that time horizon, so I took my money out).     

The other ETFs were: the First Trust Global Wind Energy Index (FAN) for wind, because it represents a more direct play on the sector than the alternative; the PowerShares Clean Energy (PBW) ETF for alt energy other than solar and wind, as an analysis I conducted earlier this year indicated it is the best way to access other sectors; and the Powershares Global Progressive Transport (PTRP) ETF, as it provides the only proxy I know of for returns on a basket of stocks with exposure to alternative modes of transportation.          

The graph below displays returns for all four ETFs, Oil, Nat Gas and the S&P 500 between Jan. 1, 2007 and Sep. 25, 2009 (click on the image for a large view).             



The table below shows returns and volatility for all seven assets over the same time interval but broken down into sub-periods. Seeing as 2009 and the post-Lehman collapse period have been eventful times to say the least, I thought it would make sense to create a few distinct sub-periods for analytical purposes.

What jumped out at me from this table is the relatively strong performance of the Powershares Global Progressive Transport (PTRP) ETF, even after adjusting for volatility. As the correlation analysis below demonstrates, this performance is not due to a rise in oil prices.

My going theory is that there is a Green Stimulus Effect at work given how much of global stimulus dollars have gone to transportation programs. This would be something worth exploring further but it certainly seems in line, at least on the surface, with a prediction I made nearly one year ago. 



The following three tables contain the real meat of my analysis. They are fairly self-explanatory: they show correlation coefficients between US Oil, US Nat Gas and the S&P 500 with all other assets. The correlations are for the periods outlined in the tables or since inception in the case of PTRP (Sep. 19, 2008), TAN (Apr. 18, 2008) and FAN (Jun. 20, 2008). The correlation coefficients above 0.5 are highlighted.




These results are, once again, in line with my expectations: there is little reason to believe that there is a strong relationship between changes in the price of oil and the performance of alt energy stocks. Even for natural gas, where one could expect a correlation with wind and solar given that all three fuels are used in power generation (or load abatement), there does not seem to be a strong relationship.

TAN and FAN have not yet been around for long enough to analyze returns going very far back into the past, but PBW has. Although the correlation between PBW's returns and oil's returns seems to have strengthened somewhat in the past year, it certainly does not qualify as strong.

I must admit that I was fairly surprised to find such a low correlation between the returns on oil and those on the PTRP ETF. My guess is that this ETF hasn't been around long enough, and that a relationship might emerge under an extreme Peak Oil scenario. That said, spending on public transportation is heavily dependent on the fiscal health of various levels of government, and we've just been moved from the emergency room to the critical care unit.    

On the other hand, I was not particularly surprised to see that returns for all four alt energy ETFs are strongly correlated with returns for the S&P 500 - that seems intuitive enough given that they all belong to the same asset class. 

Conclusion

It doesn't really matter how one slices and dices the data: there just does not appear to be a strong relationship between returns on oil and returns on alt energy stocks, including alternative modes of transportation.

That's not going to matter to a great many commentators who will continue to claim in newspaper and magazine articles, on blogs and on TV that the success of alt energy stocks is closely tied to the price of crude, even though that's mostly untrue.

Those who invest in alt energy should, however, pay close attention. These results suggest that there are far more important factors than oil prices, most notably returns in equity markets in general and regulatory incentives by governments.

There is a good chance that equity returns and returns on oil will diverge in the next couple of years as oil prices climb and equities stagnate or decline. If such a scenario materializes, those who have the relationship backwards could be in for unpleasant surprises.   
  
DISCLOSURE: None

Posted by Charles Morand at 09:18 PM | Permalink | Comments (6)

Charles Morand

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

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

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

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

Putting Your Money Where Your Signature Is?

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

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

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

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

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

Approaching Climate Change Like An Investor

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

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

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

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

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

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

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

Conclusion

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

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

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

DISCLOSURE: None

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

Charles Morand

This is the third installment of my review of the book book "Investment Opportunities for a Low Carbon World". The second installment covered geothermal power and energy efficiency and the first installment covered wind and solar.

This post reviews three interrelated chapters on the world of cleantech and alt energy indices, funds and ETFs. Two of these three chapters are my favorite in the book so far -  they provide very useful information for the novice investor with an interest in alt energy investing but limited time and knowledge for successful stock picking. 

Cleantech and alt energy are challenging sectors to invest for several reasons: (1) pure-plays tend to be risky investments because substantial technology and business risks often exist; (2) when pure-plays are not so risky (i.e. wind power), stocks tend to trade at outrageous multiples, with several years of strong growth already fully priced in; (3) the stocks of non-pure plays with some exposure to alt energy trade, more often than not, based on what happens in other parts of the company, requiring investors to own businesses they might have little interest in or understanding of (e.g. General Electric (GE) and Siemens (S)).        

The alternative to equities is to invest in one of the alternative energy and cleantech ETFs (either long or short) or purchase one of the alt energy mutual funds. I generally believe the latter option to be less desirable than the former, mostly because of high expense ratios and other fees. ETFs, in my view, provide an excellent way for retail investors to gain exposure to the sector - although overpricing and volatility issues still exist, firm-level risk is eliminated and risk is spread over a large number of securities at a relatively low cost.

Measuring the Performance of Environmental Technology Companies

David Harris, FTSE Group

This chapter provides an introduction to cleantech and alt energy stock indices. Early on in the chapter, the author notes:

"Active managers claim they can identify those companies with above market average growth potential, but at this stage in the sector's evolution it is impossible to know which environmental technology companies will be the winners"

While I don't think this assessment applies equally to all sub-sectors of the environmental technology market, this statement still sums up relatively well the landscape for most retail investors and, as mentioned above, provides a strong argument for index-based investing.  

The chapter then moves on to provide a methodology for breaking down the environmental technology sector into sub-sectors, based on the approach used by FTSE in making its Environmental Technology Index Series. It then lists out the main environmental technology indices available and their key characteristics.

Overall, this is a useful chapter for investors in understanding how index makers approach the process of index creation. Since indices form the backbone of ETFs and are the single most critical determinant of ETFs' relative performance, this is a process worth understanding. However, the author could have provided more technical information to increase the chapter's usefulness to investors with an intermediate level of knowledge.

Investment Approaches and Products for Investors

Clare Brook, WHEB Asset Management

This chapter provides a review of the following investment vehicles: socially responsible (SRI)/ethical funds, cleantech mutual funds, private equity cleantech funds and environmental hedge funds.

We learn that the largest holdings in most ethical/SRI funds are often in industries unrelated to environmental tech such as financial services. That is because such funds, unlike cleantech and alt energy mutual funds, do not invest in anything specific - they merely avoid investing in companies and industries that violate pre-determined ethical standards. For cleantech investors, those funds are generally useless.

As far as real cleantech and alt energy mutual funds go, the author discusses the problem of over-valuation mentioned above - in her view, valuations often reflect more a scarcity of investment options in pure-play cleantech stocks than realistic expectations for future growth.

The criteria provided by the author to evaluate different investment options are the most part of this chapter. The one thing that the author stresses across different actively-managed investment products is the quality of the management team, its experience and its track record. I would tend to agree - if someone decides to invest in mutual funds, these factors should arguably weigh more than the expense ratio, as they help put the expense ratio into perspective.

Exchange Traded Funds as an Investment Approach

Lillian Goldthwaite, Friends Provident  

This chapter provides a detailed overview of ETFs and makes the case well for using them in a portfolio. I particularly liked this chapter.

According to the author, some of the main strengths of ETFs are: they are traded on exchanges and can be bought and sold (and priced) throughout the day; they can be sold short, bought on margin and loaned; the portfolio can be viewed in its entirety at all times and the index construction process is transparent; and the process by which institutional investors can acquire and redeem shares by trading in the stocks of companies in the index ensures that no sizable gap emerges between net asset value and portfolio value.

As with the previous chapter, the author provides a checklist of items to research when doing the due diligence on an ETF. The chapter concludes with a list of ETFs in cleantech and alt energy, but also in nuclear energy, carbon emissions, timber and water.

The author does not delve particularly deep into cleantech  per se, keeping the discussion focused instead on ETFs more generally. 

Overall, I found this chapter interesting and quite useful. As is the case with the preceding two, there is less to say about this chapter than there was about the ones on environmental technologies that I reviewed in the first couple of installments, mostly because these chapters are shorter.

The more seasoned investor is unlikely to learn much from this section of the book. But so it goes for such books in general; they are ideally suited for novice investors who want to get started investing into the sector and want a framework to approach the process.

For those interested in cleantech and alt energy ETFs, the following articles might be of interest:

Wind
Solar
General alt energy and cleantech 
Carbon emissions   

DISCLOSURE: None 

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

Posted by Charles Morand at 09:46 PM | Permalink | Comments (0)

Charles Morand

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

 Geothermal Energy

Alexander Richter, Glitnir Bank (now Íslandsbanki)

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

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

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

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

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

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

Energy Efficiency as an Investment Theme

Zoë Knight, Cheviot Asset Management

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

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

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

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

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

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

DISCLOSURE: None 

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

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

Charles Morand

Tom and I recently received complimentary copies of a new book called "Investment Opportunities for a Low Carbon World", edited FTSE Group's Director of Responsible Investment Will Oulton*. 



The book is a compendium of articles by 31 different authors broken down into three main categories: (1) environmental and low-carbon technologies; (2) investment approaches, products and markets; and (3) regulation, incentives, investor and company case studies.

While Tom will provide a comprehensive review of the book once he's finished reading it in its entirety, I will instead review a few selected chapters over the course of the next couple of weeks.

I decided on this approach as that is how I generally use such a resource; I select the chapters and authors that I am interested in and I read only what I selected. That said, the majority of chapters in this book were of interest to me and I ended up selecting 19 out of 27 that I'm going to read (I won't be reviewing them all!) Truth be told, reviewing the contents section made me feel like a kid in a candy store and I suspect that most alt energy investing aficionados would feel the same. If I like what I read, I will most likely finish the book.    

This first post provides reviews of Chapters 1 and 2 on the wind and solar sectors.

Wind Power

By Mark Thompson, Tiptree Investments ltd

I tend to consider myself pretty well-versed in all things wind power, and so I was especially eager to read this chapter. Overall, I was very pleasantly surprised.

The author provides a good review of the wind turbine and wind turbine component industries. I especially enjoyed the technical discussion on turbine size and optimizing turbine output, which will become a critical competitive element for turbine makers.

For instance, we learn that because of the relationship between diameter and surface area for a circle, the power of one machine can be increased to match that of several smaller machines by simply lengthening the blades, thus lowering requirements for a range of other components and materials (for instance, two turbines with rotor diameters of 40 meters will have a power output of about 1000 kW, whereas one turbine with a rotor diameter of 80 meters can power 2500 kW.) Because of the mathematics of this, power output increases acheived through longer blades should further improve the economics of wind, so this is definitely a trend worth keeping an eye on.  

We also learn that while the turbine market has been chronically under supplied for the past few years, conferring the incumbents an appreciable amount of market power - the author estimates that the top six makers hold a combined 84% market share -, barriers to entry remain high and very difficult to surmount for would-be suppliers. Concerns over quality, durability, track-record and the strength of the balance sheet to support warranties are all factors that make it very difficult to secure funding for projects using a newcomer's technology. It is fair to say that Thompson is bearish on new market entrants.

Finally, we learn that the trend toward turbine makers internalizing sub-component design and manufacturing is restricting investment opportunities in pure-play supply chain opportunities.

However, what I enjoyed the most about this chapter was the detailed overview of how wind projects are built and what factors make them successful. When it comes to wind power, investment commentators tend to focus on turbines and turbine components, even though very interesting opportunities exist in the project development and operation space. In the author's words: "the development process offers some of the best returns in the sector [...]."

One key point made by the author in that regard is that headline figures about the size of various developers' portfolios are rarely - if ever - comparable given the various developments stages involved in bringing a project into operation. The risk-return profile for pure-play wind power developers is far more driven by the quality of the projects than by the size of the portfolio. However, disclosure tends to be weak in that regard, making it difficult for small investors to gauge the real value of a portfolio.

Overall, I thoroughly enjoyed this chapter. In my view, the information would be most useful to a fundamentally-driven investor looking to really understand how wind power and the wind power industry really work. While the chapter does not answer every question an investor might have, it nonetheless provides the right balance of technical and business information to set someone on the right path. It is a reference to which I will go back.  

Those looking primarily for stock picks, however, will be disappointed. The lack of stock picks is probably the chapter's weakest point, especially given that the book is purportedly about investment opportunities. Having said that, investment ideas abound on the Internet these days and books focused too heavily on providing stock picks at the expense of more general information risk having very short shelf-lives.

Solar Power          

By Matthias Fawer, Bank Sarasin

Writing a book or a book chapter on solar power, especially solar PV, is always a risky endeavor as the information could be outdated 12 months after publication. I thus salute the effort of those who undertake to do it, but in my view this sector is best left to specialist consultancies and sell-side analysts because they can easily update their analysis when conditions change, something that happens frequently in the world of solar PV.

Matthias Fawer's chapter does, in a lot of ways, read like a sell-side report. It covers three broad sub-sectors of solar: (1) solar photovoltaic; (b) solar thermal; and (c) solar collectors. Other than for solar thermal, the way in which the chapter is written assumes the reader already has a fair bit of solar knowledge. For instance, unlike your typical generalist piece on solar PV, few if any details are provided on what the main solar PV cell technologies are, how they compare in terms of price and performance and which company makes them.

The advantage of this approach is that it allows the author to jump straight into industry-level dynamics and not waste precious space explaining what many people already know. For instance, we learn fairly early on that Bank Sarasin sees silicon cell production appreciably outpacing module production until about 2012, potentially providing module makers with a margin expansion opportunity. We also learn that the plant engineering firms that had done so well when every cell manufacturer and their grandmother was adding production capacity during 2007 and 2008 could underperform in the next few years.

Of course the drawback from not providing a lot of technical background is that it makes the chapter a lot less useful for the novice solar investor, or even for the investor who knows a little bit but does not follow the industry closely. The author does, however, provide a ranking of the "strategic positioning" of 27 solar PV firms based on a proprietary model, with his top pick being Q-Cells (QCLSF.PK) from Germany.

The section on solar thermal, also known as concentrating solar power (CSP), contains more basic information on the technology, and provides an overall very good introduction to the sector. Unfortunately, there is a dearth of CSP investment options, and this sector is thus effectively off-limit to most retail investors.

The section I liked the most in the chapter was the one on solar collectors for building and water heating, an industry I knew about but had never researched. I learned, much to my amazement, that by the end of 2008 there was 142 GW of solar collector capacity installed worldwide, versus 12 GW of solar PV and 1.3 GW of CSP.

China is by far the largest market for solar collectors and, unlike in other industries, it absorbs, according to the author, 90% of its own production. Fawer expects annual growth to be about 25% until 2011 and to settle at 18% between 2011 and 2020. However, the much larger installed base currently means that the absolute level of new installations could be quite massive. Although the section on solar collector does not provide stock picks, it most definitely poked my interest and convinced me to look further into this.

Overall, while I was a bit underwhelmed by the solar PV section, I found the CSP section useful and the section on solar collectors very interesting. A greater technical focus would have strengthened the chapter given how technologically complex solar is, and more stock picks would have been appreciated. However, I will definitely go back to the chapter when I do research on solar collectors and even CSP.

DISCLOSURE: None

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

Posted by Charles Morand at 06:03 PM | Permalink | Comments (3)

Charles Morand

It seems as though the darkest clouds are finally dissipating over alt energy's financing horizon. Over the past few weeks, money has started flowing into the sector again, as evidenced by a number of recent deal announcements:

1. On June 9, I reported on the upcoming IPO for Magma Energy Corp., a geothermal exploration company. The IPO's size will be upped from an initial C$50 MM to C$100 MM, a sign of increased market appetite 
2. SunPower Corp. raised $418 MM in early May through a share and debt offering, and recently announced it had reached a $100 MM deal with Wells Fargo to fund commercial-scale solar PV projects across the US
3. John reported a few days ago that A123 Systems had amended the SEC registration statement for its proposed IPO, positing that it could be much larger than initially anticipated
4.  In late May, Suntech Power raised $277 MM from a follow-on offering of its American Depositary Shares (ADSs), and recently received a $50 MM convertible loan from the IFC
5. On June 23, Yingli Green raised $193 MM through a follow-on offering of its ADSs
6. On June 25, Trina Solar secured credit facilities of about $57 MM
7. New Energy Finance just reported a slight increase in asset financing for Q2 2009, although it cautioned that money flows into renewable energy projects were: (1) down substantially from what they were a year ago (~66% in the US); and (2) far below the level where they need to be if greenhouse gas emissions are to be brought under control by 2020

As noted by both New Energy Finance and John, requirements for matching funds under the ARRA mean that firms that want to access government grants will have to put up some of their own money, potentially leading some of them to go to market even if conditions aren't ideal.

The recent upsurge in public market financing also certainly has to do with  buoyant markets and higher oil prices, a window that could close if the general sentiment turns negative in the coming weeks.

This increased financing activity is good news to be sure. Pure-play alt energy firms, by virtue of the sectors they do business in, typically have much weaker balance sheets than conventional energy firms or firms in more established industries. They are thus generally in a much weaker position to ride out a long capital markets drought.

But the industry is far from out of the woods yet, and I remain convinced that questionable firms are in a much weaker position to conceal their flaws behind generalized cleantech exuberance than they were in 2006 and 2007. The last rally lifted some boats that didn't deserve lifting, and sooner or later those boats will sink again.

DISCLOSURE: None       
            

Posted by Charles Morand at 11:44 PM | Permalink | Comments (0)

Renewable Electricity cost estimates from a California transmission study and the investment implications.

Tom Konrad, Ph.D., CFA

The seemingly simple question, "How much does wind/solar/geothermal/etc. cost per kWh?" can be surprisingly difficult to answer.  Advocates often cite particularly low figures, but they are often based on particularly favorable conditions, or analyses that don't include all the costs (for instance, costs of permitting.)  Opponents do the opposite, often assuming particularly unfavorable conditions, or adding in costs which they would never consider adding in for their favored technology.  Adding to the confusion, levelized cost of generation calculations are very sensitive to the interest rate used to discount capital cost and the lifetime of the investment. 

A couple years ago, I put together some slides meant to give a visual comparison of transportation fuels, and another set for electricity generation technologies.  These slides were intended to be more qualitative than quantitative, and were based on my personal synthesis of a large number of reports, rather than using a single methodology for each.  More recently, I brought you an economic comparison of energy storage technologies (and alternatives to storage) based on a quantitative review of the literature.

Costs of Electricity Generation

Recently, a friend who invests in cleantech startups asked me for an update of comparisons of electricity generation technologies.  I have not done an update, but I have found more studies that take fairly impartial looks at the available technologies.  The most comprehensive one I've found is the one Black and Veatch (B&V) did for the California Renewable Energy Transmission Initiative (RETI.)  B&V looked at the costs of generation of various renewable energy resources in the California region, as a first step in planning new electricity transmission to the best resources. 

The Phase 1A report is available on the RETI website (large PDF), and is excellent reading for anyone interested in a relatively unbiased view of the real costs of renewable energy.  It is a regional report (similar to, if much more comprehensive than, the Arizona Resource Assessment I wrote about in late 2007,) so people living in other regions should adjust the numbers to reflect resource availability.  California and the surrounding area have good wind, hydro, and biomass resources, as well as world-class solar and geothermal resources.  In the Southeast US, biomass based power would probably be cheaper, but wind, geothermal, and solar more expensive, while in the Great Plains, wind would be cheaper, but solar, hydro and geothermal would be more expensive.  You get the idea.

Here are some highlights:

Levelized Cost of Generation:

 

It's interesting to note that the five least expensive renewable energy resources in the list are either baseload resources (Geothermal and Biomass cofiring) or have some potential to be dispatchable (hydropower, and landfill gas, if used in conjunction with storage for the methane.)  Although wind is a variable resource, there are inexpensive potential sources or renewable electricity that are easy to integrate into the grid.   

Although many of these are relatively small in terms of the total amount of energy produced, they can still be profitable investments, since most investors focus on the better-known renewables such as wind and solar.  Charles recently brought you two articles highlighting investments in Geothermal and Biomass cofiring.  Covanta Holding (NYSE:CVA) is an owner and operator of waste-to-energy facilities including both landfill gas and biomass.  For hydropower investments, you can look at several of the Clean Energy Income Trusts, or suppliers of parts and services for hydropower projects such as AECOM Technology Corp. (NYSE:ACM).  

Performance and Cost Summary

 

Resource Size and Industry Maturity

To the extent that the California region is representative, B&V's comments about the size of the resource will also be interesting to investors.  Although companies such as the ones discussed above can be very profitable, a limited resource will place future constraints on growth.  Investors hoping for growth will want to focus on companies focused on types of renewable energy with the largest resources.  

They said:

• Solar photovoltaic (PV) is unique among renewable technologies, as it can be located almost anywhere, and scaled to virtually any size.

• "There is several hundred MW of potential small-scale (>10 MW) hydro generation available in California, Washington and British Columbia. ... This potential is small compared with other resources assessed.

• Wave and Marine Current – These technologies offer substantial technical potential but are unlikely to achieve a commercial level of development sufficient to contribute to California’s RPS goals within the planning horizon [before 2020].

Hence, it will be no surprise to anyone that solar PV is the greatest past and potential growth story of all renewable electricity technologies.  Hydro, in contrast has substantial potential for profitable investment, but investors should focus on the current profitability of the companies in the sector, not on the limited growth potential. 

Investors considering purchasing Wave or Marine Current stocks should take a deep breath and consider other sectors.  Such development stage technologies may have great potential, but research stage technologies are not usually great investments for retail investors: most of the companies are still private, and so there is very little chance that the few public companies are going to be the ones that succeed in bringing the technology to market.

DISCLOSURE: Tom Konrad and/or his clients own CVA and ACM.

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

Posted by Tom Konrad at 01:28 PM | Permalink | Comments (6) | TrackBacks (0)

Tom Konrad, Ph.D.

I recently moderated a panel on Financing Renewable Energy for the Colorado CFA Society.  I took down choice quotes, with the plan of using them on Alt Energy Stocks' new twitter feed.   I ended up with enough material for a short article.

My panelists were Garvin Jabusch, COO of Green Alpha Advisors, a green-focused investment advisory firm in Boulder; David Gold, a partner at Access Venture Partners, and manager of their Cleantech investments, and Brian Greenman, of Greenman Financial Advisors, who does project development and finance for community wind developers.  The broad range of perspectives seemed to strongly engage the audience of professional money managers and analysts.

Here are some highlights (some are paraphrases, when my notes were not word for word.)

The State of Wind

Greenman: Community wind is like the Wild West.  Everything is negotiable... It gets interesting when these small players run out of something: money, turbines, anything.

Greenman: There has been only one PTC based wind deal in all of 2009 to date.  People expected a bigger boost from all the attention.  It will come, but it takes time and we're going to have to wait.

The State of Cleantech Venture Capital

GOLD: All Venture Capital is down and that includes Cleantech.  It's not different from the rest of venture capital, except that Cleantech has been hit by a double-whammy: the falling price of our main competitor: Oil.

GOLD: There's a big distraction factor of [early stage] companies chasing government dollars.  This is good if it means they don't go broke, but those dollars will be irrationally allocated.  The stimulus will not have the same impact that the macro efforts of getting the whole economy going would.

The State of Postcarbon Stocks

JABUSCH: Our basket of post-hydrocarbon economy stocks has been strongly outperforming the S&P 500 year to date, so we know money is flowing into the most eco-efficient companies.  Since a significant number of the companies are small and micro stocks, we think that most of this is smart money.

JABUSCH: When you add a price for carbon, that will change the structure of how carbon-intensive enterprises are valued.

Try, Try Again

GOLD: Cap and Trade will be passed in some form this year.  The first attempt at Cap and Trade will have many, many problems.  We'll have to go back and revisit it after we see what they are.

Solar vs. Clean Coal

JABUSCH: Solar is already way cheaper than "Clean Coal," when you count the costs of carbon sequestration, if "Clean Coal" can even be made to work.

Wind vs. Coal

Greenman: Everyone in wind wants to get away from the PTC [Production Tax Credit].  Wind is the cheapest form of electricity from new construction, and wind can compete without subsidies when fossil fuels compete without subsidies.

Getting a Job in Cleantech

Greenman: Get out there, start doing stuff, eventually you'll get paid for it.  Clean Energy is an incredibly welcoming community, and there are many organizations to help you network.

Handling Risks

GOLD: As Venture Capitalists, we won't take policy risk.  If the company will only be sucessful based on the implementation of policy XYZ, we won't invest.

Greenman: For wind, the policy framework is the PTC and the ITC [Investment Tax Credit], and we now have several years of visibility for those.  If you can get the project built in the next 2-3 years when we know that we have support in Washington, your PTC will be locked in for ten years forward... or you can take a cash grant in the form of the ITC.

JABUSCH: This is like the early stages of biotech.  Everyone knew great things were going to happen, but knowing which companies would win was difficult.  We therefore use big baskets of stocks (82 right now) to increase the odds we're betting on future winners.  We like to say, The writing is on the wall for clean energy, but it's still hard to decipher.

Greenman: For wind farms, the big risks are not technology... they are getting transmission interconnection and electricity off-takers.  These risks are measurable... we call it "Fatal Flaw" analysis, but the risks are always there and you have to decide.

U.S. vs. Them

JABUSCH: Everyone has a better vehicle than the GM Volt.  But the markets are so big, and the opportunities are so gigantic, the US does have time to catch up with the rest of the world, and even take a leadership position again.

Posted by Tom Konrad at 05:30 PM | Permalink | Comments (0) | TrackBacks (0)

A comparison of the charts for clean energy ETFs and broader market ETFs seems to show that, clean energy funds have, if anything, underperformed the market as a whole in recent months.  Nevertheless, the quarterly performance update for my 10 Clean Energy Stocks for 2009 showed my picks strongly outperforming the market, although the much riskier 10 Clean Energy Gambles was only performing in-line with the sector indices.

It's unlikely that my picks are due to stock picking skill.  My personal experience has shown that I'm much better at picking sectors than individual stocks: my strength is in spotting trends, not picking individual companies which will outperform. 

Trend Spotting

If my picks are not doing better because of stockpicking, it's either because of luck, or because I spotted a trend.  The relative performance of the two portfolios gives a clue as to what it might be.  When Lehman Brothers declared bankruptcy, I began selling stocks that had weak cash flows or balance sheets, and I continue to believe that companies which can internally finance all their capital expenditures and expenses will outperform the rest for years to come.  As such, my Ten Clean Energy Stocks all had strong balance sheets and cash flows, while most of the Ten Clean Energy Gambles will likely need to raise more money by the end of the year.

If I'm right about this trend, then clean energy stocks have indeed been outperforming the market, but this trend has been masked as the market as a whole fell by the fact that most clean energy stocks are young growth companies; they often have weaker balance sheets and cash-flows than older, more established companies.  

Testing the Trend.

To test my hypothesis, I turned to the Capital Asset Pricing Model, or CAPM.  CAPM accounts for the general riskiness of companies by means of a statistic Beta, which is a measure of how much a company moves in response to moves of the market as a whole.  Because clean energy companies tend to be riskier than the market as a whole, they tend to have Betas greater than one, and hence tend to decline more than the market as a whole when it declines, but advance more than the market as a whole when it advances.  Some commentators think that green funds will outperform in a recovery solely because of the higher Beta, but I suspect there's more to it.   Any difference between the  performance of a stock and the expected performance given the performance of the market as a whole is called Alpha, and if my hypothesis is correct, clean energy stocks are likely to have had positive alpha over recent months.

I chose to test my hypothesis over three and six month periods, since that is how long I feel I have been seeing an out-performance of clean energy stocks (I think it started slightly before President Obama's election, when it became fairly clear that he was going to win.)  The CAPM model says:

Alpha = Actual Return - (RFR + Beta*(RM-RFR))

Where RFR is the risk-free rate, usually taken to be a long term treasury rate of interest, and RM is the market return.  On October 24, 2008, the ten year Treasury note was yielding 3.7%, and on January 27, it was 2.5%.  The total return of the S&P 500 has been -1.2% and 2.4% for six and three months, as of April 24th.  That means that for the 3 month period, RFR₃ = 2.5%/4 = 0.6%, and RM₃-RFR₃= 2.4%-0.6% = 1.8%, while for the 6 month period since October 24, RFR₆ = 3.7%/2 = 1.9%, and RM₆-RFR₆= -1.2%-1.9% = -3.1%.

With this data in hand we can now check to see if clean energy stocks in general have been outperforming.  

Clean Energy ETFs

To understand how the sector is performing as a whole, I will use several Clean Energy ETFs: for the sector as a whole, the two domestic ETFs: The First Trust NASDAQ Clean Edge US Liquid (QCLN) and The PowerShares Clean Energy (PBW.)

ETF	Beta	3 month		6 Month
		Performance	Alpha	Performance	Alpha
QCLN	1.85	9.4%	5.5%	4.4%	8.2%