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May 06, 2014

Offshore Wind A Big Part Of Why GE Wants Alstom

Who's the Energy Alpha Dog? GE or Siemens?

By Jeff Siegel

General Electric (NYSE:GE) wants to acquire one of the largest companies in France, and it could get what it wants if Germany doesn't get in the way.

Alstom SA (AOMFF), the target of GE's desires, is a French energy and transportation company with a market value of approximately $11.5 billion. It deals in hydroelectric and nuclear power, environmental control systems, wind turbines and battery storage, as well as trains and rail infrastructure.

It's a huge company, and GE could spend as much as $13 billion to acquire it.

On Monday, General Electric CEO Jeff Immelt met with French President Francois Hollande and Economic Minister Arnaud Montebourg to iron out the potential wrinkles in this deal. International news outlets said Hollande has responded favorably to GE's approaches, but Alstom is staying quiet on any potential deals until later in the week.

On Monday, the company released a brief statement that it will “make a further announcement no later than Wednesday 30 April morning. In the meantime, the company has requested that the trading of its shares remains suspended.”

A Rival Suitor

Like General Electric, German industrial firm Siemens AG (NYSE:SI) approached Alstom with its own acquisition interests.

The German company announced on Monday that it wanted to discuss “future strategic opportunities” with Alstom's board. The following day, Siemens announced it would be making its own offer to Alstom, but only if it had access to Alstom's “data room” and that it could do four weeks of due diligence with management and staff.

The Financial Times said Siemens could trade its high-speed rail assets for Alstom's electrical power assets, but this swap is purely speculation at this point.

Ripe for the Picking

Alstom is huge, but it's by no means monolithic. It has undergone restructuring for more than a decade and is currently under a five-year investigation by the U.S. Department of Justice and U.K. Serious Fraud Office for alleged corruption.

In 2003, the company posted a $2.54 billion loss related to poor sales, outstanding debts, and a huge write-down for a wind turbine design flaw. It was on the verge of implosion, but was bailed out by the French government to the tune of $3.4 billion. It was one of the biggest bailouts in European history.

This bailout ended up blocking Siemens from acquiring Alstom's large turbine business.

Yet the company ended up having to sell off a number of its subsidiaries to pay its debts anyway. Since the bailout, it has sold various parts to other multinationals, including Vosloh AG (VOS.DE), Areva SA (ARVCF), and you guessed it, General Electric.

In 2011, GE bought a 90 percent stake in Alstom's Converteam for $3.2 Billion. That company specializes in electric power conversion components and was folded into GE Power Conversion.

As is the case with multinationals, GE has a lot of money floating around outside of the US. By some accounts, it's got nearly $60 billion in cash and equivalents. Rather than repatriate this money and subject itself to heavy corporate taxes, GE has been using it for acquisitions.

The acquisition of Alstom would end up being the biggest in GE's history.

Offshore Wind

Even though GE is a leader in offshore wind turbines, the power and water divisions suffered through depressed demand over the last three years. GE anticipates a worldwide turnaround in 2014.

Acquiring Alstom would give GE some new offshore wind farm contracts which could accelerate growth efforts. In February, Alstom won its first offshore wind export contract, promising five turbines for the Block Island wind farm belonging to Deepwater Wind.

As it happens, Siemens was jockeying for a contract there too, but negotiations fell through.

It seems like Alstom has a knack for thwarting Siemens, and GE has a massive chunk of cash to offer the company as it continues to struggle. But the ink isn't dry yet. So we'll have to wait to see how this one works out.

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

March 13, 2014

Nuclear and Solar From Down Under

by Debra Fiakas CFA

Last week the Aussies invaded New York City, bivouacking at a popular hotel and parading a string of Australia-based companies in front of investors.  Of course, there were the usual mining and minerals companies for which resource-rich Australia is so famous.  However, the Australia Stock Exchange  -  one of the event sponsors  -   has diversified with listings in communications, biotechnology and alternative energy.

One of the presenters, Silex Systems, Inc. (SLX:  ASX and SILXY:  OTCQX) is a talented little company with technologies for solar and nuclear power generation.  Silex has developed a laser for uranium enrichment.  The laser alternative presents a lower cost alternative to conventional centrifugal methods.  The company landed a sweet deal with GLE, the joint venture of General Electric and Hitachi, and began receiving payments in fiscal year 2013.  Silex has stepped into the solar industry with concentrating photovoltaic system for electric power utilities.  In June 2013, the company completed construction of Australia’s largest concentrating photovoltaic solar power facility.  Silex is also working on a demonstration concentrating solar power station in Saudi Arabia.

Silex is also dabbling in materials development.  The company is using rare earths for semiconductor substrates.  Applications are diverse:  photonics, solar and electronics.  A fourth revenue source is ChronoLogic, a producer of test and measurement products in which the Silex has a 90% interest.

In the fiscal year ending June 2013, Silex reported a profit of AU$850,544 on AU$23.7 million.  Milestone payments from GLE for laser enrichment technology tipped continuing operations into the black from a deep loss in the previous fiscal year.

Silex is recording revenue, but still has the character of a developmental stage company.  Its financial reports are noisy with events as the Silex moves ahead with construction projects and meets milestones in customer relationships.  While financial results are choppy, there appear to a number of anticipated events ahead that will serve as catalysts for the stock price.  The company expects to begin construction of another concentrating solar power facility in late 2014 and its GLE customer is expected to begin negotiations with the U.S. Department of Energy for enrichment of uranium tailings sometime in 2014.  What is more, Silex is able to bandy about the buzz words that get investors’ attention:  rare earths, alternative energy.

Investors have a choice between the Silex Systems listing on the ASX or the Over-the-Counter quotation of an ADR in the U.S.  The stock is trade in both case near 52-week lows.  The ADR trades infrequently and the Australia exchange sees only a little more activity.  Thus it seems to me the stock is best suited for a buy-and-hold strategy and makes sense only for those investors with thick enough skins to tolerate some price volatility.    

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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  SUNE is included in the Solar Group of Crystal Equity Research’s The Atomics Index, composed of companies using the atom to create alternative energy sources.

September 05, 2013

NextEra Energy: the Real Attraction

by Debra Fiakas CFA

One member of the NuStart Energy consortium of nuclear power developers is Florida Power & Light or FPL Group, a subsidiary of NextEra Energy (NEE: NYSE).  The group had its sights on getting a nuclear power plant construction and operating license from the Nuclear Regulatory Commission (NRC).  The company operates the third largest nuclear power generation fleet in the U.S. composed of eight nuclear reactors at five plant sites.  The fleet is far flung, ranging from Florida to New Hampshire and Wisconsin and West to Iowa.

FPL is working on an expansion of its Turkey Point facility in Florida.  The plan is to construct two additional nuclear reactors  -  Units 6 and 7  -  using Westinghouse’s pressurized-water design called the Applied Passive 1000.  A combined construction and operation license application (COL) is pending before the NRC.  FPL took public comments at meetings held in July this year as one step toward certification of the project.

Together the company claims these the two added units would have the capacity to produce 2,200 megawatts  -  enough to serve 750,000 homes.  Furthermore at least $78 billion in fuel costs could be saved by sourcing this power requirement from nuclear instead of fossil fuel.


Turkey Point
Turkey Point Nuclear Facility
  In early August 2013, Duke Energy (DUK:  NYSE) announced the indefinite postponement of two planned reactors at its facility in Levy County, Florida.  Duke knuckled under after its license application was delayed.  A more pressing issue is economic.  Construction costs keep mounting and cost recovery schemes may not get approval from Florida regulators.  Duke’s action does not bode well for FPL, which submitted its application for the Turkey Point expansion back in 2009, when economic circumstances are entirely different than today.

The issue before regulators and the public is whether plans and designs made over five years ago should be altered or scrapped outright because substitute power sources have experience a favorable change in economy.  Hydraulic fracturing or ‘fracking’ has rendered natural gas newly competitive for electricity generation.  It is not entirely certain that these favorable economics will continue unchanged in the future.  The practice of fracking has been brought into question by environmentalists and land owners.  Regulatory action to restrict the use of fracking would lead to a change in economic circumstances for the natural gas industry.  This would cast nuclear reactor plans in an entirely different light  -  even with unanticipated cost increases. 

Investors do not appear much troubled by the nuclear worries of FPL or its parent company NextEra Energy.  The stock is trading at 19.7 times trailing earnings, well near the company’s five-year high price/earnings ratio.  Of course, diversified utilities as a group are trading near the five-year high average P/E.  This could be in part due to shrinking profits as costs continue to mount even as sales have been weakened by the slow economic recovery.  Earnings fall, P/E measures rise.

NEE is trading at 15.2 times the 2014 consensus earnings estimate, suggesting investors are not taking little away from the stock.  However, two dozen or so analysts who follow NEE have projected only 6% growth over the next five years.  The comparison of multiple with growth rates suggests traders are paying way too much for NEE.  A forward dividend yield of 3.2% may the real attraction to NEE.


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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  SUNE is included in the Solar Group of Crystal Equity Research’s The Atomics Index, composed of companies using the atom to create alternative energy sources.

August 11, 2013

Watch This Nuclear Player Boil

by Debra Fiakas CFA

The last post on Chicago Bridge and Iron (CBI: NYSE) noted the entrance of CBI into the nuclear field with the acquisition of The Shaw Group, which has an exclusive relationship with Toshiba Corporation related to the Toshiba Advanced Boiling Water Reactor (ABWR).

 More evolutionary than revolutionary the ABWR is supposed to be superior other designs in its light water reactor class.  ABWR produces power by superheating water to the boiling point. The resulting steam is then used to drive a turbine attached to a generator.  Other light water reactors also heat water, but not to the boiling point.  Instead the heated water is held in a pressurized vessel and the energy generating heat is exchanged with a lower pressure vessel.  It is the heat exchange process that creates steam and drives the turbine.

The first basic boiling water reactors were produced in the early 1960s. There has been considerable tweaking of the design over the years, resulting in the advanced version in the late 1990s.  There are about a dozen or so deployments of the ABWR design by various power companies in the U.S., China and Japan, the only three jurisdictions where the ABWR design is licensed.  Construction continues on several and some of the older unit built in the 1990s and early 2000s are still in operation.  Indeed, several of the completed units have had to be taken off line for repairs of one kind or another.

Principally the ABWR is supposed to be advantageous over other designs through reduced capital and operating costs.  In the U.S. market cost advantages could not be more critical than at this particular time when swollen natural gas supplies have put other energy sources at a disadvantage.  Some have even called the end of the nuclear energy industry as utilities have shuttered aging nuclear plants rather than incur the expenses of repair and refurbishing.

Kashiwazaki-Kariwa Nuclear Power Plant
By virtue of its investment in The Shaw Group with its Toshiba relationship, CBI now has both feet in the nuclear power plant business.  CBI also has some new competition from General Electric (GE:  NSYE).  GE’s first ABWR installation began commercial operation at Kashiwazaki-Kariwa in Japan, in 1996.  GE partnered with Hitachi in 2007 to produce ABWRs.  The GE-Hitachi tie-up has and total of four ABWR plants completed in Japan and two in Taiwan.  We count another ten units planned in Japan and the U.S. that have ordered from GE-Hitachi.

Toshiba is not be outdone by its competitor.  Most recently Toshiba was been tapped as a contractor for the third and fourth operating units of the South Texas Project in Matagorda County, Texas.  The South Texas Project is a nuclear power joint venture among Austin Energy, CPS Energy and NRG Energy.  The consortium brags that the first two units of the South Texas generating station “produce 2,700 megawatts of carbon-free electricity - providing clean energy to two million Texas homes.”

Here is where The Shaw Group (now CBI) comes into the picture.  Shaw is responsible for the engineering, procurement and construction portion of the South Texas contract.  Shaw came up with $250 million for the strategic partnership with Toshiba when it was set up, of which $100 million was earmarked for a credit facility to finance the South Texas expansion.

The South Texas project is going forward natural gas prices be damned.  It will be Toshiba and its Shaw Group/CBI partner which reap the initial benefits.  The saying says ‘watched pots never boil’ but Toshiba and Shaw/CBI have figured out how to turn a coin with boiling water nonetheless.

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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  CBI is included in the Nuclear Group of The Atomics Index.

August 05, 2013

CB&I: The Energy Beyond Bridges & Iron

by Debra Fiakas CFA

CBI Nuke.png

The business interests of Chicago Bridge and Iron (CBI:  NYSE) have varied far and wide from its bridge building start in the late 1800s.  These days the company is no longer headquartered in Chicago, builds a lot more than bridges and works with so many more materials than iron.  It may seem even more questionable to include Chicago Bridge and Iron among alternative energy companies.  However, since February 2013 when CB&I bought out The Shaw Group with its nuclear power plant construction services, CB&I has jumped directly into the alternative energy sector.

While alternative energy might not be the highest priority, CBI certainly wants a better position in the energy sector.  CBI needs to go beyond its usual engineering, procurement and construction (EPC) functions to extend help to an evolving power generation industry that increasing is involved in innovating new technologies.  The Shaw Group brings a broader range of power generation skills and experience to the combination. The Shaw Group lays claim to induction pipe bending technology and environmental decontamination technologies.  More importantly, Shaw Group has an exclusive relationship with Toshiba Corporation related to the Toshiba Advanced Boiling Water Reactor. 

The June 2013 quarter will be the first full quarter for the CBI-Shaw combination.  It will be the first look at a transformed operation.  The Shaw Group earned $198.9 million in net income on $6.0 billion in total sales in the year 2012.  While the company has reported net losses in the recent past, cash flow from operations has been consistently positive.  CBI is a bit smaller company, only coming close to the $6.0 billion sales hurdle back in 2008.  In 2012, CBI reported $5.5 billion in total sales on which it earned $301.7 million in net income.  CBI is consistently profitable and consistently turns out ample cash flows from operations.

The seventeen or eighteen analysts following CBI think the combination will result in $2.8 billion in total sales and $110.3 million in net income.   In 2014, which will be the first full year the two will be tied together, the consensus estimate is for $551.0 million in net income on $13.0 billion in total sales. 

Shares of CBI have been on a nice upward trajectory with periodic pullbacks that give long-term investors a chance to jump into a promising story.  The momentum that has built up in the stock suggests a $76 target price, which represents potential price appreciation of 25% from the current price level.  The mean target among those analysts with the estimates is $70.00.  At the price the implied multiple is 14 times the 2014 earnings estimate of $5.13 per share.   That appears reasonable for a company targeting markets with growth rates in the middle teens.

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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  CBI is included in the Nuclear Group of The Atomics Index.

July 24, 2012

Book Review: Public Meltdown

Ben Plotzker

302px-Vermont_Yankee_Nuclear_Power_Plant[1].jpg
The Vermont Yankee Nuclear Power Plant.
The focus on the public’s view of nuclear plant operator Entergy (NYSE:ETR) sets Public Meltdown: The Story of the Vermont Yankee Nuclear Power Plant, by Richard Watts apart from other nuclear energy books.  The book avoids pro or anti-nuclear positions, and focus on scientific aspects of the plant, and instead tells the story of one nuclear plant’s journey through history.  That plant is Vermont Yankee, a General Electric (GE) boiling water reactor type, the same type of reactors which were involved in the Fukushima Daiichi nuclear disaster.  Vermont Yankee has a 620 megawatt rated capacity, and is located located in Vernon, VT, near the corner of the state with New Hampshire and Massachusetts.

The science behind nuclear energy is one thing, but the management of a nuclear plant is another. Public Meltdown outlines the management of a nuclear power plant owner in the United States. You will learn so much from this book. It is very important to understand what is allowing my night light to be on or my laptop to charge. There are usually mixed sources of sources for electricity, but which sources are more controversial?

In 2010, Vermont legislators voted to shutter a nuclear power plant, putting the state at odds with the federal government and the plant’s owner—the Louisiana-based Entergy Corporation (NYSE:ETR).  Public Meltdown explores the debate that roiled Vermont, including the lawsuits and court action that followed. The story starts out with the early days of the plant back in the 1970’s, and draws on more than 1,000 news articles to approach the highly controversial issue with non-bias towards nuclear energy. It is hard to find a book out there that does so like Public Meltdown. Every American citizen who consumes electricity from nuclear generation should read this and understand what is going on with that nuclear power plant.

In rich, well-researched detail, Dr. Watts tells a story that spotlights the role of state governments, citizens and activists in decisions about the nation’s aging nuclear power fleet.  A story that continues today as both Entergy, the nation’s second largest nuclear operator, and the state of Vermont have appealed the case to the U.S. Court of Appeals.

Entergy owns 10 nuclear plants in the U.S., so the issues raised in this book have wider implications beyond just Vermont Yankee.

The book details a series of missteps by the Louisiana-based Entergy Corporation which owns Vermont Yankee, from inadequate follow-up after one of the plant’s cooling towers collapsed to misleading statements to state regulators about tritium leaks from underground pipes.

Each chapter outlines the important aspects of Entergy’s fight to keep the plant open, even though many speed bumps arise. This non fiction book has some cliffhangers of its own because of how history played out. Anyone interested in energy issues or state’s rights is highly recommended to read this book.

Public Meltdown is available on Amazon. You can find more info at www.publicmeltdown.org.

June 05, 2012

A Nuclear Waste Disposal Stock

Debra Fiakas CFA

Many are firmly opposed and a few more are skeptical of the nuclear energy industry.  A big concern is the waste resulting from the uranium enrichment process that is part and parcel of the reactors we have chosen to use for nuclear power generation.  Some see recycling of the waste as an answer.  First a short primer on uranium and then the recycling story.

Natural uranium consists of a mixture of three radioactive isotopes which are identified by the mass numbers U-238 (99.27% by mass), U-235 (0.72%) and U-234 (0.0054%).  Uranium is everywhere in the environment.  Most nuclear reactors used in the power industry require uranium in which the U-235 content is enriched from 0.72% concentration found in nature to about 1.5% to 3.0%.  Hence the nuclear power industry uses the practice of uranium enrichment.

The uranium remaining after removal of the enriched fraction contains about 99.8% U-238, 0.2% U-235 and 0.001% U-234.  These tailings of the enrichment process are called depleted uranium or DU.  There are some commercial uses for DU such as shielding material for other radioactive material and as ballast. Other examples include sailboat keels, counterweights and shielding in industrial radiography cameras.  

The military also has uses for DU.  Because of its high density, depleted uranium can also be used in tank armor, sandwiched between sheets of steel armor plate.  However, the military uses cannot consume all DU produced.  About 95% of the depleted uranium produced is stored as uranium hexafluoride (UF) in steel cylinders in open air storage yards close to enrichment plants.  The Department of Energy is thought to have accumulated at least 700,000 tons of UF in storage.

In a “one man’s garbage is another man’s treasure” sort of business model, International Isotopes (INIS: OTC/BB) proposes to turn these tailings into commercial products such as hydrofluoric acid and fluoride gas.  INIS has applied for regulatory approval to offer a de-conversion service to entities actively enriching uranium such as nuclear power generators.  The de-conversion process separates valuable elements from the tails and creates a chemically benign waste for disposal.

It is a compelling addition to the company’s usual business in nuclear medicine and radiochemical products.  INIS expects to not only get its DU raw materials for free, they will get paid to collect the DU.  The company has a five-year fixed price contract with Urenco USA, a uranium enrichment facility, to collect the resulting DU and de-convert these tailings.  INIS expects to produce hydrofluoric acid as part of the de-conversion process Urenco hiring INIS to perform.  There is also a contract in place to sell the hydrofluoric acid (HF) to an unnamed customer in the HF industry.

In a recent investment presentation management of International Isotopes described the new business opportunity as all tied up in a tidy knot.  However, there is a critical missing step.  A safety evaluation report was completed in May 2012, but INIS doesn’t expect a final environmental impact statement until August 2012.  With finalization a license could be received as early as September 2012.

We are adding INIS to the Efficiency Group of our Mothers of Invention Index.  Granted it is a stretch to view International Isotopes among providers of energy alternatives.  However, it seems worthwhile to watch a company that might provide a key link in improving the economics and safety of nuclear energy, one of the key alternatives to fossil fuels.

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

April 25, 2012

Junior Uranium Miner ’In Position’ to Grow

by Debra Fiakas CFA

To understand UR Energy, Inc. (URG:  NYSE AMEX, URE:  TSX) investors need to polish up on their Latin phrases.  UR Energy is planning to mine uranium for the nuclear power industry using a mining practice called in situ or literally in position.  In conventional mining operations large amounts of uranium-laced rock are cut out of the earth and sent to a milling center where the rock is crushed as the first step in separating uranium from the other minerals.  In situ miners like UR Energy leave the earth and rock undisturbed, instead injecting oxygenated water and baking soda down into the strata suspected to hold uranium.  In limestone formations the water mix  - which has the unlikely name lixiviant  -  coaxes the uranium out of the rock. Then the mix is pumped back up top where it is sent through an osmosis process to remove the uranium.  The water is reclaimed to be used again and the uranium then goes through conventional processes that turn it into yellowcake for sale to nuclear power plants.

In situ is beguiling in its simplicity.  It reduces radiation exposure to animals and humans compared to conventional mining and milling operations.  The land is largely undisturbed beyond the roads and processing facilities needed for mixing, pumping and water reclamation.  The downside is that the in situ approach is only appropriate in formations with soft, porous rocks.  Uranium in hard rock formations is impervious to a water and baking soda injection.

UR Energy is counting on consumers and governments to stand by nuclear energy despite the Fukushima disasters in Japan.  The World Nuclear Association has forecast worldwide construction of 10.2 reactors per year for the next ten years.  This is a bit slower than the rapid pace of expansion in the 1980s when an average of 21.9 reactors were added each year, but it represents an acceleration from the past two decades when developers could only muster up four reactors every twelve months.   Of course, some nuclear reactors are taken off-line each year as they reach their full life.  Others are going off-line prematurely as in Germany where all nuclear power plants will be shuttered by 2022 after Germans decided they no longer have the stomach for the risks in nuclear power.

There appears to be no ground swell for a similar decision in the U.S.  UR Energy expects no change in that sentiment.  Indeed, the company thinks there is a particularly enticing opportunity in the U.S. market.  The U.S. imports over 50 million pounds of uranium each year, well over 90% of the country’s total annual uranium needs.  The U.S. is currently producing only 4 million pounds domestically.  UR Energy is counting on making good as a domestic uranium producer.

UR Energy has yet to record a sale.  In 2011, the company used $12.7 million in cash to support operations.  With $16.7 million in cash in the bank at the end of 2011, it looked like there about a five-quarter “runway” ahead.  In February 2011, the Company completed $15 million private placement, giving it a nice cushion against delays in opening its first mine operation.

Engineering designs have been completed for the Company’s Lost Creek Mine site in Wyoming, where UR Energy plans to processing two million pounds of uranium per year.  The Company continues to prepare an economic plan for Lost Creek and is seeking the appropriate permits.   The Company is expects to begin production in the second quarter 2013, and ramp at least one million pounds in 2014.

UR Energy has signed three supply agreements for the uranium it expects to bring out of the Lost Creek property.   The most recent covers 100,000 pounds per year over multiple years at delivery prices near $60 per pound.  The three agreements together cover well over 300,000 pounds per year.

URG trades near a buck and as such may not be appealing for some investors.  However, with about a year to go before initial production, the pricing presents an interesting option on an aspiring domestic uranium producer.

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

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

May 15, 2011

Smale Scale Nukes

by Debra Fiakas CFA

The on-going crisis at one of Japan’s key nuclear power plants following earthquake and tsunami damage has everyone, even proponents of nuclear energy on edge. Previous nuclear accidents, such as the disasters at Russia’s Chernobyl reactor and the U.S.’s Three Mile Island, were traced back to human error. Now it appears regulators and operators of Japan’s Fukushima plant may have had some awareness that the plant design could not withstand the onslaught of a major tsunami. Again better human performance may have averted the situation that now threatens a breach of a reactor core.

Designers of nuclear plants have invented all sorts of ingenious means to minimize the threat of radiation leaks. They have provided to all contingencies - except human error. NuScale Power, Inc., based in Corvallis, OR, believes they have also found a way to minimize the fallout (pun intended) even if human error should occur.

NuScale has developed a modular, scalable light water reactor that is intended as a building block for a nuclear power plant. Each module would produce 45 MWe of energy through its own steam turbine. The system uses a convection process to transfer heat from water in the reactor system to water in the turbine system. Since no pumps are required to keep the reactor water circulating, NuScale engineers believe the design has a key advantage over power-dependent systems.

The company proposes to assemble a group of twelve modules for a 540 MWe power plant. Such a plant would be considerably smaller than conventional power plants that often feature reactors with 1000 MWe capacity. Herein resides another advantage touted by NuScale engineers. The smaller scale design has just 4% of the nuclear fuel inventory of a conventional reactor, putting significantly less radiation at risk per operating unit.

NuScale has several steps ahead of it to successfully put into operation a power plant based on its design. The company licensed technology from Oregon State University and has perfected the design enough to approach the U.S. Nuclear Regulator Commission for design certification. The company expects to submit a formal application in 2012. If the review process proceeds on schedule, the design should be approved by 2015. For the construction phase NuScale has already partnered with Kiewit Construction, which helped complete a detailed preliminary plant design and cost study. If all steps remain on schedule NuScale expect to have an operational plant by the end of 2018.

NuScale Power is a private company that has revealed few details about its financial requirements. We doubt the company is sufficiently well capitalized to execute fully on its business plan without external financing. Unfortunately, we expect such a round to be restricted to institutional or accredited investors. Nonetheless, it is worthwhile putting NuScale on our list of companies to watch in the nuclear sector so we added the company to The Atomics Index in the Nuclear Group.

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

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


April 27, 2011

An uNclear Future

25 years on from Chernobyl: Nuclear’s unclear future, and the on-going renaissance for alternative energy stocks

Karl L. Mitchell, Ph.D.

Summary

On April 26th, 1986, the world’s worst nuclear accident occurred at the Chernobyl nuclear power station in northern Ukraine.  The blast spewed a cloud of radioactive fallout over much of Europe, causing many hundreds of thousands to flee from their homes in Ukraine, Belarus and western Russia.  25 years later we are facing the only other level 7 event on the International Nuclear Event Scale; at Fukushima, Japan.  Although less immediately catastrophic, it has resulted in the evacuation of hundreds of thousands of people, and the human and economic impact in such a densely populated country will be profound.  More broadly, the impact on government energy policies amidst a climate of rising energy costs and concerns about the impact of fossil fuels on the environment is likely to be significant, with major shifts in public opinion resulting in reductions to many nuclear programmes.  Setting aside the environmental and safety concerns, it seems that the scene is set for a radical shift towards alternative energies based on an integrated distribution of energy sources and grid upgrades.  The technology required already exists and is implemented, and alternative energy industries have been investing massively in order to sustain already high rates of growth.  The challenge is to maintain this expansion, which is good news for alternative energy investors.

Chernobyl and its effects

The consequences of the Chernobyl nuclear disaster were massive.  Dealing with this incident has cost an estimated 18 billion rubles, and contributed to the crippling of the Soviet economy in the late 1980s and collapse of the government.  Death estimates range wildly, from 4000 (the World Heath Organisation, WHO [1]) to 200,000 (Greenpeace [2]) and even 985,000 (a Russian publication [3]).  These differences may be explained in part to different methods; Reports with higher figures looked more at unexplained anomalies in deaths and diseases, whereas the WHO figures were focusing more on deaths where the causal relationship – either directly during the disaster, or later as a result of cancers - could be defined.  Bias may also play a role.  Greenpeace certainly have an agenda.  However, despite being a well-regarded UN-affiliated organization, the WHO, who throughout most of the 1950s were clearly against nuclear power, have an agreement with the International Atomic Energy Agency dating from 1959 that grants the IAEA the right of prior approval over any research it might undertake or report on to the IAEA; In short, giving veto to an agency whose goals include to “seek to accelerate and enlarge the contribution of atomic energy to peace, health and prosperity through the world”.  In any case, whether the figures are four thousand, one million, or somewhere in between, the human and economic consequences of this nuclear incident were massive, and it seems appropriate to remember those lost on the 25th anniversary and consider the relevance of those events today.

The Chernobyl event is one of only two considered to be a level 7 event on the International Nuclear Event Scale.  The other is the on-going Fukushima incident which, although it is less serious in many ways as it does not appear to have caused any deaths directly, will have comparable and profound long-term effects.  As with Chernobyl, it has resulted in the evacuation of hundreds of thousands of people, and the economic consequences on as small and densely populated a nation as Japan will be great.  But is incident an anomaly?  Perhaps it’s the last great nuclear incident?  Certainly the context, a magnitude 9 earthquake, is very rare.  For many years now, nuclear proponents have been saying that nuclear power is “safe”, and more that it is an economic necessity in the face of rising fuel prices and shrinking fossil fuel reserves.  These same people argue that it couldn’t happen in America, despite Three Mile Island’s partial meltdown and numerous smaller incidents since [4].

Since 2007, the number of active nuclear reactors in the world has actually shrunk.  In 2010 the world had ~440 reactors, accounting for ~14% of the world’s electricity demand (~2628 TWh); of these, 104 are in the United States, providing 19.6% of the supply (807 TWh) [5].  This compares with about 30% in the European Union.  A look to the future suggests that, in order to accommodate the expansion of demand for electricity and replace fossil fuel power stations, the world would need to a few thousand new power stations, several hundred of which would be in the United States; and so even if nuclear power stations were an order of magnitude safer, level 7 nuclear events are still going to happen. So, how safe would they need to be, from natural disaster, from terrorism and from human fallibility?  Can we really protect against every possibility, no matter how refined the power plant design?  Do you really want one in your backyard?  For the vast majority of people, the answer to the last of these questions is “no”, and this has only been exacerbated by Fukushima.

What are our options?

But, for a moment, let’s set aside the very real safety concerns and consider the main argument espoused by nuclear protagonists, that it is simply an economic and environmental necessity; CO2 production rates need to be reduced for the good of our environment, peak oil is near if not already passed, coal and natural gas reserves are going to shrink in the future, and alternative energies are simply not financially viable.  But is all of this true?  Certainly fossil fuel supplies will eventually dwindle and, despite a small number of detractors, anthropogenic climate change appears to be a very real phenomenon supported by almost all scientists that are not funded by the oil industry.  But when it comes to viability in the free market we have to look at simple economics.

A recent report of the U.S. Energy Information Administration sought to estimate the unsubsidized costs of energy production for 2016 in the United States from different sources, including capital costs, operation, maintenance and transmission, based on current prices and trends [6].  It found that, of those methods available, “Advanced Nuclear” would likely cost around $113.9/MWh.  This is more than most many of the alternatives, including coal.  Note that these are production costs, and do not take into account health and environmental costs, which may be significantly greater for some sources [7].  Of alternative energy sources, geothermal, which is viable around the Pacific Rim, comes in at $101.7/MWh, hydroelectric at $86.4/MWh, wind at $97.0/MWh, and biomass at $112.5; all of these are cost-competitive with nuclear today.  Solar energy, which is the most abundant source on Earth, came in at $210.7/MWh (photovoltaic) and $311.8/MWh (thermal).  However, these figures are coming down more rapidly than any other form of energy production.  The cheapest available energy source is Advanced Combined Cycle Natural Gas at $63.1/MWh, at a whopping 45% cheaper than nuclear.

Of course, all of these figures have their uncertainties.  Nuclear power costs are almost impossible to predict due to uncertainties in requirements for long-term storage of waste and the costs of incidents.  The estimate for entombing the Fukushima power plant alone is $12bn, which is comparable to the entire Price-Anderson fund [10], the effective indemnity cap for major nuclear incidents in the United States.  If the U.S. were to experience a single level 7 incident directly, the costs would not be met, and hence current nuclear policy artificially lowers the costs of nuclear.  Fossil fuel industries have high environmental and health costs [7], which are difficult to account for.  This is not to state that alternative energies are problem free, and there are cost-increasing factors.  Wind is a highly variable form of energy production [8,9], requiring both a wide distribution of turbines [9] and development of pumped storage plants (a technique that is already in use worldwide) to smooth out supply.  Solar is also variable, especially from night to day, and is not well suited to higher latitude, cooler regions.  Geothermal only works near volcanic zones and can cause local subsidence and minor earth tremors.  Taken on their own, none of the clean alternatives are an ideal solution to world energy problems, but our energy needs could easily be accommodated using a combination of solar (both power plants and rooftop installations), wind farms (widely distributed) and geothermal (near volcanic zones), together with smart grid solutions and large scale pumped storage facilities to smooth out supply.  All of these technologies exist already, and just need to be implemented on a broader scale.  

Furthermore, in the context of Fukushima, the highly regulated nuclear industry is almost certainly going to be under greater scrutiny, increasing safety demands and insurance costs, and a “Not In My Back Yard” mentality.  This will inevitably result in a rise in costs at a time when alternative energy production costs, some of which are already cheaper, are generally decreasing.

It is true that nuclear power stations are fast to implement and bring online.  However, alternative energy installations do not have to be massive power plants with a huge up-front capital costs; In fact, many can be established by individuals and local communities.  In southern states such as California, an increasing trend is to lease solar panels for your roof at rates that undercut local grid prices; In fact, in many places its even possible to generate an excess, selling it back to the grid for a profit.  In Texas, a local cotton farmer, Cliff Etheredge, led his community to establish the Roscoe Wind Farm, currently the largest wind farm in the United States.  By spanning the 627 wind turbines across the edges of farmers’ fields over four counties and 100,000 acres, 400 land owners share in royalties of 781 MW of electricity production, equivalent of a modest sized nuclear power station, bringing in a needed boost to the local economy.  If this project were to be extended across farmlands throughout the United States (over 2 billion acres), a simply extrapolation shows that it could provide more than the nation’s electricity needs (over 17 TW rated capacity). 

Some large-scale investment will be necessary, however.  The national grid system of the United States needs a major overhaul, to reduce the considerable transmission losses and to balance the loads from more supply-variable solar and wind energy generation.  The Tres Amigas project [11], to link the three primary interconnections, shows great potential here, and seems to be a no-brainer.  Also, the 21.5 GW of pumped storage capacity also needs to be increased by at least an order of magnitude, in order to smooth out the remaining supply.  Such broad scale projects may need to involve the government, as national infrastructure costs are difficult to implement in the fragmented energy industry.

While alternative energy costs continue to decrease compared with fossil fuels, existing power stations will remain in service, and potentially more natural gas power stations will be built; They are cheap running, produce far less CO2 than coal or oil and, if shale reserves can be tapped safely, which is unclear at present, may end up providing the backbone of energy production for the next few decades. 

At the moment, many wind and solar stocks in particular are undervalued relative to P/E ratios and anticipated growth, largely due to market volatility and uncertainties in the near future; Recent decisions regarding subsidies in Italy and Germany hit solar stocks particularly hard.  Chinese solar [e.g. LDK, JKS, JASO, SOL, TSL, DQ, HSOL, CSUN] and wind [MY] stocks typically have P/E below 10, and PEGs below 0.5, and many U.S. stocks in the same areas remain competitive [e.g. SPWRA, SOLR, PWER, SATC, AMSC].  Even the powerhouse of the solar world, First Solar [FSLR], has a quarterly earnings growth in excess of 10% and a PEG of 0.63.  Compared with almost any other industry these are impressive figures.  Geothermal Energy stocks [ORA, CPN, HTM, NGLPF.OB] also show great potential [12], despite the relatively long implementation timescales.

Critics of alternative energy solutions point out that these industries rely on government subsidies and tax breaks in order to fuel their growth, but the same argument applies to nuclear power in the United States [13], and also to oil [14].  Given the falling costs [15] and rate of growth [16] of alternative energies, in the face of rising energy prices, such subsidies should become less relevant over the next few years, and in many cases are simply not required to match grid parity.  Their purpose for the time being is to act as a stimulus for faster growth in the light of growing demands for clean and independent energy, rather than a means of facilitation.  So, as far as alternative energy stocks are concerned, I’m in it for the long haul.  It will undoubtedly be a bumpy ride, as changing government policies, such as we’ve seen coming from Italy and Germany, will result in volatility, but their growth in the mid-to-long term seems assured, and the current low valuations seem to provide a very attractive entry point.

Disclaimers:
All opinions contained within this article are the author’s own, and in no way reflect the policy or opinions of his employers.  This article was written and researched in the author’s own time.
Disclosure:
   Long: LDK, SOL, PWER, COMV, CPST, ENOC, HTM, BWEN, AMSC.
   Short: with anyone who argues in favour of building a nuclear power plant on an Earthquake zone.

Continue reading "An uNclear Future" »

March 28, 2011

Four Green Money Managers' Top Stock Picks

Green money managers' stock picks after the Japanese nuclear crisis.

Even as the nuclear disaster in Japan unfolds, it's clear that the world's energy industry will be forever changed. Russian reactors were never considered safe, but a Japanese to have a nuclear meltdown is an entirely different story.

Market Reaction

Since Monday, nuclear stocks and ETFs have been plummeting. As of Wednesday night, The Market Vectors Uranium + Nuclear Energy ETF (NYSE:NLR), the iShares S&P Global Nuclear Energy Index (NASD:NUCL), PowerShares Global Nuclear Energy Portfolio ETF (NYSE:PKN), and the Global X Uranium ETF (NYSE:URA) are down 17%, 14%, 16%, and 29% respectively.

Yet we still need energy, and when the dangers of traditional energy once again rise in our awareness, the safety of renewable energy gains appeal. Over the same three days, the most liquid of the Clean Energy ETFs, the Powershares Wilderhill Clean Energy ETF (NYSE:PBW), the First Trust ISE Global Wind Energy ETF (NYSE:FAN), and the Guggenheim Solar ETF (NYSE:TAN) gained 1%, 2%, and 11%, respectively, even as the S&P 500 fell 3%.

The market thinks that the outlook for clean energy in general and solar in particular, has improved greatly. This makes sense, because as the Japanese rebuild their energy infrastructure, they will stay away from nuclear, and focus on electricity that's safe, and quick to deploy. Green energy fits the bill.

Stock Picks

If green energy will do well in general, which stocks will do the best? I emailed my contacts among green investment fund managers, and asked them each to pick one stock they thought was particularly well positioned. Here are their picks.

Garvin Jabusch: LDK Solar

Jabusch manages the Sierra Club Green Alpha Portfolio. He thinks that, in the long run, solar will be the big winner, followed by wind. His top pick is LDK Solar (NYSE:LDK), which his fund holds. He also blogs about green investing, and has just finished an article on Japan, Nukes, and Solar.

John Segrich CFA: Capstone Turbine

Segrich manages the top-performing Gabelli SRI Green Growth Fund (SRIGX). Like many contrarian investors, he's not great at following instructions (I asked for no more than three sentences), but he has interesting things to say:

The big beneficiary in the aftermath of the Japan nuclear crisis will be natural gas related companies. In particular Japan is likely to rebuild generation infrastructure with natural gas and in particular liquid natural gas (LNG). The pushback against nuclear will not necessarily be the boon to renewable that many are suggesting. Renewables are not failsafe in a disaster scenario (look at how many solar panels were shattered in the quake) and they cannot replace baseload power. Gas is the logical and cleanest and safest solution and we would expect Japan, Italy, and Germany to build more gas vs increase emphasis on renewable. … one interesting way would be to look at companies whose business model is gas based and can handle local based generation with rapid deployment:

Capstone Turbine (NASD:CPST) makes gas powered microturbines that can be locally installed and can provide immediate efficient and clean power generation for stand alone facilities (hospitals, schools, hotels, critical infrastructure) – we are already seeing deployment on infrastructure in the US to provide constant, reliable, failsafe power. I would expect to see adoption of these solutions for rapid deployment in disaster areas such as Japan at the moment to provide critical power on a local level as needed. Longer term, integrating these turbines as a backup/distributed power solution also makes sense for future emergency planning.

Sam Healey: MEMC Electronic Materials

Sam Healey manages a Cleantech stock portfolio at Lamassu Capital. He thinks MEMC Electronic Materials (NYSE:WFR) has two chances to benefit from the disaster. First, the nuclear renaissance stalls, it will boost to the Solar industry, and MEMC will benefit. By year end WFR will be vertically integrated from Poly [silicon] production through installation via Sun Edison and will be able to capitalize on any global expansion of solar power. Second, and more important in the near term, Japan accounted for 10-20% of the global Poly manufacturing of Semi[conductor] Wafers. Therefore, MEMC, will be able to gain share in the near term as it absorbs some of the demand for Semi Wafers, and perhaps will also have better pricing. MEMC does have one plant in Japan that is currently off line as a result of the earthquake.  The plant does not produce raw poly but was one of MEMC's 8 plants that manufacture 300 MM wafers and 1 of 3 MEMC plants that engage in wafer polishing and slicing.  The risk is that they will not be able to replace this production at their non Japan plants.

Tom Konrad CFA: NGK Insulators

My own pick is NGK Insulators (Tokyo:5333, Pink:NGKIF). NGK has fallen along with the Japanese market, but stands to benefit from the rebuilding of the northern Japanese grid. NGK's manufacturing is located in the central and southern part of the country, so the company should not have been too badly hurt by the earthquake and tsunami. NGK also sells the most mature, high capacity grid-based electricity storage technologies: the Sodium-Sulfur (NaS) battery. Especially on a small island like Japan, electricity storage is very helpful for integrating the variable power from solar and wind, and the Japanese are likely to favor this home-grown technology over foreign rivals.

Solar, distributed Natural gas, Electric grid & storage: they could all be winners. What do you think? The comments are open. I've also started a poll.

This article was published on Tom Konrad's Green Stocks blog on March 18th.

DISCLOSURE: No Positions. I did not ask the money managers interviewed if they own their picks, but we can assume they do.

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

March 24, 2011

Clean Energy Stocks to Fill the Nuclear Gap

Tom Konrad, CFA

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

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

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

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

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

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

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

The Conversation So Far

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

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

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

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

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

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

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

Market Reaction

The market seems to think solar, natural gas, and wind will all benefit.   While the natural gas exchange traded notes (ETNs) are based on baskets of commodity futures, while the solar and wind exchange traded funds (ETFs) are baskets of stocks, the gains in all three over the 10 days following the crisis are surprisingly similar (see chart.)
ETF returns 3/10 thru 3/21

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

Linear vs. Geometric Growth

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

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

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

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

Variability

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

Geographic Dispersion

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

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

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

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

The Japanese Grid

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

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

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

The First Fuel

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

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

Filling the Gap

Much depends on how Japan decides to rebuild, but whatever they do their priorities will probably be:
  1. Quick to deploy
  2. Low cost
  3. Improve grid safety and stability
  4. Not greatly increase reliance on foreign imports
Energy Efficiency meets all four goals.  Many energy efficiency stocks are local operations, but suppliers of highly energy efficient components, such as Power Integrations (POWI) should be well placed to benefit.  Investors' focus should be on companies with industry-leading technology that the Japanese will not be able to source locally.

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

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

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

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

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

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

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

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

DISCLOSURE: None.

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


March 18, 2011

Epic Changes Are Coming in the Electric Power, Transportation and Energy Storage Sectors

John Petersen

Epic is the only word I can use to describe an evolving tragedy that killed tens of thousands of people, inflicted hundreds of billions in property damage, destroyed 3.5% of Japan's base-load power generating capacity in a heartbeat and will cause recurring aftershocks in the global electric power, transportation and energy storage sectors for decades. While I'd love to believe the worst is behind us, I fear the times of trouble have just begun.

Since it's clear that Japan will have to turn inward and serve the urgent needs of its own population first, the following direct and immediate impacts seem all but certain:
  • Lost electric power from Japan's ruined nuclear plants must be replaced with oil, natural gas and coal because alternative energy technologies like wind and solar can't possibly take up the slack;
  • Cleanup and reconstruction must increase total Japanese demand for liquid motor fuels;
  • Japanese demand for industrial metals and construction materials must skyrocket; and
  • Crushing limitations on Japan's base-load power generating capacity must:
    • complicate supply chains for equipment, components and materials from Japan;
    • increase the cost of Japanese exports;
    • increase demand for all types of electric efficiency technologies;
    • increase demand for HEVs and other fuel efficiency technologies;
    • increase demand for grid-based energy storage systems; and
    • force utilities to shed non-essential loads and abandon their support for plug-in vehicles.
Some years from now, I expect to see rows of headstones in the EV graveyard that read "Lost to the Tsunami."

While I'm still trying to puzzle my way through the primary, secondary and tertiary impacts, it's a virtual certainty that nuclear power will be immensely unpopular even if things go spectacularly well in Japan. Switzerland has suspended pending applications for two planned nuclear plants and anti-nuclear activists are on the offensive in France. Germany just declared a moratorium on nuclear power and ordered the "temporary" cessation of operations at seven reactors that were built before 1980. Other jurisdictions, including earthquake prone California, can expect immense public pressure to follow suit. In time things will stabilize at a new normal, but that new normal will be very different from the normal that existed two weeks ago.

Some readers will be offended by my offhand dismissal of wind and solar as viable solutions. Others will be enraged by the suggestion that utilities will abandon their support for distributed and inherently unpredictable power demand from plug-in vehicles. All I can say is that reality is inconvenient that way. Japan just lost 7.6 gigawatts of base-load capacity. The German moratorium slashed their base-load capacity by 8.3 gigawatts. As the nuclear dominoes continue to fall, the strain on power grids everywhere will get far worse than any of us can begin to imagine. The last thing the world needs in times of plummeting base-load capacity is rapid expansion of demand. We simply can't have it both ways.

Nuclear power plants typically operate at 90% of nameplate capacity while wind and solar operate at something closer to 25% of nameplate.  The nuclear reactors that have recently gone off-line in Japan and Germany accounted for roughly 125 TWh of electricity production last year. In comparison, global electricity production from wind and solar power in 2009 was 269 TWh and 21 TWh, respectively. In other words, we just lost base-load power that represents 43% of the world's renewable electricity output. The gap cannot possibly be filled by new wind and solar power facilities.

There is no question that Japan will be forced to use conventional fossil fuels to replace its destroyed nuclear plants and unless its residents choose to endure extreme hardship for the sake of principle, Germany will be forced to do the same. Comparable power shortages will arise in every industrialized country that decides the risks of vintage nuclear plants outweigh their benefits. When you start stripping base-load power out of the grid, plug-in vehicles become wildly extravagant. My cynical side is tickled that Armageddon Entrepreneurs will finally be forced to choose between stoking fears over (A) imported oil and turmoil in the middle east; (B) global warming; and (C) nuclear power plants. My practical side foresees an immensely difficult time when reality finally sinks in and people are forced to come to grips with their own wasteful behavior. The panacea possibilities were washed away in the tsunami. Now we have to get serious about conservation and abandon the childish notion that we can waste one class of natural resource in the name of conserving another.

Over the last few months the mainstream media has been abuzz with stories about high-profile demonstration projects that will use battery-based systems to help stabilize the grid and smooth power output from wind and solar installations. As usual, the mainstream is getting it wrong and creating expectations the energy storage industry can't possibly meet.

A classic example of overblown media hype is Southern California Edison's plans to spend $55 million to demonstrate a battery-based solution from A123 Systems (AONE) that will provide 32 MW of power and 8 MWh of energy to smooth power output from the Tehachapi wind complex. The following graph from the California ISO highlights the variability issue that's the bane of alternative energy facilities everywhere.
3.16.11 Wind.png
While the new energy storage system will probably do a fine job of smoothing minute-to-minute variability, it will be absolutely worthless in the context of Tehachapi's average daily power production swing of over 200 MW. Tehachapi needs several gigawatt hours of storage, not a few megawatt hours.

I'm convinced that grid-based energy storage is an immense opportunity, but it won't be in the form of the headline grabbing projects the media is fixated on today. Two weeks ago the Pacific Northwest National Laboratory published a review of "Electrochemical Energy Storage for Green Grid" that describes the need for grid-based storage, identifies the leading storage technologies and explains the baseline economic requirements. Copies of the PNNL review are available from the American Chemical Society for $35. If you own stock in a battery company or are thinking about investing in one, it's the best $35 you'll ever spend.

In their discussion of storage economics, the authors said:

"Cost is probably the most important and fundamental issue of EES for a broad market penetration. Among the most important factors are capital cost and life-cycle cost. The capital cost is typically expressed in terms of the unit cost of power ($/kW) for power applications (e.g., frequency regulation) or the unit cost of energy capacity ($/kWh) for energy applications (e.g., load leveling). The life-cycle cost is the unit cost of energy or power per cycle over the lifetime of the unit.

...  In the authors' opinion, the cost of electricity storage probably needs to be comparable to the cost of generating electricity, such as from natural gas turbines at a cost as low as 8-10 ¢/kWh per cycle. Thus, to be competitive, the capital cost of storage technologies for energy applications should be comparable or lower than $250/kWh, assuming a life cycle of 15 years or 3900 cycles (5 cycles per week), an 80% round trip efficiency, and “zero” maintenance. A capital cost of $1,250/kW or less is desired if the technology can last 5 h at name-tag power. ..."

A123's demonstration project at Tehachapi will cost $1,720 per kW and $6,880 per kWh for a 15 minute solution. It's a highly profitable project for A123, but light-years from cost-effective. The same is true of another high profile project where Ener1 (HEV) will sell power quality systems with a combined capacity of 3 MW and 5 MWh to the Russian Federal Grid for $40 million, or $13,300 per kW and $8,000 per kWh. These projects are great headline events, but they'll never be the basis for a sustainable business.

In February and March of last year I wrote a series of articles that focused on grid-based storage. The first summarized a study titled "Energy Storage for the Electricity Grid: Benefits and Market Potential Assessment Guide" that was commissioned by the DOE's Energy Storage Systems Program and conducted by Jim Eyer and Garth Corey. For that article, I calculated an average economic benefit for each of the 17 grid-scale storage applications discussed in the report and then used those averages to calculate the potential demand in MWh, the potential economic benefit per kWh and the potential revenue opportunity for storage system manufacturers. The following table summarizes my results.



The color coding is simply my attempt to separate high-value applications that need objectively cool technologies like flywheels, supercapacitors and lithium ion batteries from low-value applications that need objectively cheap solutions like flow batteries, lead-acid batteries, compressed air and pumped hydro. The bottom line is that revenue opportunities in grid-based storage will be 90% cheap, 8% cool and 2% in-between. Any way you cut it, the lion's share of the revenue opportunity will flow to companies that manufacture objectively cheap storage solutions. There will be niche markets in the $1 billion to $6 billion range for cool technologies like flywheels, supercapacitors and lithium ion batteries, but those niche markets will pale in comparison to the opportunities for cheap energy storage.

Until last week, I believed global demand for grid-based storage would ramp slowly over the course of a decade. Today it's beginning to look like grid-scale storage will rapidly eclipse all other potential markets. The universe of companies that can effectively respond to urgent global needs for large-scale storage is very small. It includes General Electric (GE), Enersys (ENS), Exide Technologies (XIDE), and C&D Technologies (CHHPD.PK)  in the established manufacturer ranks, and Axion Power International (AXPW.OB) and ZBB Energy (ZBB) in the emerging technology ranks. Companies like A123, Ener1, Active Power (ACPW), Beacon Power (BCON) and Altair Nanotechnologies (ALTI) will undoubtedly have exciting revenue opportunities, but the cost of their products will exclude them from the competitive mainstream.

In November of 2008 I wrote, "what I initially described as a rising tide is now looking more like an investment tsunami as a handful of micro-cap and small-cap companies gear up to compete for $50 to $70 billion of rapidly developing annual demand for large format energy storage systems." While it took a real tsunami to bring things to a head, I'm more convinced than ever that every company that brings a cost-effective energy storage product to market over the next few years will have more demand than it can possibly handle. EVs may be dead men walking but grid-scale storage looks like the opportunity of a lifetime.

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

March 15, 2011

Energy Dominoes From Japan

Joe McCabe

Energy amazes me; the ramifications from elementary school physics of converting potential energy into kinetic energy.  It's happening everywhere around us, and can have far reaching ramifications. An example is the potential energy in the form of pressure built up under Japan in plate tectonics before the recent earthquake, turned into land shaking, country moving, tsunami creating kinetic energy that reaches across the world. There are other forces, lets call it society energy, that can create financial shock waves in the energy industry including political, religious, and inaccurate supply curve assumptions.

Energy Industry Domino Effect

The energy industry is prone to frequent unexpected events that change its entire structure.  Domino effects magnify and spread the effects of events.  A chain reaction occurs when a small change causes a similar change nearby, a pattern that repeats leading to large scale changes, much like one falling domino triggering the fall of an entire room full of edge balanced dominoes. Middle East political changes could not have been predicted to the extent of change seen in the last few weeks. There will be more change in the Middle East, no longer will dictatorships and rule by force be sustainable possibly due to small amounts of energy used by tweets and Facebook users. The financial ramifications in the Middle East have been seen in recent increases in the price of oil. The domino failures of the Deepwater Horizon oil well disaster will make oil more expensive and harder to reach. The nuclear fear, whether justified or not, will change energy policy in Japan and elsewhere.

We have experienced events recently which will compound to help change our energy future towards converting solar energy into electricity and, more specifically, photovoltaics (PV).

For example, the California Energy Crisis of 2001 helped spark investments in system level solar electric solutions at the California Energy Commission under the Public Interest Energy Research Department. These vertically integrated system solutions projects were recognized by the US Department of Energy (DOE) as a good use of public funds when they replicated the concept across the country in the Solar America Initiative. The DOE continues this system level approach with the SunShot Initiative, the most recent program to further reduce the cost of electricity from solar. As these system costs continue to fall, conventional costs will continue to rise.

Oil will be needed to support Japan after the recent earthquake disaster. Russia has promise energy industry support to Japan, the easiest of which to implement is fuel. Clean up is going to take lots of horsepower from fuel.  The Japanese electrical grid will be without electricity from nuclear generators for quite sometime. Bloomberg reported that Tokyo Electric is still seeking government approvals for a full restart of the Kashiwazaki Kariwa nuclear power plant (five reactors at 1,067 MW and two at 1,315 MW for a total 7,965 MW), which was shutdown after being damaged by an earthquake in 2007. The company posted its first loss in 28 years after it was forced to buy fossil fuels at record prices to make up for the lost nuclear output.

Licensing

California will need to revisit its approach to re-licensing nuclear plants after the Fukushima nuclear accident. Imagine evacuating the area around the San Onofre California nuclear energy plant (two reactors, at 1,172 MW and 1,178 MW, completed in 1983 and 1984 respectively), with the prevailing but constantly changing winds blowing inland towards Orange County and Los Angeles just 70 miles away.

Nuclear licensing will be revisited for Diablo Canyon Nuclear Power Plant, which is owned by Pacific Gas & Electric (PCG), aka PG&E. It is not in as populated an area as the San Onofre nuclear plant, but San Luis Obispo California is very close to Diablo Canyon.  The maximum output of this power plant is 2,240 MW.  The Diablo Canyon plant was recently re-commissioned with new steam generators after 25 years of operating. Somewhat alarmingly after considering the recent Japanese earthquake, a January 2011 PG&E report outlines a previously unknown potential volcanic fault located 1 km off shore of the Diablo Canyon Power Plant.  Recent licensing procedures are investigating extending the life expectance of the Diablo Canyon nuclear plant. An Unusual Event was declared at 1:23 AM PT on Friday March 11 at Diablo Canyon, apparently in response to tsunami warnings. Again, representing energy industry domino effects from events thousands of miles away.  

We now know that our assumption that a 9.0 Richter scale earthquake could not happen is false. And the dominoes falling because of that earthquake (Tsunami, power outages, backup systems failures), demonstrate the fragility of our energy systems.

Oil and Solar

Previous high oil prices created  the first bubble of solar stocks in the summer of 2008. Sunpower (SPWRA) reached its highs in December of 2007 and First Solar (FSLR) briefly topped above $300 around the same time that oil was peaking. Over the past month, that trend has been inverted, with oil rising as solar stocks have fallen. I'm not predicting another solar bubble, but I expect solar stocks will see a steady rise for well executing companies.

M&A activity will continue with Evergreen Solar (ESLR) a prime candidate. They have a good brand, unique approach to utilization of silicon without cutting with saws and the associated losses. The market cap of Evergreen with their associated MW/year capacities makes it a nice acquisition when including their intellectual property at current low share prices.

A sad but interesting visual during the tsunami news coverage in Japan was seeing a house float by that had PV modules across what was once the south facing roof. While this specific building had obviously experienced a disaster, the energy supply from the PV being distributed did not cause a societal disaster.

Rising oil prices and increased attention towards the risks of nuclear energy in the ring of fire will increase alternatives to conventional energy production.

As our mistaken assumptions about the security and sustainability of traditional energy sources fall like dominoes, alternative energy businesses become more and more attractive.

DISCLAIMER: Long OIL and FSLR.

Joseph McCabe is a solar industry expert with over 20 years in the business. He is an American Solar Energy Society Fellow, a Professional Engineer, and is internationally recognized as an expert in thin film PV, BIPV and Photovoltaic/Thermal solar industry activities. McCabe has a Masters Degree in Nuclear and Energy Engineering.
Joe is a Contributing Editor to Alt Energy Stocks and can be reached at energy [no space] ideas at gmail dotcom.

December 16, 2010

Nuclear Stocks: Too Hot for an Eco Portfolio?

Guest Author

Nuclear energy is not the “bad boy” it once was

For many years, nuclear energy was labelled as a potential threat to the environment as well as the global population.  Interestingly enough, the memories of the disasters at Chernobyl and Three Mile Island are now distant and the perspective of nuclear energy is changing in positive fashion.  The growing worries created by the ballooning demands on the world’s energy sources, an increase in the competition for energy supplies, rising concerns regarding global warming, and the volatility of the gas and oil prices are reasons that many countries are now re-thinking the nuclear energy proposition.

Why investing in nuclear stocks could be ecologically positive

Politicians and scientists around the world are now viewing nuclear energy as being eco-friendly as well as an economic and efficient solution to the Earth’s looming energy and environmental crisis that we are currently facing.  In so many words, investing in nuclear stocks is now an option that is back on the table and is being viewed as an ecologically positive investment.  Unlike fossil fuel combustion, nuclear energy does not leave a carbon footprint on the environment.  In other words, it does not produce the excessive amounts of carbon dioxide that fossil fuels do.

Nuclear stocks

Where stock trading is concerned, there are numerous reasons to consider investing in nuclear stocks and in the long run, there could be huge benefits, not only for the investors themselves, but the environment as well.  For instance, there is an abundant supply of uranium which as most people know is the primary basis of nuclear energy compared to so many other commodities.  The following are other reasons why investing in nuclear stocks is moving towards the forefront again:

  • concerns over global warming
  • erratic pricing of fossil fuels
  • high-profile catastrophes related to coal and oil production
  • surging demands for energy on a global scale

Environmental and political agendas are now pushing nuclear energy back towards the top of the list of priorities where the above are all concerned.

What are the moral benefits if any?

The moral benefits of investing in nuclear stocks are not necessarily based in financial gains as much as it relates to socially responsible investing overall.  As an alternative energy source and one that does not leave the carbon footprints on the environment that fossil fuels do, it is inevitable that investing in nuclear stocks could be beneficial.  Socially responsible investing describes the type of investment strategy that maximises both financial gains as well as the social good.  It is also referred to as ethical, socially conscious, or sustainable investing.

From the standpoint of being morally beneficial, that may still be up for speculation as nuclear energy is still not the preferred energy source that many environmentalists feel will solve the problems we are currently encountering in the global environment.  However, based on the above, we may not have any other viable alternative energy options to choose from other than the current ones – hydro, solar, and wind.  In so many words, nuclear energy and re-investing in it may benefit the Earth’s chances at survival.


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