Pollution Control Archives

Main


June 17, 2014

The EPA's Carbon Rule: Likely Stockmarket Winners

By Harris Roen

2012ghg-sources[1].gif
Greenhouse gas emissions by economic sector
  A seismic shift in the power generation landscape is starting to sink in. It has been two weeks since the EPA announced its new proposed carbon rules, one of the flagship efforts of the Obama Administration to address climate change. This shift is meant to move the country in the direction of inevitable changes coming to the energy economy. It is important for investors to know which companies and sectors stand to benefit from the new rule.

What the rule says

The basics of the proposed rule are this: States need to come up with ways to reduce power plant emissions. The goal is to allow flexibility to States so that they can implement innovative strategies to reduce the “pollution-to-power ratio” of fossil-fuel fired power plants. The EPA believes that by doing so, U.S. power plants should emit 30% less carbon in 2030 than they did in 2005.

The EPA is framing the effort with four “building blocks” in order to reach carbon reduction goals. These are:

1. Improved operations at power plants.
This means building more efficient plants, or retrofitting existing ones.
2. Substituting high carbon generating plants with lower carbon generation.
In effect, replace coal-fired plants with natural gas.
3. Substituting fossil fuel plants with low and zero carbon generation.
A call to enhanced deployment of renewables.
4. Increase demand side efficiency.
Lower the energy use of homeowners, businesses, etc.

 
All four of these building blocks have strong implications for alternative energy investors. They are listed below in order of relevance to the companies we track here at the Roen Financial Report.
 

Substituting fossil fuel plants with low and zero carbon generation

This building block is at the heart of the mission of the Roen Financial Report, moving beyond fossil fuels and into the realm of renewables. These two very different companies are among my top picks to benefit in this category.

SolarCity Corp (SCTY) is an innovative, full service solar installation company that has had more digital ink spilled about it than most any other alternative energy company (including my own analysis). SolarCity takes the residential and commercial customers through design, installation and financing of solar systems. In addition to solar installs, SolarCity does home energy evaluation, energy efficiency upgrades, electric vehicle charging and energy storage. Growth has been outstanding for this company, and though it is a speculative investment, I have no doubt it will become profitable in the new two to three years.

Trina Solar Limited (ADR) (TSL) is a China-based integrated photovoltaic module manufacturer. It has a large production capacity and a global distribution network covering Europe, North America and Asia. Its sales have picked up since 2012, and Trina has posted positive earnings in its three most recent quarters. Trina Solar recently closed on $150 million of convertible senior notes and over $90 million of American Depositary shares. I see the fact that the company is looking to western capital and away from Chinese government loans as a positive sign.
 

Increase demand side efficiency

Efficiency is one of our favorite investment themes. This is low hanging fruit – it benefits end homes and businesses by saving money, it benefits utilities by reducing the need to build more capacity, and it benefits the environment. The three companies below are well positioned leaders in this category

EnerNOC, Inc (ENOC) helps commercial and industrial users reduce electricity use during peak demand, which can significantly reduce a company’s energy consumption. EnerNOC’s services include demand response, energy efficiency, energy procurement, emissions tracking and trading support. This Boston-based company recently won an auction for over $185 million in capacity payment in the PJM Interconnection capacity market for 2017/2018, which should bode well for its bottom line. ENOC is up 41% for the year, and over 220% from its lows in 2012.

Tetra Tech, Inc (TTEK) is a diversified company that provides environmental services, energy efficiency consulting, carbon management and other services. This large California-based company works on projects world-wide and brings in almost $2 billion in revenues annually. TTEK has been a component of the Paradigm Portfolio since its inception. We consider Tetra Tech to be trading below fair value at current levels in the mid-$20 range.

Ameresco Inc (AMRC) is a small Massachusetts-based company that provides a variety of measures to improve the efficiency of major building systems. These include heating, ventilation, air conditioning and lighting. Ameresco also installs small-scale renewable energy plants. AMRC had a solid vote of confidence by management, as CEO George P. Sakellaris recently purchased 85,000 shares in a month worth over half a million dollars. This positive insider trading activity brings his direct ownership to over $18 million.
 

Substituting high carbon generating plants with lower carbon generation

The case is now clearer than ever that coal will be phased out in favor of natural gas. Though substituting one fossil fuel for another may not be the ultimate solution to solving our climate problems, it is undoubtedly a critical short-term step to addressing base-load needs while reducing carbon emissions. Three companies have been selected which stand to benefit from this trend.

NextEra Energy, Inc (NEE) is a large, profitable Florida-based power company that generates more than half its power from natural gas. NextEra is in the process of completing a major development cycle where it is modernizing older, less-efficient fossil generation facilities and building more efficient, cleaner natural gas-fueled plants. For example, its Port Everglades plant was demolished in 2013 to be replaced with plant that should have half the emissions. Also, NextEra is developing a new natural gas pipeline to Florida targeted for completion in 2017. In addition, NEE generates 8,000 megawatts of electricity from renewable resources.

As a utility NextEra offers steady stock price growth with an attractive yield. With over 4.5 million customer accounts, NextEra Energy is well over the industry average in assets and earnings growth. We consider NEE to be above fair value at current levels, but it remains a good long-term investment.

Sempra Energy (SRE) Sempra Energy is a holding company that owns two southern California utilities, as well as energy assets in other parts of the United States, Mexico, and South America. This San Diego based company has over 17,000 employees and provides products and services to more than 31 million consumers worldwide. Sempra has a strong portfolio of natural gas pipelines, storage and generation facilities. As with NextEra, Sempra also has an array of solar and wind facilities that it manages. Sempra has had steady sales and strong earnings, but has a relatively high PE. It is deemed to be just above fair value, so is a good buy in the $85-$90 price range.

GreenHunter Energy, Inc (GRH) provides water management solutions for shale gas focusing on serving companies in the Marcellus, Eagle Ford and Bakken shale plays. Its services are essential to address environmental issues concerning hydraulic fracturing, or fracking, utilized in shale gas production. Though this microcap penny stock had a sketchy beginning, it has enjoyed a recent jump in its stock price due to increasing revenues leading to decreasing losses. Its earnings are still negative, though, so we consider this micro-cap to be a speculative investment.
 

Improved operations at power plants

Though many people may not consider it a renewable energy company, General Electric (GE) is a key player in many aspects of the energy industry. As a leader in power plant design and turbine development, GE will surely benefit from planned power plant retrofits and reconfigurations.

Sales and earnings for GE have been flat since the beginning of the decade, but it has had climbing dividends every year since 2010. Though we see GE as overvalued at current levels, this company can be a stable large-cap component of a balance portfolio. We estimate fair value to be in the low 20’s, so accumulate on the dips.
 

Summary

The Obama administration made a bold move to address climate change by issuing these carbon rules through the EPA. While the proposed regulations are still in a draft phase, there is no doubt that the changes already occurring in the utility business will continue. Savvy investors well positioned in the proper companies and industries will be sure to benefit from this continued energy transformation.

DISCLOSURE

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

About the author

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

June 06, 2014

Mantra's Promise of Innovation

by Debra Fiakas CFA

How often do we see the crowd rooting for the underdog?  You could hear the cheers for Mantra Energy (MVTG:  OTC) last week at the Marcum Microcap Conference in New York City.  Mantra is a developmental stage company pursuing technologies to harness carbon dioxide for energy.  Of course, the company has no revenue and therefore no earnings.  Indeed, its technologies are so unique and as yet at such an early stage some might find them almost fanciful.   Yet for some investors, a fanciful underdog is even better than another.  

Mantra sees itself as a technology incubator, building on intellectual properties the company bought from the University of British Columbia.  The company is perfecting what they call the electro-reduction of carbon dioxide.  The idea is to use electrochemistry to convert carbon dioxide to usable products such as formic acid.  A wide range of end products depend on formic acid, such as preservatives and antibacterial agents in livestock feed and materials for de-icing runways.  Another important product might be formate salts, which are increasingly being considered as chemical carriers in hydrogen storage and transportation.

Turning a waste from industrial processes  -  a nasty one at that with far reaching climatic impact  -  into a useable product could have very impressive economic attributes.  The cost of carbon dioxide capture could be partially or fully covered by sales of the commercially viable products.  Mantra management believes the economics of its carbon capture and recycling solution attractive.

At least one company has already been convinced.  Lafarge Canada (LFRGY:  OTC) has agreed to work with Mantra with a pilot project at Lafarge’s cement plant in Richmond, British Columbia.  The pilot plant will have the capacity to convert 100 kilograms of carbon dioxide per day to formate salts.

Also under development is what Mantra calls its Mixed-Reactant Fuel Cell (MRFC).  In conventional fuel cells it is necessary to incorporate expensive membranes in the design prevent the fuel and oxidant from mixing.  In Mantra’s fuel cell the fuel and oxidant are allowed to mix, eliminating the cost and weight of membranes.  A variety of fuels can be used, including the formic acid that Mantra hopes to produce from its carbon capture and recycling technology.  Manta does not expect its fuel cell to have as much efficiency a conventional fuel cells, but the MRFCs are expected to have higher volumetric power densities.

Mantra has many steps to complete before reaching revenue stage.  Even more time will probably be needed to reach profitability and positive cash flow.  Before then the stock will trade on investor’s willingness to back an underdog if not confidence in management’s ability to execute on its strategic plans.  The company recently received a vote of confidence from a group of investors who infused $1.7 million in new capital into the company.  The company is using the money to take care of a few outstanding obligations and begin assembling the pilot plant.

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 23, 2013

Chinese and EU Clash Over Airline Emissions

Doug Young

Contrails
China’s increasingly contentious trade relations with Europe suffered another setback late last week, when the EU threatened to fine Chinese airlines that were refusing to comply with a new controversial program to reduce greenhouse gases. China responded with its own threat by saying it won’t accept the EU’s planned carbon tax, raising the prospect of a dangerous new trade war. This latest in a recent series of trade conflicts between China and both Europe and the US is developing into a troublesome pattern that could spin out of control, endangering the nascent global economic recovery. While the West bears some blame for initiating most of the conflicts, China’s approach of angry public denials and refusal to negotiate only makes the problems worse and leaves little room for negotiated settlements.

The latest clash broke out last Thursday, when the EU threatened fines and a ban from its airports for eight Chinese airlines that failed to provide flight information required under Europe’s new greenhouse gas reduction program. (English article) China says the plan violates international law, and has ordered the country’s airlines not to participate.

China responded to the EU’s latest threats by saying that Chinese airlines won’t accept the tax, indicating it has no intention of yielding in the matter. A resulting trade war could ultimately cost Chinese airlines millions of dollars in lost revenue and undermine their competitive position by forcing them to cut back or cancel many of their flights to Europe.

China’s stance of angry defiance was nothing new, since leaders in Beijing have opposed the plan for more than a year since it was first announced. This approach of public anger and behind-the-scenes defiance is fast becoming China’s preferred way for handling a growing number of disputes with both Europe and the US, two of its most important trading partners.

Two weeks ago, the EU moved closer to imposing punitive tariffs on Chinese solar cells after formally launching a probe last year into unfair state support for the sector. The EU has also threatened similar action against Chinese telecoms equipment. In both cases, China’s response has been largely to deny existence of a problem and to threaten retaliatory action.

Meantime, China has also had similar clashes with the US, which has imposed anti-dumping tariffs on Chinese solar cells and banned the import of Chinese telecoms equipment over national security concerns. Again, Beijing’s reaction has been to deny existence of a problem and threaten retaliation.

In all of these cases, signs of grievances by both the EU and US emerged months and sometimes more than a year before the imposition of concrete punitive measures. And yet in all of the cases, China did little or nothing to try to find a solution before the conflicts reached crisis levels.

If China wants to avoid an escalation in these kinds of trade wars, it needs to take a more proactive approach, both publicly through more positive public relations and also behind the scenes by making a real effort to negotiate solutions. A continuation of its current approach of defiance and denial will only result in a growing number of trade wars that hurt everyone and benefit no one.

Bottom line: Beijing needs to take a more positive, conciliatory approach in its trade disputes, or risk a growing number of damaging trade wars.

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

March 09, 2013

Plastics from Carbon Dioxide

by Debra Fiakas CFA

In the last post, I promised to close out this series on carbon dioxide capture with a note on a third example of Department of Energy funding for innovations in turning carbon dioxide (CO2) into a valuable raw material.  Besides changing the chemistry of inorganic compounds and feedstock for biofuel production, CO2 has some potential for plastics.  In 2010, the DOE placed a bet of $18.4 million on Novomer, Inc., which is a self-described sustainable chemicals developer.
 
The bet appears to be paying off as Novomer and its partners go into production of polypropylene carbonate (PPC) polyol using CO2 from industrial waste streams.  So far Novomer has produced seven tons of finished product containing more than 40% CO2 by weight.  The polyol was produced using waste CO2 from a processing plant owned by specialty chemical maker Albemarle Corp. (ALB:  NYSE) in Orangeburg, South Carolina.  Albemarle turns out active pharmaceutical ingredients at the Orangeburg plant.

A critical element in the process is Novomer’s proprietary enzyme that enables CO2 to react with petrochemical epoxides, resulting in thermoplastic polymers.  The PPC polyol will replace conventional petroleum-based polyether, polyester or polycarbonate polyols.  According to Markets and Markets Research, the global polyols market is expected to grow to $22.4 billion in annual sales by 2017. The growth is being driven by rapidly growing polyurethane plastics markets, particularly in Asia, Eastern Europe and South America.

Novomer believes it has conjured a highly economic product.  Novomer claims its polyols are stronger and more durable.  Accordingly, plastics using these ‘CO2’ polyols are expected to have higher tensile and load bearing capacity.   Since the CO2 is a waste product of an established manufacturing process, it is lower-cost than conventional petroleum-based raw materials.  Thus Novomer believes its polyol manufacturing costs will compare favorably against conventional polyol.

It is a wonderful story, but for investors looking for a play environmentally sustainable products, it is a tale of reduced expenses and not higher revenue.  The equity market rarely rewards low-cost scenarios with lavish multiples.  That said, lower cost producers, once they get to scale are often in a position to capture market share and that might make a difference for Novomer should it ever decide to go public. 
 
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. 

March 08, 2013

Phycal Captures CO2 Funding for Biofuel

by Debra Fiakas CFA

As part of its program to promote beneficial reuse of carbon dioxide, the Department of Energy awarded a total of $27.2 million ($3.0 million in the first phase and $24.2 million in a second phase) to a consortium led by alternative energy developer Phycal, Inc. (private).  According to the DOE website, Phycal is to develop an integrated system to produce biofuel from microalgae cultivated with captured carbon dioxide (CO2).  The biofuel is to be blended with other fuels for power generation or as drop-in diesel or jet fuel.

It is a bit of a stretch to see Phycal’s project as a bona fida “reuse” of CO2 that would have otherwise gone out into the atmosphere.  The company ferments the root food crop cassava (also called yucca or manioc) to produce ethanol.  Nonetheless, this is more by-product that final product, because what Phycal really needs are the sugars and CO2 that are also produced in the fermentation process.  That is because Phycal is principally focused on algae-based biofuel production and CO2 is the critical food source for growing algae.  Sugars give the algae an extra boost before the oil harvesting step.
 
Phycal+Process[1].png
The design does have a certain appeal.  Algal oil can be turned into a drop-in diesel or jet fuel that has significantly more versatility and lower distribution costs than ethanol.  Integration of the dual ethanol/biofuel plant affords precious economies that are vital to turn out a cost-competitive fuel product.

Phycal’s development partners include General Electric’s (GE:  NYSE) Global Research Group and Seambiotic (private) among others.  The group has set up a pilot cassava/algae farm near Hawaii’s Wahiawa, Oahu.  Phycal has some confidence in its ability to iron out the kinks in its process.  In late 2011, the company signed an off-take agreement with Hawaaiian Electric for delivery of 100,000 to 150,000 gallons of algae-based biofuel beginning in 2014.  The biofuel will be tested at the utility’s Kahe Generating Station.

Unfortunately, only accredited investors are in a position to get involved with Phycal at this stage in the company’s development.  A stake in its partner General Electric is a play on the myriad markets that are the targets of GE’s broad product portfolio.

Given that the world economy has yet to agree on a value for the liability of creating toxic CO2 emissions, it is impressive that work on CO2 sequestration has progressed at all, let alone the next step of finding uses for CO2.  Even though “carbon capture and use/reuse” gets little attention from investors, it appears to be quietly underway.  We expect the economic impact will be equally quiet, manifesting in lower costs rather than generating more visible new revenue streams.  However, knowing which companies are successfully harnessing the CO2 beast could be an advance look at higher earnings.

Basically, CO2 can be used in three major areas:  polymers, biofuels and inorganic materials.  The previous post “Capturing CO2 for Environmental Remediation” was about Alcoa’s (AA: NYSE) attempt to use CO2 for treating clay soil for environmental remediation  -  an inorganic material.  Phycal’s project is an example of biofuel production.  Next post will be a look at a polymer application.  
 
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. 

March 06, 2013

Capturing CO2 for Environmental Remediation

by Debra Fiakas CFA

In 2009, the Department of Energy (DOE) awarded $17.4 million in funding to a gaggle of companies pursuing practical uses for carbon dioxide.  The recipients were asked to kick in a total of $7.7 million.  A year later in 2010, the DOE picked six projects to a second round of support totaling $82.6 million.

Industrial giant Alcoa, Inc. (AA:  NYSE) leads one of the winning groups, including partners U.S. Nels, CO2 Solutions (CST:  V or COSLF:  OTC/BB) and Strategic Solutions.  The DOE gave the Alcoa team $13.5 million to complete a pilot project for flue gas capture and conversion to a useful product.

The project is dependent upon a new in-duct scrubber technology to capture and treat flue gas.  The technology is being tested at an aluminum manufacturing process.  A by-product of aluminum production is alkaline clay or bauxite residue.  The project will combine the flue gas with enzymes and this alkaline clay and turn out a mineral-rich soil mix that can be used for environmental remediation.

The pilot is also dependent upon the effectiveness of special enzymes produced by CO2 Solutions and its partner Codexis (CDSX:  Nasdaq) -  carbonic anhydrase enzymes to be exact.  The enzymes are supposed to decrease the cost of the CO2 capture step.  Carbon dioxide and water converts to bicarbonate anyway, but the enzymes dramatically speed up the process.

In its most recent annual report, Alcoa reported progress on a pilot project involving technologies that would eliminate CO2 emissions, but was did not report specifically on the DOE funded project.  Aluminum production is among the most toxic of industrial processes.  Any reduction in emissions from Alcoa’s plants will be significant in the battle to reduce greenhouse gases.   The aluminum industry claims a reduction in perfluorocarbon (PFC) emissions by 77% over the last fourteen years.  Yet there is more to do.  Alcoa represents ‘big muscle’ in the industry and its leadership in technology development would probably send the entire industry in the same direction.

While a stake in Alcoa is simply a play on aluminum production, the shares of Codexis and CO2 Solutions are more clearly defined by carbon capture.  Alcoa towers over the two microcap companies in revenue.  Its stock trades at 9.8 times the consensus estimate and offers a dividend yield of 1.4%.  Neither Codexis nor CO2 Solutions have been able to generate a profit, so CDSX and COSLF trade like options on their technologies.
 
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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

February 26, 2013

While Others Seek to Inject CO2, Airgas Sells It

by Debra Fiakas CFA
 
airgas logo Just one of the many suppliers of industrial and commercial carbon dioxide, Airgas, Inc. (ARG:  NYSE) recently announced plans to build a new carbon dioxide plant in Houston.  The press release hit news wires right along with announcements of carbon capture projects and other investments to reduce greenhouse effect from too much CO2 in the atmosphere.

In one those strange twists that makes our world so interesting and vexing at the same time, is the fact that we use carbon dioxide all the while we invest wildly to reduce CO2 emissions.  An inert gas at normal temperature, carbon dioxide liquefies under high pressure.  Carbon dioxide is highly reactive, making it is a handy compound to a wide range of applications such as freezing food, treating alkaline water and facilitating oil recovery that wells.  It also finds its way into various products such as fire extinguishers.  It is used to de-caffeinate coffee and jazzes up carbonated beverages.   

Airgas claims a total of eleven plants for purification and liquefaction of carbon dioxide.  Much of the supply goes to Airgas’ dry ice facility also in Texas.  Airgas has struck an agreement with oil and gas exploration company Denbury Resources (DNR:  NYSE) to deliver raw carbon dioxide to the new Houston plant. The new plant replaces an older plant that is being shuttered this year after the principal supplier of raw carbon dioxide discontinued operations.

There are a variety of sources for carbon dioxide.  Besides the CO2 that you and I respire, CO2 results from the combustion of coal or other hydrocarbons.  Unfortunately, the concentration of CO2 in ambient air and in stack gases from simple combustion sources such as heaters, boilers, furnaces is not high enough to make carbon dioxide recovery commercially feasible.

Commercially-produced carbon dioxide is principally recovered from large-scale industrial plants which produce hydrogen or ammonia.  These sources typically use natural gas, coal or some other hydrocarbon for feedstock.   Another carbon dioxide source is large-volume fermentation processes in which plant products are made into ethanol. Breweries producing beer from various grain products are a traditional source. Corn-to-ethanol plants have been the most rapidly growing source of feed gas for CO2 recovery.  CO2 is also comingled with oil and gas deposits.

Denbury will be supplying raw carbon dioxide it brings up in its Gulf Coast gas wells.  The company claims ownership in every known producing CO2 well in the Gulf Coast region.  Denbury also owns CO2 producing wells in the Rocky Mountain region, where it simply re-injects the CO2 back into the geological formation.  With demand growing for "injection” CO2 to facilitate extraction of oil and gas from stubborn deposits, Denbury is planning a CO2 capture facility and pipeline at Riley Ridge in the Rocky Mountain region.  Denbury says it will require $70 million to complete the initial phase of the CO2 capture facilities at Riley Ridge.  The company expects to capture up to 13 million cubic feet per day of CO2.

The required investment for Denbury is a drop in the bucket compared to the hundreds of millions being spent to get CO2 back into the ground.  A recent forecast for CO2 prices starts at $0.75 per thousand cubic feet in 2015, and rises to approximately $4.00 per thousand cubic feet in 2030.  A separate feasibility study estimated that CO2 from industrial processes or power plants can be captured and transported approximately 100 miles at costs ranging between $1 and $3.50 per thousand cubic feet.  It is not hard to understand why carbon capture requires public support. 

Airgas trades at 17.5 times estimated earnings for 2013  -  a bit of a premium to the industrial chemicals sector.  A higher than average profit margin helps set the company apart from the crowd.  While Airgas is a major player, others in the industry have larger market share.  Debt-to-equity is 110.0% is nearly double the industry average.  After the recent run-up in the U.S. equity markets, Airgas appears fully valued.  A review of recent trading patterns suggests that Airgas is headed toward $113.00.  From the vantage point of the current price level, anyone considering a long position in the stock is well advised to accumulate shares judiciously.
 
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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

February 23, 2013

Air Products Goes Operational with Carbon Capture

by Debra Fiakas CFA
 
Air Products logo In October 2009, the U.S. Department of Energy selected a dozen projects aimed at bringing relief to a planet suffocating in a cloud of toxic carbon dioxide emissions. The DOE called the program it’s Large-Scale Industrial Carbon Capture Storage Projects and wrote checks for $575 million out of American Recovery and Reconstruction (ARRA) funds.  A little more than a year later the DOE weeded out all but three projects for the second phase of the program.  Besides Leucadia Energy (subsidiary of Leucadia National, LUK:  NYSE) and Archer Daniels Midland (ADM:  NYSE), the DOE tapped Air Products and Chemicals, Inc. (APD:  NYSE) to move forward with design and construction of their carbon capture schemes.

Like Praxair, Inc. (PX:  NYSE), which was profiled in the last post “Praxair’s Long Road to Carbon Capture,” Air Products is a supplier of industrial gases.  Oxygen appears to be a key requirement of carbon capture technology, and both suppliers are actively working to cultivate the market by pushing carbon capture demonstration projects.

For its part Air Products is to build a system to concentrate carbon dioxide (CO2) from two steam methane reformer (SMR) hydrogen production plants located in Port Arthur, Texas.  The two plants are being retrofitted with using vacuum swing adsorption (VSA) technology to separate CO2 from the gas streams coming out of the SMRs.  After capture the CO2 will be concentrated to 97% purity and shipped to the West Hasting oil and gas fields in Texas.  The CO2 will be injected in underground formations to help squeeze out so-called “shut in” oil in late-stage oil fields.  In January 2013, the DOE announced Air Products had gone fully operational in Port Arthur and declared the project a success.

Air Products estimates that as much as 90% of the CO2 can be removed from the gas stream and apparently in the initial weeks of operation the yield has been as much as 97%.  That is an impressive accomplishment, if it can be deployed widely across industrial and power generation sectors.  At what cost?

The Port Arthur project had a $430.0 million price tag, for which Air Products received $284.0 million in grant monies from the ARRA.  For the trouble, Air Products estimates that approximately 1.0 million metric tons of CO2 will get removed from the atmosphere and an incremental 1.6 million barrels of oil will result from the injection and storage stage.  At current West Texas crude prices the oil represents over $150 million in value.  Certainly, that justifies an attractive sales price for the CO2 concentrate.

From another angle, the two hydrogen plants in Texas represent less than 5% of hydrogen production capacity for refinery use in the U.S.  Thus if Air Products’ CO2 capture demonstration remains successful, there may be some chance to recover its investment with technology licenses or sales.

Calculation of that revenue might be akin to putting the cart before the horse. There is nothing new about the vacuum swing adsorption (VSA) technology that Air Products is relying on to tease out the carbon dioxide from the rest of the gas stream.  The adsorbents are special solids mixed to attract particular gases and act like a molecular sieve to adsorb the target gas  -  in this case CO2.  This takes place at ambient air temperatures and pressure.   After the CO2 is separated, the system “swings” to the vacuum phase where the adsorbents are regenerated.  VSA is already used in refineries, chemical plants and water treatment facilities to purify air, and to manufacture oxygen, nitrogen and hydrogen.

No matter how well established in applications for ordinary gases, VSA is only just now being proven effective for CO2 separation.  If it really works in practice, the VSA technology could overcome one of the many criticisms of carbon capture  -  prohibitively high cost.  Remember the process works at ambient temperature and pressure, which means that less energy is needed to start and run the gas separation step.  VSA systems also require less maintenance. Will VSA economy be enough to make economically feasible to layer this added equipment onto the normal costs of running the hydrogen plant?

Air Products reported $9.9 billion in total sales in the last twelve months, providing $1.1 billion in net income.  That measured out to $5.59 per share.  Those impressive numbers and not some unproven, but politically popular carbon capture project are what drive Air Products shares.  The company pays out as much as 46% of net income and over the next year shareholders expect to get $2.56 per share in dividends.  Based on the stock price at the time of this post the forward dividend yield was 2.9%.  Add that to the average projected growth rate of 9% and shareholders have quite a bit to look forward to in Air Products shares.  That said, the stock is trading at 13.8 times earnings expected next year, suggesting the stock is fully priced.
 
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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

February 18, 2013

Praxair's Long Road to Capturing Carbon

by Debra Fiakas CFA
 
Praxair-Logo-20percent[1].gifIn 2007, industrial gas supplier Praxair (PX:  NYSE) teamed up with power plant equipment dealer Foster Wheeler (FSLT:  Nadaq) to work on demonstration projects for cleaning up coal-fired electric generating plants.  At first the duo planned to pursue clean coal technologies and oxygenated coal combustion systems.  The joint press release at the time indicated Praxair’s “oxy-coal’ technology would be applied to Foster Wheeler’s ‘circulating fluidized-bed steam generators.’  The oxycombustion process is one of several proposed methods to capture carbon dioxide from coal-fired power plants. In a retrofit situation, pure oxygen would replace air required for combustion, and the oxygen would likely be supplied via a cryogenic air separation unit.  Praxair was to provide the upstream oxygen supply and the downstream carbon dioxide capture and gas processing technologies.

A year later, in August 2008, Praxair seized on a U.S. Department of Energy program supporting clean coal technologies.  This time Praxair was locked arm-in-arm with the Jamestown Oxy-Coal Alliance to demonstrate the capture of carbon dioxide emissions from coal-fired power plants.  Praxair was trying to develop a process configuration for integrating ‘oxygen transport membranes’ in the power generation process at coal-fired power plants.

Subsequently Praxair received $1.2 million in funds from the American Recovery & Reinvestment Act in 2009, to demonstrate carbon capture and sequestration from a hydrogen production facility in oil refinery.  The project has been reported as complete, but Praxair has been somewhat circumspect on actual results.

Then in September 2010, the DOE cut a bigger check for $35 million for the oxy-combustion project.  The grant was one of a long list for industrial carbon capture projects.  In total the DOE pledged $575.5 million to carbon capture.  The Jamestown project has been soundly criticized as ill advised because of high costs for oxygen production, compression of carbon dioxide to liquid and pumping to and injection in the storage site.  Some estimated a permanent government subsidy would be necessary to keep the project going.  The DOE was undeterred. A key promise in Praxair’s oxygen transport membranes is efficiency, resulting in a 75% reduction the costs for in oxygen production.

Praxair’s perseverance in carbon capture is remarkable.  This is especially more the case since Praxair is also one of the world’s largest producers of carbon dioxide in box liquid and gas form.  Yes, Praxair sells carbon dioxide for everything from carbonating beverages to helping loosening up gas deposits.

A stake in Praxair is more a stake in carbon production than carbon capture.  Praxair trades near 20 times trailing earnings, which totaled $1.7 billion in the most recently reported twelve months.  Revenue was $11.2 billion.  Even with a 2.2% dividend yield that valuation seems a bit pricey given that the consensus estimate for annual earnings growth is only 12.0% over the next five years.  The company is not among our usual small-cap fare, but I have to think that Praxair is going to be a leader in carbon capture it is coming about.  The required technology appears to be challenging, but when a fix is found, it will benefit from a very large market opportunity represented by coal-fired power plants the world over.    
 
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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

February 08, 2013

Southern Company's Carbon Capture Testing

by Debra Fiakas CFA
 
bigstock-Industrial-smoke-stack-of-coal-26328461.jpg
Coal emissions photo via BigStock

An electric utility of Southern Company’s size  -  $38.3 billion in market capitalization  -  is not among the typical company covered in the Small Cap Strategist weblog.  Southern (SO:  NYSE) owns and operates six dozen power plants in the southeastern U.S., generating 12,222 megawatts of power from a mix of fossil fuel, hydroelectric, nuclear and solar plant assets.  The company earned $2.68 in earnings per share on $16.5 billion in total electric power sales.  Sales dipped in 2012 compared to the prior year as mild weather conditions led to a fall off in heating and air conditioning needs.  Nonetheless, profits were a bit higher in the year on higher profit margins.  Indeed, Southern is a bit more profitable than the industry average.  Still Southern’s stock trades a bit below the average multiples of earnings and cash flow.  The gaggle of analysts following Southern expect growth over the next year.  The consensus earnings estimate is $2.76 on $18.0 billion in total sales and predicted growth rates are near 5.0%.

Most investors probably focus on Southern’s generous dividend payout ratio that has resulted in a dividend yield of 4.5%.  However, we are more interested in how progressive Southern appears as one of the founding members of an international group devoted to developing carbon capture technologies.

The U.S. managed to reduce its overall carbon emissions in 2011 by 1.7%.  The verdict is still out on 2012.  One of the principal drivers of reduced emissions is the swap of coal-based power plants for new plants that burn cleaner natural gas.  As beguiling as this dynamic might be given ample natural gas supplies, it may still not be enough.  This is apparently why Southern is hard at work trying to find a means to tuck away offending carbon emissions.

Southern Company manages and operates the U.S. Department of Energy's National Carbon Capture Center.  The Center is testing a technology which would capture carbon dioxide in flue gas and then deposit then deposit it underground. An amine solvent reacts with the carbon dioxide in the flue gas, making it possible to sequester it.  Pilot tests are relying on an underground oil field near Alabama where the Center is located.  Southern claims this is the largest carbon capture demonstration in the world, capturing 150,000 tons of carbon dioxide annually.

The project has no impact on Southern’s near-term financial results.  However, with 34 emission-belching fossil fuel plants in Southern’s power generation portfolio, it will benefit in the long-term from a technology that could provide a shield from emissions fines.  Greenhouse gas emissions (GHGs), of which carbon dioxide is the principal culprit, are regulated from large stationary sources under the EPA’s GHG Tailoring Rule.  In January 2013, an oil and gas production company became the first business in the country fined by EPA for violations of the Act.  The fine totaled $34,000.  It is not such a significant sum, but the action makes clear the EPA will pursue fines.

Under the Clean Air Act, new power plants may not emit more than 1,000 pounds of carbon dioxide per megawatt hour.  Most new natural gas-fired plants meet that standard.  However, even new coal-fired plants emit as much as 1,800 pounds per megawatt hour.  That means realize the value of existing coal-fired plant assets or to build new coal-fired plants where natural gas is not available, utility companies must capture the carbon dioxide before it hits the atmosphere. 
 
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. 

September 02, 2011

Axion Power is Poised to Dominate Energy Storage for Stop-start Idle Elimination

John Petersen

After eight years of rarely speaking above a whisper, Axion Power International (AXPW.OB) has found its voice, taken the scientific wraps off its PbC® battery technology and shown potential customers, competitors and investors that it's carrying a big stick and is poised to dominate energy storage for stop-start idle elimination – a cheap and sensible fuel efficiency and emissions reduction technology that's expected to grow at spectacular rates for the rest of the decade as shown in the following forecast of battery demand in vehicles equipped with stop-start systems.

6.27.11 10-year.png

In a new white paper on dynamic charge acceptance that's available in the Investor section of its website, Axion has thrown down the technology gauntlet and shown why flooded and valve regulated lead-acid batteries from Johnson Controls (JCI), Exide Technologies (XIDE) and others aren't good enough for today's stop-start systems and won't be good enough for even more demanding second generation systems. In the process it's also shown why a dual device system from Maxwell Technologies (MXWL) and Continental AG (CTTAY.PK) that combines a supercapacitor module with a valve regulated AGM battery can't be an optimal solution either.

The basic problem is that stop-start systems require their batteries to operate at a partial state of charge and conventional lead-acid batteries rapidly deteriorate if they're not kept fully charged. There's a fundamental mismatch between the needs of the application and the capabilities of the battery. With flooded lead-acid batteries the deterioration is obvious within weeks. With valve regulated AGM batteries it takes a few months. As the battery deteriorates, the mechanical systems just stop working. Stop-start systems that lose their functionality over a few weeks or a few months because of feeble batteries aren't efficiency technologies at all - they're greenwash. Automakers desperately need a better solution, but it has to be easy to manufacture, easy to scale and cheap enough for a price sensitive mass market.

In simple terms, the PbC is a battery-capacitor hybrid that loves operating at a partial state of charge and doesn't deteriorate rapidly with age. While the basic chemistry is pure lead acid, Axion replaces the lead-based negative electrodes found in conventional batteries with carbon electrode assemblies that eliminate battery deterioration and pave the way for second-generation systems that will offer even better performance. Since the white paper does a fine job of explaining the science, I'll focus on the business dynamics that favor rapid launch and widespread implementation of the PbC technology.

The PbC offers 10x the dynamic charge acceptance and 20x the cycle-life of conventional lead acid batteries for one reason – it's a third-generation device that takes valve regulated AGM battery technology to a whole new level. While the science underlying the PbC technology was patented in 2002, the challenge was developing production methods and equipment that could leverage existing manufacturing and distribution infrastructure instead of replacing it. Axion spent eight years developing PbC electrode assemblies that can be used as plug-and-play replacements for the lead-based electrodes used by battery manufacturers worldwide. The last step is earning OEM certification for its automated electrode manufacturing processes. Once the OEM's have certified Axion's electrode manufacturing processes, it will be easy for an AGM battery manufacturer to substitute PbC electrode assemblies for their conventional lead electrodes and offer a better battery to customers without having to requalify their factories or their products.

Unlike other battery manufacturers that want to build new factories and develop new customers, or wrestle business away from entrenched competitors, Axion plans to pursue a platform technology strategy where it will focus on manufacturing a high value component for sale to existing manufacturers that want to offer a better product to current customers. Axion's strategy was lifted from the Intel playbook. They don't care who manufactures the battery for a particular customer as long as it uses Axion's electrodes. With a strong intellectual property estate that will keep new entrants away from its sandbox, Axion is well positioned to forge a variety of cooperative relationships with battery manufacturers worldwide.

The only battery technology on the market that can offer comparable performance in stop-start applications is lithium-ion. While lithium-ion developers like A123 Systems (AONE) are actively developing products for the stop-start market, their batteries are more expensive than the PbC and harder to scale because they can't leverage existing infrastructure. They also suffer from significant cold weather performance issues and have limited potential for future cost reductions while the PbC is at the upper left-hand corner of the learning curve. There's a reason that first tier battery buyers like BMW and Norfolk Southern publicly aligned themselves with the PbC technology before there was a PbC product.

In his seminal book The Innovator's Dilemma, Dr. Clayton Christensen uses the term disruptive technologies to describe low-cost innovations that satisfy new customer needs, improve over time and eventually displace established technologies. The following graph illustrates the phenomenon.

9.2.11 Disruption.png

If you believe Dr. Christensen's theory it's impossible to believe that lithium-ion batteries that were developed for the most demanding uses will be the ultimate winner in energy storage for stop-start idle elimination. Technologies simply do not transition downstream from high quality uses to low quality uses. Disruptive technologies always start at the bottom and work their way to the top. Given a choice between embracing the PbC technology and working with Axion or losing critical market share to more expensive lithium-ion products, the lead-acid battery industry will do the only sensible thing.

At yesterday's close Axion had a $48 million market capitalization and a serially patented technology that holds the price and performance keys to a multi-billion dollar market. The math seems obvious to me. In less than two weeks Axion will present at the Rodman & Renshaw conference in New York. It's stock had a strong run in February and March of this year after similar presentations at lower tier cleantech conferences sponsored by Piper Jaffray, Jefferies and Kaufman Bros. While the first run was crushed by selling pressure from a couple of large stockholders, cumulative trading data leads me to believe that the willing sellers are effectively out of stock and can't cause a comparable reversal of the next run.

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

October 20, 2009

What Shouldn't Be in a Green Energy Portfolio

The London Accord took a look at what portfolio theory would suggest as the most effective ways to address Climate Change.  Knowing which technologies don't make the cut is at least as useful as knowing which technologies do.

I recently looked at a paper from the London Accord which used portfolio theory to recommend the best mixes of technologies to deliver different levels of carbon abatement.  The most useful technologies to achieve the needed levels of carbon abatement were Forestry, Hydropower, Biofuels, Wind, Efficiency, and Geothermal. I suggested stocks that investors might consider to invest in each of these sectors.

abatement portfolios.bmpOther technologies played on bit parts in the abatement portfolios (left) the report found are likely to achieve the needed levels of climate reduction most efficienctly.  

If we were to assume intelligent political policies, these bit-part technologies should be avoided by investors.  The assumption of intelligent political policy is unlikely to be realistic, however:  Some of these technologies will turn out to be good for investors, even if they fail to achieve the desired goals for the climate.  

Below, I try to imagine the political decisions which would lead to each of these also-ran technologies rewarding investors. 

Nuclear

Nuclear power plays a large role in abatement portfolio 1, shown to the left.  This portfolio delivers about 3 gigatons of worldwide CO2 equivalent (Gt CO2e) abatement per year, at a cost of $25B annually.  Given that necessary level of abatement is at least 5 times that amount, portfolio 1 represents a vastly inadequate policy response to climate change.  We could get such an inadequate policy response if opponents manage to convince decision makers that an adequate response to climate change will do unacceptable harm to the economy.

Such policies would sad for humanity, ibut good for investors in suppliers of nuclear equipment.

Nuclear does not play a big role in the larger mitigation portfolios simply because it's potential for carbon mitigation is limited.  Nuclear plants take a very long time to build, and concerns about the disposal of waste and the desire of most people not to live anywhere near a nuclear plant are not likely to go away.  Furthermore, nuclear power and other baseload technologies which are difficult to stop and start quickly are somewhat incompatible with variable renewable energy such as wind and solar.  If wind is to meet its much larger potential for climate carbon mitigation, nuclear will have to play an even smaller role. abatement cost.GIF

Solar

Solar only plays a significant role in the most aggressive portfolios, 4-6.   As you can see in the chart above, portfolios 5 and 6 do not produce much extra carbon savings even though they cost two and three times what portfolio 4 does.  The implication is that solar will do best if society decides that action against climate change is worthwhile regardless of the cost (scenarios 5 and 6,) or in a scenario where we decide that we need to be very aggressive about dealing with climate change, but should keep an eye on costs.

One significant caveat here is that the above abatement portfolios are based on the 2007 IPCC Working Group report, "Mitigation of Climate Change."  This report may have had much too conservative assumptions for cost reductions in solar technology (right).sarasin abatement.PNG

With Sarasin's more optimistic assumptions about cost reductions for solar technology, it plays a large role in all mitigation portfolios on the efficient frontier.  Here "solar" refers to solar photovoltaic (PV) and Concentrating Solar Thermal Power (CSP): solar thermal collectors were not modeled.

Stock market investments in solar make sense so long as you believe that you are investing in a company which is capable of drastically reducing the cost of the technology, and will be able to cut solar costs more quickly than its rivals, including those which are yet to emerge.

Carbon Capture and Storage

Carbon Capture and Storage (CCS), the enabling technology for so-called "Clean Coal" does not play a role  in any of the mitigation portfolios which achieve less than 15 Gt CO2e (portfolios 1-3) and only small roles in portfolios 4-6.  This is very similar to solar under the 2007 IPCC Working Group assumptions.  However, CCS differs from solar in that all the believable cost estimates I've come across (even those originating from CCS proponents) expect it to remain very expensive.

Coal with CCS also has the same problem as nuclear: because it is difficult to ramp such "Clean Coal" plants up and down, they are relatively incompatible with large penetrations of wind.  If CCS does take its place as part of an efficient carbon abatement portfolio, it will probably be CCS used in conjunction with natural gas turbines, rather than coal. 

Hence, it would only be reasonable to make stock market investments in CCS technology if you expect significant spending on the technology by governments with little regard to cost.  Given the power of the coal lobby, such a scenario is a real, if unappealing, prospect.

Conclusion

I do not include any of these technologies in green investment strategy.  Even though I believe that the optimistic case for quick reductions in the cost of solar technology makes sense, I do not think that I have the skills necessary to pick a company today which will be able to survive the rapid industry upheaval a technological revolution in PV technology would entail.

All three technologies have the potential to receive large amounts of government largesse, even if the economic case for such help is weak.  However, I am not confident that I can predict the direction of such largess, and more deserving green technologies with better economic prospects seem just as likely to receive government money than these three.  Given my uncertainty about the future direction of government support, I think it makes more sense to invest in forestry stocks, building and industrial efficiency stocks, transport efficiency stocks, and geothermal stocks, than it does to invest in nuclear, carbon capture and storage, or solar stocks.

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.

January 11, 2008

A Concrete Proposal

The Economist recently had a story on how the cement industry is beginning to confront the fact that the industry produces 5% of the world's emissions of greenhouse gasses.  Carbon dioxide is emitted not only by the fossil fuels used to create the heat used in the creation of cement, and by the chemical reaction in that process.

Unfortunately for us, cement is a remarkably useful building material, not least as a structural material which can also serve as thermal mass in passive solar buildings.  

All the large cement firms: Lafarge, Holcim, and Cemex (NYSE:CX) have joined a voluntary emission reduction initiative, the Cement Sustainability Initiative, pledging to reduce their emissions per ton of cement they produce.  This is more likely to be effective with industry PR than to actually produce reductions in industry greenhouse gas emissions, even if they meet their goals of per ton emissions reductions, since production continues to grow.  (All three are on track to reach their voluntary targets.)

One avenue of CO2 reductions they are pursuing is fuel substitution for their kilns, such as using agricultural waste or used tires.  This can lead to opposition due to the concern about more conventional emissions.

solarseville.jpg

Cement plant prototype?

The Economist article was titled "Concrete Proposals Needed."  Here's my proposal: consider more radical fuel-switching, and build new plants in deserts with abundant direct-ray radiation.  Then the heat can be provided by the sun, in the form of concentrating solar.  I'd almost certainly buy a public cement firm adopting that strategy in a big way.  We may need a lot of cement for levees in the not-so-distant future.

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.

December 02, 2007

Ten Insights into Carbon Policy and Its Implications

On November 27, I attended the National Renewable Energy Laboratory's (NREL) Fifth Energy Analysis Forum, hosted by NREL's Strategic Energy Analysis & Applications Center.  The forum focused on carbon policy design, the implications for Renewable Energy and Energy Efficiency.  As a stock analyst focused on that sector, I am extremely lucky to have NREL as a local resource: the quality and the level of the experts at NREL and the ones they bring in is probably not matched anywhere in the country, and conferences like these provide priceless insights into what these Energy Analysts are thinking.  

Why should investors care what analyst think about the best form of carbon regulation, when it will be the politicians who eventually implement it?  Because these are the very experts politicians will call on when designing their legislation.  While interest groups will also undoubtedly have a large say in regulation, they are unlikely to come up with new ideas which help shape future regulation.  The new ideas will come from the 50 or so analysts that gathered in Lakewood last Tuesday, and the regulations based on these ideas will be critical to the business plans of the companies we invest in.

This is a link to my notes.  I will likely find many investment ideas there, only some of which will make it into articles.  For those with the time and interest, I expect they will be a valuable resource.  For the other 99% of readers, here are ten interesting, intriguing, or just plain surprising ideas that pop out for me.

From Howard Gruenspecht, Deputy Administrator: Energy Information Administration

INSIGHT #1: "Clean Coal" is a Solution to a Political Problem

Integrated Gasification Combined Cycle with Carbon Capture and Sequestration (IGCC w/ CCS or "Clean Coal") is popular with legislators because it is a solution to a political problem, not because the technology is ready or because analysts expect it to be the most economical solution. Nuclear power is likely to be cheaper, and it is an existing technology. 

INSIGHT #2: Electricity Generation may be a Better Use of Biomass than Liquid Fuels

If the goal is to reduce net carbon emissions, burning biomass for electricity (either by cofiring in coal power plants, or in dedicated biomass generation stations) is more effective than using the same biomass to produce liquid fuels, such as cellulosic ethanol.  TK note: I believe that many investors in companies developing methods to produce cellulosic ethanol are underestimating the competition for available feedstock from biomass based electricity generation.

From Joe Kruger, Policy Director National Commission on Energy Policy

INSIGHT #3: Electricity Generators May Get Windfall Profits

Allocation of Emission Credits is likely to create windfall profits for existing generators except in carefully designed auctions.

From Eric Smith, EPA Climate Economics Branch.

INSIGHT #4: EPA May Have to Regulate More than Tailpipes

Because of the Massachusetts vs. EPA lawsuit, the EPA must now regulate Greenhouse Gas (GHG) emissions from automobile tailpipes.  The EPA is now studying GHG, and if the EPA concludes that GHG represent an endangerment to the public, the EPA will be forced to regulate GHG emissions from many more sources than just vehicles.

From Rich Cowart, Regulatory Assistance Project

INSIGHT #5: It's Better to Allocate Credits to Electricity Distributors than Producers

Greenhouse Gasses need not be regulated at power generators, and other approaches may lead to more efficient reductions.  Mr. Cowart was introduced as "Father of the Load-based Cap," in which GHG emissions are distributed to power distributors on behalf of their customers.  Carbon regulation can occur anywhere from the mine/wellhead when a fossil fuel is first taken from the ground, to the final consumer.  Where this regulation takes place matters because different actors have different abilities to change the way power is consumed.  Mr. Cowart argues effectively that for the electricity and natural gas sectors, energy distribution companies are best placed to work with consumers to reduce overall energy use.

BONUS INSIGHT (my own): China Can Build Coal Plants, But We Can Cap Their Emissions

Worries about the number of coal plants built in China and other developing countries might be best dealt with by applying carbon regulation at the mine mouth.  China is now a net coal importer.  Given that, the rest of the world does not need China's acquiescence to regulate carbon emissions: the coal exporters of the world could form an Organization of Coal Exporting Countries (OCEC), which would effectively be able to limit the total amount of coal burned around the globe.  The United States, which I have previously called the "Saudi Arabia of Coal," could play the role of the swing producer, much as Saudi Arabia has traditionally played in OPEC.

From Karl S. Michael, NYSERDA 

From Karl S. Michael, NYSERDA 

INSIGHT #6: Reggie Never Asked, "Where are GHGs best Regulated?"

The Northeast Regional Greenhouse Gas Initiative (RGGI, or "Reggie") will be an emissions cap on power plants because the question was never asked: are power plants the right place to regulate Greenhouse Gasses?  Future climate regulations should ask this question up front.

Todd Litman, Victoria Transport Policy Institute.  I've long been a fan of Todd Litman.  Among other things, his comprehensive economic analysis was very influential in providing the ideas for my recent articles Investing in Mode-shifting, and my current love affair with commuter rail stocks.

INSIGHT #7: A Carectomy is Better than a Better Car

Regulations designed to solve a single problem often end up making others much worse.  For instance, an increase in CAFE standards will make vehicles more efficient, lowering fuel costs.  Driving will rise somewhat because it is less expensive, but this will only reduce the fuel savings by a small amount.  However, the increased distances driven will increase accidents, congestion, parking costs, road costs, and other indirect costs to society, and these costs are likely to swamp the savings from better fuel economy.  Society would be better served by policies which reduce driving, rather than increase it.

INSIGHT #8: Put the Car back into "A La Carte."

The current pricing system for driving is like the "all you can eat buffet."  It encourages people to over-consume (drive too much) because the marginal cost of driving (fuel and maintenance) is only a small fraction of the average cost of driving, which consists mainly of fixed costs such as vehicle ownership and parking costs.   Since most of the costs to society of driving are correlated to the number of miles driven (road safety, road maintenance, pollution), this leads to much higher costs to society for increased driving than to the individual.  The all-you-can-eat pricing model is also unfair to the poor, because it makes it impossible for many to drive at all, when an a-la-carte pricing model would allow them to drive small amounts for essential trips.

Mark Meliana, NREL Hydrogen Technologies Program, speaking of California's Low Carbon Fuel Standard (LCFS), on which he worked until recently being hired by NREL.

INSIGHT #9: Some Fuels are Better than Others

The California LCFS incorporates "Drive Train Efficiency" for different fuels, which reflects the quality of the energy in various transportation fuels.  A Btu of electricity is worth a lot more than a Btu of gasoline, because electric motors are inherently more efficient (by a factor of 5) than gasoline engines.  This is completely independent of vehicle aerodynamics, and drive train design, factors which will also effect efficiency.  Diesel engines are inherently 1.28 times as efficient (on a Btu basis) than gasoline engines, while hydrogen is 2.13x as efficient, and electric motors are 5 times as efficient as gasoline engines.  This is why an electric vehicle powered by electricity from a coal plant is still much less carbon intensive than a gasoline powered vehicle.  These numbers are the inverse of the factor "eta" in the LCFS.

John Sheehan, Live Fuels (formerly of NRELs Biofuels division.)  Incidentally, I had the opportunity to hear John speak (PDF 100 KB, (Powerpoint 4.5 MB) over a year ago while he was still at NREL.  At that time, he was constrained in expressing his opinion about conventional biofuels... this time he didn't pull any punches.

INSIGHT #10: Water is the 800 Pound Gorilla

Narrowly defined incentives in biofuel policy are likely to lead to more boondoggles as we have seen in the domestic corn ethanol and biodiesel industries (see notes for specifics.) Water use is "the 800 pound gorilla" we need to be talking about when considering which biofuels we can sustainably produce.

Final Thoughts: For analysts, it's clear that a narrow focus, be it in biofuels, transportation policy, or allocation of GHG allowances, will lead to more perverse effects.  For investors, we need to be aware that the perverse effects of bad policy will eventually fail to sustain an unsustainable model, as investors have recently learned about corn ethanol. On the other hand, shorter term investors may be able to profit handsomely from regulatory windfalls, a trend we have also seen in corn ethanol.

Will likely policies which will be designed to encourage IGCC and a focus on cheaper driving rather than more efficient transport in the future follow this same pattern?  They may, and it is likely to lead to substantial costs to society and investors who jump on the trends at the wrong time.   

In contrast, good policies will allow investors to do well by doing good, and profit as companies solve societal problems, rather than reaping transient rewards at the taxpayer's expense.  These good policies include load-based rather than generation based carbon caps, which will allow energy efficiency companies to more easily reduce consumers' electric bills and make profits for their shareholders.   Likewise, transport policies which provide viable alternatives to driving and incentives to use those alternatives will allow investors in alternative transit to profit while reducing commuting costs, traffic fatalities, congestion, pollution, and greenhouse gas emissions.

We all like making money in the market.  Good energy analysts, like the ones at this forum, are working to provide us the opportunity not only to make money, but to solve societal and environmental problems at the same time. For that, we're all lucky to have them.

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.

November 20, 2007

A Coal Stock...Almost

This morning, I read an article in this week's Economist that summarized well what I've been hearing over the past few weeks: coal is back in fashion with power utilities. As pointed out in the article, on a BTU basis, coal remains the cheapest fuel for thermal generation, an the prospect of high carbon prices is not deterring even European power generators from investing in coal-fired assets.

A few months ago, Tom discussed his peak coal portfolio. The long-term perspective is of course critical to keep in mind, and that piece helps putting recent news around coal into perspective. Nevertheless, in the near term, coal is making a comeback.

Coal is dirty, very dirty. Besides greenhouse gases, which I believe will represent a material hurdle to economically burning coal in the long term (10 years and beyond) in most Western markets, coal creates significant localized pollution problems.

If estimates of the pace at which new coal capacity is currently being added in China and India are anywhere near accurate, both countries (and their populations) stand to suffer greatly from increased levels of air pollution. There is, however, evidence that China has begun taking pollution control seriously, especially in light of the fact that Beijing is currently too polluted to host Olympic Games.

A (Clean) Coal Stock

I'm no fan of coal for a number of reasons, but one play on cleaner coal caught my attention in late 2006: Fuel-Tech Inc. (NASDAQ:FTEK). Fuel-Tech makes pollution control technologies that could see significant uptake with tightening air quality standards. You may remember an interview with their CEO that we published back in March.



I followed the stock for while but always found it expensive on a PE basis. Then, in the spring, the stock took off with the rest of the market (but not the earnings) and I just stopped paying attention. Fuel Tech remains, however, a bit of a tech play and so it's been correcting heavily with the recent market slump.

According to Yahoo data, Fuel Tech is still trading at a whooping 12-month trailing PE of 166x. However, its forward PE (fy 08), arguably a much more important stat, is around 40x. While that is no Buffet stock, there are a number of investors out there who seem willing to pay up for a piece of Fuel Tech's future growth (keep in mind too that when the article linked to was written, the stock was staging a bit of a comeback).

While I'm not sure this is something I'm ready to jump on right now, both on an intrinsic basis and because I don't think the markets are currently likely to be gentile to this type of security, it is definitely back on my radar.

I don't like coal at all, but if I had to play it I would do it through Fuel Tech.


DISCLOSURE: The author does not have a position in this stock.

August 02, 2007

Carbon Capture and Storage: By the Numbers

"We have over 200 years of coal reserves, and we have to/will use them."

I have heard some variation of this line far too many times, and I have little patience for it.  Here's why:

  1. We don't have over 200 years of reserves.  The real number for economically accessible coal is less than half that.
  2. A square, 100 miles on a side in the Southwestern deserts of the US could meet the electricity needs of the entire nation, if solar energy were converted to electricity at 10% efficiency.  There's a lot of desert in the Southwest, and we're never going to run out of sunshine.  A similar argument can be made about the wind in the Dakotas plus Texas, Kansas, and Montana, although wind could only meet our electricity needs 2 or 3 times over, rather than thousands of times over, as is the case for solar.  Clearly this does not mean that we have to or will meet all our energy needs with either solar or wind.  
  3. Just because you have something does not mean it's a good idea to use it.  Saying we need to use our coal reserves is like a diabetic saying he has a cupboard full of candy bars, and he needs to eat them.
  4. Even if all the emissions from coal are somehow managed, using coal will continue to have serious environmental impact from mining, which will only increase as we mine more and more challenging deposits.

Last week, I heard Howard Herzog of Massachusetts Institute of Technology speak on the economics of Carbon Capture and Sequestration (CCS).  Dr. Herzog  is one of the authors of The Future of Coal, a report that advocates greater research into CCS "because it allows significant reduction in CO2 emissions while allowing coal to meet future energy needs."  Nevertheless, he provides some excellent numbers on the costs of CO2 Capture and Storage, and the remainder of this article will look at those numbers, that most "clean coal" advocates don't usually like to talk about.

Research

Dr. Herzog was clear that CCS is still in the research stage, and needs considerably more research to become commercially viable (even if there were a regulatory framework to induce power plant owners to install CCS equipment on their new coal plants.)  How much will it cost?  $1 billion a year for in excess of a decade, he said in response to an audience question.  He also noted that he has since inflated all the costs from the MIT study by around 50% because of the extraordinary rise in the costs of materials and labor in the two years since the study was published.

The $1 billion dollar a year research price tag is slightly higher than that called for by another interdisciplinary MIT Study, The Future of Geothermal Energy over a similar period.  This study found that with a combined public/private investment of about $800 million to $1 billion over a 15-year period, EGS technology could be deployed commercially on a timescale that would produce more than 100,000 MWe or 100 GWe of new capacity by 2050. This amount is less than the cost of a single, new-generation, clean-coal power plant without CCS (300-500 MWe.)  

Cost of Capture and Storage

Dr. Herzog presented estimates of the expected efficiency losses for coal plants that would be needed to sequester 90% of the carbon emitted.  Depending on the technology choices, the parasitic energy requirements of CO2 capture and compression would be between 19% (IGCC with CCS) and 24% (Pulverized coal plant with Amine capture) of the power produced.  In addition to raising the cost of electricity from coal, CCS would therefore also effectively reduce the amount of coal available to meet our electricity needs by at least one fifth, transforming the 100 years of coal reserves we have at current rates of use into only 80 years or less of reserves.  This would also magnify the effect of coal prices rises on the cost of electricity by a similar factor.  Unless we reduce our demand for coal, price rises will be inevitable as producers move to harder-to-extract reserves.  According to the Energy Information Administration, the price of coal for electricity increased from a relatively stable price of slightly less than $30 per metric ton before 2004 to over $38 per metric ton in 2006.  Most other countries saw similar increases.

By adding CCS to a coal plant, Dr. Herzog expects the levelized cost of energy (LCoE) from coal would increase between 36% and 61%.  If the technology becomes mature, he expects it to add 2-3 cents (2005$) per kWh to the price of electricity from coal.  For comparison, according to the geothermal study referenced earlier, even low grade geothermal sites such as might be built in New Hampshire (a state with geothermal resources previously considered negligible) would have a  LCoE of between 7 and 10 cents per kWh.  High grade sites such as Kelseyville in California would have an LCoE of around 3-4 cents per kWh, comparable with the cost of CCS alone.

Some costs of CCS which Dr. Herzog did not analyze were the costs of getting the CO2 to a location suitable for sequestration, the costs of long term stewardship of the CO2 reservoir, and pipeline transport of CO2 to the reservoir.  Given the uncertainty about how a carbon sequestration industry might look, it is currently very difficult to say what they might be.  Over the long term, who will take responsibility for ensuring that sequestered carbon stays where we put it?  How likely is the emergence of a dedicated NUMBY (Not Under My Back Yard) movement?  CO2 is not as dangerous as the radioactive waste that the United States still lacks a suitable place to store, but it still can have toxic effects on marine life.

Conclusion

We will have to produce our electricity without coal at some point, either because we choose to in order to avoid further global warming, or because we simply run out of coal.  Given the uncertainties about carbon sequestration, and the certainties about the cost of performing sequestration, it makes sense to spend our limited research dollars on technologies which are likely to be more benign on the environment.  Enhanced geothermal has the potential to provide significant baseload power, while Concentrating Solar Power with thermal storage has the potential to power our entire nation many times over with both peaking and baseload power.   Concentrating Solar Power with storage has been successfully demonstrated, and requires no mining for a limited fuel supply, while wind is already cheaper than IGCC even before adding the costs of capture and sequestration.. 

 transelect.PNG

Source: Trans-Elect, LLC, testimony before the Colorado Public Utilities Commission (July 24, 2007). PTC=Production Tax Credit.

Perhaps coal with CCS will be part of the route we take on the road to a clean energy supply.  However, it is far from the only route to take, and given the uncertainties and ongoing harmful effects of mining for coal regardless of what happens to the emissions, there are many other candidates more deserving of limited research dollars.  The same holds true for our investment dollars.

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.

April 18, 2007

Greenhouse Gas Management Stocks: Key To A Real Climate Change Portfolio?

There has been a lot written lately about how to turn climate change into an investment opportunity, including on this site. Not all of it is, however, especially useful or relevant. In the worst cases, commentators have ascribed the 'climate change investment opportunity' label to just about any industry out there, indiscriminate of whether or not there really is a strong and direct connection.

If you are seriously interested in playing the climate story, you should stay focused on near and medium term opportunities with real and tangible links to what is currently going on with the climate file. In plain English, this means that if you invest your money in a boat maker tomorrow because you expect sea levels to rise at some point in the future, you may not be putting your money to its best possible use.

Regulation: Where Real Climate Opportunities Lay

The most immediate investment opportunities related to climate change are connected to regulatory developments such as the EU Emissions Trading Scheme (ETS), the Regional Greenhouse Gas Initiative (RGGI) and California's AB 32 (PDF document). These regulatory initiatives all have the same intent: to cap emissions of greenhouse gases (GHG) across a range of industrial sectors. As such, they will create demand for certain technologies and solutions for which there would otherwise be no market.

We have discussed opportunities linked to carbon finance on several occasions in the past. Today, I want to speak about another area that is sure to get a boost for climate change legislation: end-of-pipe technologies to control emissions of GHG.

There are 2 main approaches to end-of-pipe GHG control: (1) carbon capture and storage (CCS) and (2) technologies seeking to transform the CO2 contained in flue gas into an innocuous - or even useful - commodity. The former has been in the news a lot over the past few months but the latter has pretty much fallen below the radar, mostly because these technologies are only just emerging and investing in them at this stage can be considered speculative. This is what I want to discuss today, and will leave CCS for another post.

Managing GHG Emissions: No Need to Re-invent the Wheel

Most of our readers will no doubt be familiar with just how prevalent coal is in power generation today, and how this role is not forecasted to diminish over the next 2 decades (see also Tom's excellent article on investing in peak coal published a few days ago). Coal is the 'dirtiest' of fossil fuels and burning it to make electricity is often blamed for contributing significantly to global GHG emissions.

A number of companies are now working to find ways to make coal 'cleaner' by removing carbon dioxide from flue gas and transforming it into something either neutral or useful, rather than burying underground as is the case with CCS. Such solutions can be applied to any industrial process that entails a pipe spewing out GHG, but the most immediate opportunities are definitely related to coal-based power generation.

The primary appeal of end-of-pipe solutions is that they don't entail 're-inventing the wheel', meaning that they can be appended to existing technologies relatively painlessly without the need to overhaul entire operations. End-of-pipe solutions for environmental control typically form a bridge between existing and emerging technologies that might be too risky for more conservative players such as utilities to get involved with.

While these GHG management solutions are sure to add to the cost of producing power and might not get uptake under a business-as-usual scenario, the economics will be different once coal-intensive power producers are forced to internalize the costs of emitting carbon dioxide.

Four Stocks With Exposure to This Space

I know of 4 companies currently active in this area:

NRG Energy Inc (NYSE:NRG)

NRG is primarily engaged in wholesale power generation and in the development, construction, and operation of power generation facilities. The company has significant exposure (PDF document) to coal as a generation fuel, and so could be a prime beneficiary of technological developments in this area.

NRG is currently involved, with a privately-held partner called GreenFuel Technologies Corporation, in testing a process that entails turning carbon dioxide from flue gas into algae, which can then be turned into biofuel or high-value animal feed supplements. Both can be commercialized and turned into revenue streams.

While this is unlikely to represent a material development for NRG in the very near term, successful testing could provide the company with an important competitive advantage should strict CO2 caps be imposed at the federal level. This could thus be a safer way to play this space, especially if you're also looking for exposure to utilities.


CO2 Solutions (TSE: CST.V)

According to its website, CO2 Solutions "has developed a biological process allowing for the transformation of carbon dioxide (CO2) into bicarbonate, which is an environmentally safe product. This process takes place inside a bioreactor with the help of an enzyme that accelerates the transformation of CO2 into bicarbonate in an aqueous environment.". The company was recently profiled in Technology Review.

CO2 Solutions signed, in mid-March, a licensing option and R&D cost-sharing agreement with Babcock & Wilcox, a large provider of boilers and other components for coal-fired power plants. This agreement will, in effect, allow CO2 Solutions to 'move out' of the lab and test the scalability of its technology. The exclusive license part could, however, limit the company's ability to commercialize its technology as fast as it might want to should tests prove successful.

Babcock & Wilcox is a unit of McDermott International, Inc. (NYSE:MDR), and this technology can be considered a direct competitor to NRG's.



Greenshift Corporation (OTC BB:GSHF.OB)

The angle here is Greenshift's recent merger with GS Carbon Corporation. GS Carbon Corporation currently has patents pending for what it calls "decarbonization technologies".

From rapidly skimming over its website, it does not appear that GS Carbon Corporation is anywhere near ready to commercialize any of its technologies, and I couldn't find anything on strategic partnerships with large players. This is very much a spec play.


CO2 Tech Ltd. (OTC:CTTD.PK)

In its own words: "CO2Tech engineers, manufactures, installs and services the optimum system for its clients' needs implementing a total systems approach to anti-global warming. The company integrates the most precise, sophisticated testing equipment for performance evaluation and monitoring, allowing its customers to comply with ever-changing, stringent environmental regulations."

The company offers a range of pollution control solutions. CO2 Tech was recently hired to provide environmental assessment services for the Sakhalin II project in Siberia, to help Romania devise a Kyoto compliance program, and to provide environmental assessment services for a conservancy project in Guyana.

It does not appear that CO2 Tech has, so far, been able to generate much interest with its GHG management technologies. Moreover, while based in London, CO2 Tech only has a Pink Sheets listing in the US. Given the popularity of London's AIM with emerging environmental tech companies because of its very lax listing requirements, it is somewhat worrying that CO2 Tech would choose to go with the Pink Sheets. This is definitely one that I would not touch.

To Conclude

Quite clearly, the GHG management technology space is in its infancy, and is thus very much in a speculative phase of its evolution. Nevertheless, this is an industry worth keeping an eye on, in my view, for 2 main reasons:

(a) Coal and other fossil fuels will not be phased out of power production overnight, simply because there are no cost-effective alternatives in the near and medium terms

(b) Regulatory developments in industrialized countries in the near term and in certain dominant emerging markets such as India and China in the medium term will 'create' demand for end-of-pipe solutions to GHG emissions

If our readers know of other players involved in this industry, or have any insight on the companies discussed above, we would very interested to hear about it.


DISCLOSURE: The author does not have any position in any of the stocks discussed above.


Site Sponsors





Oil and Gas



Search This Site


Share Us






Subscribe to this Blog

Enter your email address:

Delivered by FeedBurner


Subscribe by RSS Feed



Certifications and Site Mentions


New York Times

Wall Street Journal





USA Today

Forbes

The Scientist

USA Today

Seeking Alpha Certified

Twitter Updates