Joseph McCabe

Many people ask me, “which CIGS company is going to emerge as winner in the race towards high efficiency thin film PV’s? To provide an enlightened perspective to the question, some historical perspectives are needed.

First Solar (FSLR) has helped the Thin Film PV Industry by proving that respectable solar to electric area efficiencies can be achieved in a low cost manufacturing processes, with respectable performance over time. First Solar’s technology is cadmium telluride (CdTe) on glass. Previously, amorphous silicon was the thin film leader, with the highest commercially available thin film area efficiencies; currently they have a challenge in today’s low cost, higher efficiency, crystalline PV market. CIGS (copper, indium, gallium and selenium) currently holds the world efficiency record for a single layer thin film PV deposition in a laboratory setting. The promise of CIGS is that it can surpass the commercial manufacturing efficiency of the other thin film technologies in the near term.

In a recent presentation at Intersolar in San Francisco by David Eaglesham of First Solar showed their CapEx (the capital expense for the plant and manufacturing equipment) at $0.75/W, roadmapping (RM, future expected levels) to $0.65/W; manufacturing (mfg) costs (including depreciation and recycling) currently at $0.81/W, RM to $0.52/W; and current area efficiencies at 11%, RM to 14%. So a CIGS-on-glass company will need to compete with these current and future benchmarks to be at least competitive with First Solar. Flexible CIGS might have some greater market opportunities discussed below.

A second order performance factor in the PV technology race is temperature correction. PV is a direct energy conversion technology, which works better at lower temperatures. As PV modules are integrated into conventional building materials such as single ply roofing, standing seam metal roofing, or automobile surfaces, the modules will become hotter, and thus perform less than rack mounted PV modules which have air movement on the back sides. The moral of the finer system level details is that annual performance can vary with the various manufacturers’ module technology and should be a consideration when comparing various companies and technologies. Perhaps this can be a topic of a future altenergystocks article.

There is an additional economic metric which is required of PV systems, called balance of systems costs (BOS). Most PV on glass has similar BOS, between $1 and $3 a watt system level installation costs. The lower the module efficiency, the higher the area related BOS costs. Comparing 10% and 20% efficient modules both with area BOS of $2/W, the lower efficiency module has twice the costs because it uses twice the area. As the price of modules is reduced, the BOS becomes a more dominant factor in the installed system costs. A Deutsche Bank (DB) report expresses the concepts better than can be accomplished here. {July 9, 2007, DB “Technology and economics; thin films and crystalline silicon”} The costs are no longer valid, but the technology discussions are valuable. All manufacturers are being judged on their products utilization in a system that provides long term performance, expressed in the levelized cost of energy from the lifetime costs of the system.

From the previously mentioned DB report: “CIGS on flexible substrates offers a potential low cost, higher conversion efficiency modules, but has yet to enter commercial production.” And “We believe that flexible substrate CIGS based modules could have excellent applicability for building integrated PV (BIPV) applications as well as other applications like consumer electronics, and portable devices.” Be looking for the flexible CIGS products which have both TUV and UL certifications indicating successful completion of both long-term performance and safety testing.

Some CIGS on glass companies have been around for a long time, for example Solar Frontiers (Formerly Showa Shell, formally Shell, formally Siemens…). They make a beautiful, monolithic black glass modules with respectable performance, perfect for a vertical building integration application. Other companies are newer, some deposit CIGS on glass and others have flexible products and one coats the inside of glass tubes with CIGS. For CIGS, there is an inherent CapEx embedded in the deposition process. Current and RM CapEx should be considered for the various sputtering, electrodepositing, co-evaporation-in-vacuum or sintering processes used in CIGS manufacturing when comparing the various company technologies.

In summary, look for low manufacturing and capital equipment costs for a high efficiency CIGS technology which can reduce balance of systems costs. The winner in the race towards higher efficiency CIGS thin film PV systems will be the company that can provide long term confidence in their product, at system level costs similar or lower than First Solar, and solid business plan execution.

Joseph McCabe is a solar industry veteran 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. Joe can be reached at energy [no space] ideas at gmail dotcom.

Posted by Guest Contributor at 05:52 PM | Permalink | Comments (0)

Tom Konrad, CFA

One of the best things about Solar Photovoltaics (PV) is that they can be installed close to load but need not take up open space.  Now public company Envision specializes on solar shading for parking lots that not only produces power, but also shade where it's needed most.

I lived in Tucson, Arizona for two years in the early 2000s.  Like everyone who lives in the desert Southwest for any length of time, I became very aware of what would happen if I left my car in an open parking lot for more than ten minutes: it would get very, very hot.   Without a windscreen sunshade, you were liable to burn your hands on the steering wheel if you were not wearing gloves, but even with it, the car interior would feel like an oven.  It would take 5-10 minutes of the air conditioner running at full blast just to bring the temperature down to a bearable 90° F (32C).  If you don't consider 90 degrees bearable, don't move to Tucson, or get used to only going outdoors before the sun is up, at least in the summer.

Needless to say, Tuscon residents become adept at spotting one bit of shade in a parking lot from a scraggly mesquite or palo verde.  These spots of shade are at a premium because such desert trees are small and usually only cast enough shade for a single parking spot at most.

With that experience in mind, the value of Envision Solar's (EVSI.OB) photovoltaic parking lot structures is quite clear.



Solar Trees

When it comes to solar, I much prefer developers to solar manufacturers.  Solar manufacturers face the prospect of ever declining prices for their product and a constant need for technological innovation to keep up in a fierce competitive landscape.  Solar project developers, on the other hand, have strong public support and interest in their product, combined with rising prices for the electricity they sell and declining prices for the solar panels they buy.  They also have much lower fixed costs, meaning that while the threat of new entrants will keep them from ever becoming wildly profitable, they also do not have huge capital investments that can lock them in if building solar installations becomes unprofitable.

The low barriers to entry for solar developers mean that strong product differentiation is valuable. 

Envision has developed parking lot structures they call "Solar Trees" for attractively shading parking lots while producing solar electricity.  The company promotes their products as "addressing the unused millions of acres of parking spaces."  I there's actually more too it than that, because in the sunnier parts of the country, there is value in both the electricity and in the shade.  In an extremely sunny city such as Tucson, Phoenix, or Las Vegas, I would expect that most shoppers would be more interested in visiting a store where they expected to get a shaded parking space, since almost all shady parking spaces in Tucson are almost always already taken.

The idea of solar on parking lot shades is not a new one.  I remember seeing one in the parking lot of an Austin Library Branch in 2000.  But earlier parking lot solar arrays were bespoke designs created anew for each individual project.  With a small number of flexible designs, Envision can not only keep engineering costs down, but also talk with some credibility about the cost and performance of previous arrays they have installed over nine MW of projects for clients such as Dell.  They've also teamed up with Bright Automotive to combine the solar parking structures (which require electric service) with electric vehicle charging stations. Along with the ready-to-build, relatively attractive designs, partners and previous clients like these could establish Envision as the go-to firm for parking lot solar.

EVSI Stock

Envision Solar International, Inc. stock started trading on the Over the Counter market under the symbol OTCBB:EVSI on May 3 through a reverse merger with shell company Casita Enterprises.

I usually like to wait a year or two for a newly listed company to develop a track record as a public company to help me assess the company's financial strength and management effectiveness.  Envision has not yet begun publishing financial statements as the newly merged entity.   I took a few minutes to look over their electronic investor kit, in the hope of finding some hard numbers.  Unfortunately, all the kit contains is an investor presentation without any hard numbers as to assets, revenues, debt, and income.  Until such information is available, I can't say if the stock is worth $0.04, $0.365 (the price it closed at on May 3), or $3.65. 

It's an interesting company, and I'll probably take another look at it when there is more to go on.  For now, the stock is a pig in a poke.

DISCLOSURE: No position.

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

Posted by Tom Konrad at 10:45 AM | Permalink | Comments (1)

J. Peter Lynch

I have been reading your articles for years and always thought your stock market related insight was interesting and helpful for me as an investor. At the current time I am worried about the market and am wondering where you think the market is currently, given the major run up we have had in the past year. I would also be curious about your view on solar stocks and what you see for them.

-- Claude M., France.

Claude, great questions.  You are really going to make me think about this one. Sorry for the long answer but the question really got me going.

Every step of the way since April of 2009 we have heard the popular financial press and the frenetic cable pundits tell us a litany of things to worry about - foreclosures, unemployment, the growing deficit etc. and it still continues today.

However, all along this troubled path the market has steadily moved up, climbing a classic “wall of worry” with all the major averages advancing significantly from the March 2009 lows - S&P 500 +77%, Dow Jones +68% and Nasdaq + 94%.

These are very strong numbers, by any historical measure and the logical conclusion to draw is that the market must be close to a top. I certainly understand that and in fact, personally “feel” (read that as “emotion”) that this is the case. But what is important to understand is not your or my emotions or what we think “should” be, but what is. Sounds simple and obvious, but believe me, it is not.

As I stated on 3-17-2009, a few days after the market bottomed and this bull market started:

I have been a student of the market since 1975 and I can assure you that there is plenty of FEAR out there now. Nothing is 100% for sure, as we all know. But I think we are either at a significant bottom or very close to it. Everything is so “oversold” at this time, that I think the worst case is that we get a significant rally in what could still be a bear market.

Once again, sounds obvious with all the historical data available. But how many people recognized this and had the courage and discipline to jump in at that time?

Currently the market is performing in a very orderly manner and the underlying technical measurements are sound and are still pointing to a higher market with the major longer term uptrend still intact, despite all of the worries and other concerns.  It is also true that the market is currently at a HIGHER relative level of risk (overbought short term) and things could change quickly.  But the market has done this before – back in late 2003 and early 2004 the market stayed at a comparable high level of risk for extended periods of time climbing another classic “wall of worry.”

At this time, some additional relevant historical data is worth considering. Since the beginning of this new bull market (March 2009) the stock market has had two meaningful corrections of greater than 5% and less than 10% (June – July 2009 and January-February 2010) and no corrections more than 10%.  This situation is historically a sign of a healthy unfolding stock market.   A market that goes “straight” up with no corrections is a dangerous situation not a healthy situation. 

As I said, the market has not had a correction of 10% or greater since March of 2009.  Why is that significant?  It is significant because there has never been a bull market in the last 80 years that has not had at least one 10% correction before it topped out (Credit: Invest Tech Research). As a result, it is likely (from an historical statistical point of view) that we will have at least one 10% correction and then another move upward before the end of this bull market.  Historically a lot of money has been left on the table after the first 10% correction, if you sold out too soon and did not give the market a chance to run its course.

Where we are now?  Somewhere toward the end of Stage 2!

I always think that a picture can tell a better story than hundreds (or thousands) of words, so take a look at the diagram below.  This is a snap shot of the classic stock market pattern, how it “usually” unfolds and where I think we are now on the curve.

These stages are the four classic stages of a typical market cycle that generally moves from fear to greed and back.

Stage 1 - Capitulation:  This was late 2008 and early 2009. The world as we know it is ending and all was lost. If you go back and look at the “headline hysteria” back then this would not seem far from the truth and the general consensus at the time.

Stage 2 – Doubt and Skepticism:  This is the period we are in currently, climbing a wall of worry. The market has been moving up for over a year and still most people do not believe that this can be real. This psychological fact is reflected in the various measures of investor sentiment according to the American Association of Individual Investors, which are currently approaching levels that are historically seen at correction or market tops. It is a scary time, but the main trend is still intact and can remain intact for quite some time, even at these levels. But a watchful eye is necessary at this time. Risk is higher, but opportunity may still be around until we see indications of entering stage 3.

Stage 3 – Euphoria:  Here is where the greed factor and fear of being left behind starts to come into play and usually after one last correction the market takes off on its last glorious run up, taking the general public with it. This always ends the same way. After this last run up there are no more buyers, the professionals are sellers and the public is left holding the bag with only hope to cling to. During this stage you will start to see very positive headlines and the pundits pointing to a bright future.

Stage 4 – Hope followed by Fear:  As the market begins to roll over and start down the slopes of hope investors keeping hoping that it will come back. Despite the clearly deteriorating underlying technical factors, people just do not want to believe (i.e. emotional decision) that it is happening.  They seem to think “this time it will be different.”  But alas, that is very seldom, if ever, true and the hope gives way to fear and finally to capitulation when investors dump all the rest of their stock (Feb-March 2009).

My advice to you is do not lose heart. I have been an investor for over 35 years and I know all of the above perfectly. But that does not mean that I do what I say and what I know from experience.  It is a constant battle and the best you can do is be aware of it, learn from it and try to develop an unemotional method to deal with it. It is an amazing 4-stage phenomenon (cycle) and the good news is that it has consistently repeated over the years and I would expect will continue to do so. If you are NOT invested now, I would not start now and I would at least wait for a pullback from current over-bought conditions.

Solar Stocks

Solar stocks did great for the first 12 months of the current bull market (3/09 – 3/10) — up an average of 124%. But as I mentioned in an earlier article the vast majority of that gain was centered in a 8 Chinese stocks — CSIG, CSUN, JASO, LDK, SOLF, STP, TSL and YGE — which were up an amazing 267.96% on average, certainly the major reason that the group as a whole was up 124%. Without the Chinese companies the solar group would have actually underperformed the major averages for that 12-month period.

 Looking a bit deeper, more than 50% of the 267.96% gain was from 2 stocks — CSIG and TSL.  This is an extreme case of narrowing (2 of 21) leadership in a sector and is usually a bad sign for the sector. Also the fact that all of these leaders were Chinese companies indicates to me that the trend is clearly to lowest cost.  Good for the Chinese companies, maybe not so good for U.S. and European companies.

Looking at the first quarter of 2010 the numbers reflect this narrowing with solar sector underperforming the general market significantly.

Solar Stock Performance  First Quarter 2010
All Solar Stocks Average		-9.89%
Dow Jones		+4.11%
S&P 500		+4.87%
NASDAQ		+5.68%

So what does this mean for the investor interested in the solar market sector?

 It means that the industry is starting another transition phase in its long-term growth.  This is a period of “lowest cost wins” and of industry wide profit margin compression. It means that because of these factors and probably a host of other factors (lower natural gas prices, uncertainly of government policy etc.) that the solar segment has been a lagging market sector and probably not one that is optimal at this time for new investment. Especially given the higher risk level that the general market is at now.

It also means, in my opinion, that the U.S. has to wake up and start to move forward now (instead of our usual approach of thinking about having a meeting to discuss planning to do something maybe sometime in the future when all the stars are perfectly aligned — i.e. all talk and very little action of any significance) with a strategy to compete with our lower cost Chinese friends. I do not think we can beat them at their own game – lowest cost via cheap labor.

What the U.S has to do now is to do what we do best — innovate.  This is the time for investment and focus on new technologies and “out of the box” thinking. This is a time to increase focus, investment and activity rather than slow down and wait for someone else to do something that we have historically always been the best at doing. The ball is in our court.

Mr. Lynch has worked, for 33 years as a Wall Street security analyst, an independent security analyst an investment banker and private investor in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977 and is regarded as an expert in this field. He was the contributing editor for 17 years to the Photovoltaic Insider Report, the leading publication in PV that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. He is currently a private investor and advisor to a number of companies. He can be reached via e-mail at: SOLARJPL@aol.com. Please visit his website for the promotion of solar energy – www.sunseries.net.

Posted by Guest Contributor at 08:18 PM | Permalink | Comments (2)

Tom Konrad, CFA

Prospective investors in solar manufacturers should consider the competitive forces that constrain the industry's long-term profitability.

In the first part of this series, I showed how a competitive analysis of the corn ethanol industry in early 2007 illuminated the forces that soon caused ethanol company stock prices to collapse in late 2007.  I also implied that the solar cell manufacturers, including industry leaders such as Sunpower (SPWRA) and First Solar (FSLR) are vulnerable to these forces and may not be able to maintain high returns on capital over the long term.

I'm not predicting that solar stocks will collapse later this year, as happened with ethanol stocks in 2007.  The dramatic timing of my article on ethanol companies with the quick collapse of ethanol stocks was coincidental.  Competitive analysis of an industry can illuminate long term trends, but short term stock prices often have very little to do with long term trends or underlying economics.  Given that solar stocks have fallen considerably over the last two years (see chart), a further drastic decline seems unlikely.

Solar ETFs KWT and TAN compared to market indexes Mar 2008 to Feb 2010.

 
Yet a recovery in solar stock prices that might bring solar indexes back into line with general market indexes is also unlikely, because the intense competition in the sector restrains the underlying profitability relative to companies in sectors with average levels of competition.

Returning to Micheal Porter's classic competitive forces model, each of the five forces are each composed of a number of factors.  The more of these factors are above average, the greater the overall competitive contribution of that force.  In the table below, I list above-average factors which contribute to competitiveness, and below average factors, which reduce competitiveness, and the resulting overall competition for each force.

Force	Factors increasing competition	Factors decreasing competition	Overall Competition
Industry rivalry	Large number of firms, High fixed costs, low switching costs, low product differentiation, specialized equipment, diverse companies	High market growth, nonperishable product	High
Threat of Substitutes	Electricity can be produced in may ways, and is usually more conveniently and cheaply available through the grid	Government requirements or subsidies for solar power	High
Buyer Power	Product is standardized	Many diverse buyers	Average
Supplier Power	Suppliers are concentrated (but becoming less so)	Commodity inputs, customers weak	Average to Low
Threat of new entrants	Constant innovation in solar technology, ability to purchase standardized manufacturing equipment, globally traded product, low minimum economy of scale, little brand franchise	Asset specificity	Very high

The key factors keeping competition high are the strong threat of substitutes and rapid innovation bringing new entrants into the industry.  Electricity from other sources such as fossil fuels or other renewable generation is functionally indistinguishable from solar electricity, and may be available at night or on cloudy days.  Hence there are not only readily available substitutes to solar panels, they are often more convenient to use.

I brought up the specter of innovation in solar technology as a risk factor for solar stocks in my recent article on risks for alternative energy investors.  The great hope for the solar industry is that constant innovation will quickly bring down costs to the point where solar power is cost-competitive with electricity from the grid, or grid parity.  But that same innovation, if it comes from outside the current industry, will undermine the economics of manufacturers using current technology.  The advent of First Solar (FSLR) is a case in point.  Because First Solar can produce its CdTe technology at much lower cost per peak watt than conventional silicon manufacturers are able to match, First Solar is able to expand its market share at the expense of other manufacturers while maintaining strong profitability. 

But First Solar may only be in its current privileged position for a few years: other thin-film technologies such as Copper-Indium-Galium-diSelenide (Ascent (ASTI), DayStar (DSTI), and many private companies) or amorphous Silicon (Applied Materials (AMAT), Sharp (SHCAY.PK) and many others.)  Beyond these up and coming thin-film technologies, there is a constant stream of new innovations such as organic PV and PV from abundant materials (IBM) that could potentially be manufactured at much lower cost than current thin film technologies.

There are also non-photovoltaic competitors.  Bloom Energy is trying to present itself as an alternative to solar, but not very credibly.  Concentrating Solar Thermal Power (CSP) has long had a cost advantage for large scale farms, and has the additional advantage of producing on-demand power because it is simple to integrate with inexpensive thermal storage.  PV is not safe from encroaching thermal technologies even at the residential level.  One potential challenger is startup Cool Energy.  Cool Energy's combined heat and power system uses an array of evacuated solar thermal collectors to provide space heating in cold months, and then uses a Stirling engine to convert excess heat in warmer months into baseload or on-demand electricity. 

Conclusion

Because of rapidly falling costs and a vast solar resource, solar PV is likely to produce a significant and growing portion of our electricity in years to come.  But this growth trend is an industry trend, and the growth could easily come from new competitors at the expense of current 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.

Posted by Tom Konrad at 01:07 PM | Permalink | Comments (1)

How Solar PV is like Ethanol

Tom Konrad, CFA

High levels of competition in the the solar photovoltaic (PV) industry mean that buy-and-hold investors should look elsewhere.

In May 2007, I published a competitive analysis of the corn Ethanol industry based on Michael Porter's classic Five Competitive Forces model.  At the time, Ethanol stocks were flying high, but my conclusion was that "the prospective ethanol investor should be very careful about investing in corn ethanol producers at random."  If anything, I understated the case.

This chart shows three ethanol stocks that have survived since 2007.  As survivors, they are among the best performers in the industry; several others declared bankruptcy.

Corn ethanol is not a great business to be in; it's too competitive.  If you buy assets at the right price, you can do well, but it's all about timing.  A passive buy-and-hold strategy will  under-perform the same type of strategy in a less competitive industry.  Companies in less competitive industries can maintain higher returns on capital for longer periods.

Solar Manufacturers

It's not a secret that I'm no fan of investing in solar stocks, although I understand why enthusiasts are seduced by the sector.  Unlike corn ethanol, solar PV will likely be a significant part of any future sustainable energy mix, but that is not the same thing as saying that today's solar stocks will be good long-term investments.  Americans watch more television today than ever before, but were network television stations a good investment over the last 20 years?  No, because new entrants came in and stole their audience: the industry has become much more competitive than it was 20 years ago.

Thinking that todays solar stocks will do poorly over the long term is not the same as thinking that the solar industry will flop.  Rather, it is the belief that increased competition will drive down returns at existing companies.  This will be great for buyers of PV panels, but not so great for owners of PV stocks.

Porter's five competitive forces model of competion bears this out, just as it did when I analyzed the corn Ethaonol Industry in 2007.  The next article in this series will take a look at the five forces, and how they apply to solar PV manufacturers.

DISCLOSURE: None.

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

Posted by Tom Konrad at 10:27 AM | Permalink | Comments (1)

Tom Konrad CFA

Green energy experts accept that solar panels are one of the least cost effective ways to reduce your carbon footprint.  Nevertheless, many buy solar stocks.  They should rethink their investment strategies.

I recently spoke on "Stock Selection in the Era of Peak Oil and Climate Change" at the ASPO 2009 International Peak Oil Conference.  Whenever green energy enthusiasts find out that I analyze green energy stocks professionally, they react in one of two ways.  Many want to know my top stock pick in general (New Flyer Industries NFI-UN.TO/NFYIF.PK) or in their favorite sector (see below.)    Others tell me about their own green energy investments.  

My guess is that the latter group hopes I will stamp some sort of stock guru seal of approval on their portfolio.  If so, they usually go away disappointed.  This is not only because I have not yet been issued with a special seal by the stock guru union.  It's also because, even if I had such a stamp of approval, I would seldom need to use it. 

I find that even industry experts who know more than I do about green energy fail to apply that knowledge when it comes to investing.  Enthusiastic amateurs are often worse.  The typical green stock holdings of a brilliant cleantech engineer are a couple solar stocks, like First Solar (FSLR) and Sunpower (SPWR.)  People who will lecture tirelessly on the need to improve the efficiency of buildings before slapping solar on the roof don't walk the walk when it comes to their investment portfolios.  Instead, they take whatever portfolio they have, slap on a couple solar companies.  They forget all about the efficiency stocks and other, more cost-effective renewable options such as wind, geothermal, and biomass that they would recommend if they were asked about what we needed to decarbonize the economy.

Invest In What You Know, Use What You Know

To be fair, none of these people are professional investors. They cannot be expected to make the same sort of decisions that a professional would.  On the other hand, many are extremely knowledgeable when it comes to green energy.  The old adage "Invest in what you know" does not mean that a pilot should buy airlines.  It means that that a pilot will have more knowledge of the airline industry than an industry outsider, and my be able to use this knowledge to either choose between well-run and poorly run companies, or to have a better understanding of industry cycles, and buy when industry fortunes are on the upswing, and sell before a decline in profitability.  The key to successful investing is not depth of knowledge, but knowledge that other market participants lack.

Likewise, an energy rater will know that efficiency improvements will deliver much faster paybacks than solar PV.  Yet, based on my informal survey, energy raters are more likely to own a solar stock than an energy efficiency stock  Dedicated greens know taking mass transit or biking to work is much greener than any private car, even an electric one.  Yet these same greens are more likely to have investments in electric vehicles or battery stocks than investments in mass transit or bicycle companies.

"But I Don't Know any Energy Efficiency Stocks"

When I ask these people why their portfolios don't match their lives, they usually tell me they don't know what stocks to buy.  Ignoring the fact that people who aren't willing to do several hours of research for every stock they own should not be venturing into the Wild West of individual stock investing (don't say I didn't warn you) here are a few of my favorite investments in each of the major green energy sectors.

Sector	Investments	Related Articles
Energy Efficiency	Waterfurnace, Cree, Flir	Heat Pumps, LEDs, Infrared
Clean Transportation	PTRP, New Flyer	ETFs, New Flyer
Wind	FAN	Wind ETF, ETFs,
Transmission/Grid	Quanta Services, ABB, General Cable	Transmission shopping list
Batteries / Energy Storage	Enersys, Exide, A123	Irrational Battery Investments
Solar	Solar Millennium, Satcon	Solar Shopping List
Geothermal	Ormat	Geothermal & the ARRA
Smart Grid	Echelon, Telvent	Smart Grid Shopping List
Biomass/Biofuel	Aracruz, Plum Creek, Potlatch	Forestry Stocks and ETFs

Note that this is not intended as a list of companies to buy now.  I currently consider most stocks to be overvalued, and am waiting for a market decline before buying again.  But, if you have an urge to buy a glamorous solar stock today, or are reading this article after the market has descended to more reasonable valuations, I hope you'll use this list to buy stocks in the sectors you know are greener, even if they're not as sexy.

The Right Questions

Using your knowledge from the real world to help choose your investments is another variation on the theme of Asking the Right Investment Questions I recently discussed.  The easiest way to gain an advantage over other market participants is to zig when emotional investors zag.  Solar has a lot of appeal because it lets anyone with a rooftop generate electricity, and emotional green energy investors tend to buy solar stocks.

It's difficult to underestimate the emotional appeal of the personal energy independence photovoltaics seem to promise.  Nevertheless, few rooftop solar installations do add to our personal energy security: They are grid-tied, and stop producing power whenever the grid goes down.  While solar panels can be a good investments with sufficient subsidies and tax breaks, or where electricity is extremely expensive, government subsidies and small markets with expensive electricity are not good foundations for the explosive growth that solar stock speculators are betting on.  

Financial modeling shows that solar will only be a significant part of the most effective carbon mitigation strategies if prices fall quickly and dramatically.  Such cost improvements are possible, but will come with the risk of extreme disruption for the current crop of solar stocks.

Investors swept up in the emotional appeal of solar stocks are providing those of us who pay close attention to the economics of green energy an opportunity to profit at their expense.  Taking advantage of the opportunity is not only likely to benefit the investor, it will also help the companies we do invest in raise capital.

DISCLOSURE: Long WFFIF, CREE, NFYIF, PWR, ABB, AXPW, ORA, ELON, TLVT.

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

Posted by Tom Konrad at 12:05 PM | Permalink | Comments (2) | TrackBacks (0)

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.

Tom Konrad, Ph.D., CFA

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.

Other 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.

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).

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.

Posted by Tom Konrad at 02:17 PM | Permalink | Comments (0)

Charles Morand

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



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

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

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

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

Wind Power

By Mark Thompson, Tiptree Investments ltd

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

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

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

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

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

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

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

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

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

Solar Power          

By Matthias Fawer, Bank Sarasin

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

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

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

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

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

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

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

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

DISCLOSURE: None

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

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

Charles Morand

A couple of weeks ago, I noted the importance of examining parameters other than module costs when gauging the economic competitiveness of solar PV energy. I noted how multiple factors influence the levelized cost of energy produced by solar PV systems, and thus its relative cost position on the grid. Nothing new here.  

However, besides standard test conditions (STC) conversion efficiency, or nameplate conversion efficiency, public data on parameters other than cost per watt-peak is not always easy to come by. That's why I found reading "Potential of photovoltaic systems in countries with high solar irradiation", a paper about to be published in the journal Renewable and Sustainable Energy Reviews, particularly interesting.

The Study

In the authors' own words, the paper reports the results of the following study (funded by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU)): 


This study thus examines the performance of the main commercially-available solar PV cell technologies under the same real-world conditions, rather than in the lab. The annual solar irradiation measured on-site at the ideal inclination was 1997 kWh/m2 in Cyprus and 1460 kWh/m2 in Germany. This equates to roughly 5.5 kWh/m2/day and 4.0 kWh/m2/day, respectively. The NREL Photovoltaic Solar Resource map provides a rough guide to equivalent US locations, while Solar4Power's global maps do the same for the rest of the globe.    

The systems were initially deployed in June 2006 and the data reported is for the first year of operation, so until June 2007.

The systems under study are as follows:

Manufacturer (Ticker)	Technology	System Power (Wp)	Size (m2)	Nameplate Module Efficiency (%)
Atersa (uses Q-Cells cells, QCLSF.PK)	Mono-crystalline silicon (tracker)	1020	7.90	12.9
Atersa (uses Q-Cells cells, QCLSF.PK)	Mono-crystalline silicon	1020	7.90	12.9
BP Solar (BP)	Mono-crystalline silicon (Saturn-cell)	1110	7.52	14.8
Sanyo (SANYY.PK)	Mono-crystalline silicon (HIT-cell)	1025	6.26	16.4
Suntechnics (Uses Sunpower cells, SPWRA)	Mono-crystalline silicon (back contact-cell)	1000	6.22	16.1
Schott Solar (Private)	Multi-crystalline silicon (MAIN-cell)	1020	7.87	13.0
Schott Solar (Private)	Multi-crystalline EFG silicon	1000	8.58	11.7
SolarWorld (SRWRF.PK)	Multi-crystalline silicon	990	7.82	12.7
Solon AG (SGFRF.PK)	Multi-crystalline silicon	1540	11.50	13.4
Mitsubishi (MIELY.PK)	Amorphous silicon (single cell)	1000	15.74	6.4
Schott Solar (Private)	Amorphous silicon (tandem cell)	960	18.00	5.4
First Solar (FSLR)	Cadmium Telluride	1080	12.96	8.3
Wurth (Private)	Copper–Indium–Gallium– Diselenide	900	8.75	10.3

The study uses energy yield - kWh produced divided by nameplate kWp - to directly compare the performance of each system. Theoretically, this should normalize out conversion efficiency differences between the various systems and, because other key factors such as inclination are kept equal, the performances of the systems should be roughly equal.

The figure below displays the annual energy yield for the Cyprus location. Ignoring the tracker-equipped system, we note some non-trivial differences in AC energy yields between the various systems, with the Suntechnics (SunPower), Wurth, Sanyo and First Solar systems performing best, and the BP Solar and Schott a-Si systems performing worst.    



The figure below depicts the energy yield by season for the Cyprus location. As can be noted, the thin-film technologies (a-Si, CIGS and CdTe) tend to have higher energy yields in the summer months than most crystalline technologies, but perform in roughly similar fashions or even slightly worse in winter months.



The seemingly wider variations between summer and winter months for thin-film systems are not actually due to the properties of thin-film materials, but rather to the properties of crystalline materials. The table below displays deviation from the average AC energy yield across all systems, as well as the MPP power temperature coefficient. The latter metric shows the drop in system power per one kelvin increase in temperature.

As can be noted, overall, the crystalline technologies tend to experience much greater performance declines under warmer conditions than do their thin-film brethrens. The authors note that the technologies with the lowest MPP power temperature coefficients showed the highest average energy yields during the summer period. 




The phenomenon discussed above is perhaps best captured by the graph below, which displays seasonal module efficiency for the Cyprus systems. Once again, by-and-large, thin-film technologies tend to experience much lower drops in efficiency with higher temperatures than do crystalline technologies, with the First Solar CdTe system showing the most stability.

The authors note that the systems installed in Cyprus showed a lower average measured performance ratio than those installed in Germany because of higher temperatures.



Conclusion

A couple of fairly obvious insights emerge from this article.

First, at least for the time being, crystalline technologies retain an edge over thin-film for applications where available space is an issue. Lower efficiencies in thin-film are forcing much larger system sizes, as depicted in the first table above. The urban roof-top market thus remains crystalline technologies' domain.

However, and far more interestingly in my opinion, thin-film technologies' relative performance stability in warm weathers, as demonstrated by lower MPP power temperature coefficients, makes them superior alternatives for areas where temperatures between seasons range from very hot to hot, and where module temperatures are likely to be fairly high year-round. In Cyprus, according to data in the study, average monthly temperatures stood near or below 15 degrees Celsius (~60 degrees Fahrenheit) during six months out of the whole year. Several potenially large markets will show much higher temperatures throughout the year.    

Incidentally, such regions could become, because of their solar irradiation regimes, very attractive solar PV markets. Areas such as India, North Africa, the Middle East and Australia all come to mind (the scale shows kWh/m2/day).

India recently announced it would be targeting 20 GW installed by 2020, and it was reported that it would institute a production-based incentive, which generally takes the form of a production tax credit or a feed-in tariff. In regions of Southern India with very hot summers and hot winters, thin-film technologies would probably offer the best alternative for ground-mounted installations, which will likely spring up in fields across the region if the incentive is generous enough.

DISCLOSURE: None                   

Posted by Charles Morand at 12:27 AM | Permalink | Comments (0)

Charles Morand

One of the - if not THE - most popular debates in solar PV circles is about when exactly the electricity produced by solar PV systems will reach "grid-parity", or become competitive with like-generation fuels (i.e. non-baseload) on a stand-alone basis (i.e. no feed-in tariffs, mandates or rebates).

A lot of the time, these discussions slip into arcane sub-debates about module costs, as expressed on a dollar per watt basis, and how far they need to fall for solar PV to be competitive. But module costs are only one part of the equation; inverter, installation and other balance-of-plant costs can make up to 50% of the installed cost of a system, and the local solar regimes, cell efficiency, interest rates and system orientation can all impact the levelized cost of the power produced, and thus its relative cost position on the grid.

While such discussions are most definitely intellectually stimulating, the fact remains that the solar PV industry is, by-and-large, heavily dependent on regulatory incentives for growth. Recent figures by REN21 (p. 24 of the PDF document) demonstrate the extent of this dependency. In 2005, Japan accounted for ~24% of new installations and ~35% of total installed capacity for grid-tied solar PV globally, while for Spain the numbers were ~2% and ~2%, respectively. By the end of 2008, Japan made up ~5% of new installations and ~15% of installed capacity, whereas Spain accounted for ~48% and ~26%, respectively. What changed in those three years? Japan canned its residential incentive in 2006 and Spain implemented its feed-in tariff in 2004. Now, both countries have made 180-degree turns, with Spain canning and Japan re-instating. I expect investment flows to reverse. 

Reaching grid parity in certain regions with high wholesale power prices is not going to change that situation overnight - last year, McKinsey & Co published a forecast in which they estimate that economic demand for solar PV will begin outpacing policy-driven demand by about 2015. By 2020, the authors believe, policy-driven demand will still account for a little under a third of total global demand. Regulatory incentives are thus going to account for a substantial portion of installed solar PV capacity for at least the next decade.

That is why solar PV investors should be elated that India has finally decided to join the solar club by planning to have its own targets and incentives announced by September. Early information points to a non-trivial target of 20 GW installed by 2020 (Germany had about 5.4 in 2008), with 1 to 1.5 GW installed by 2012. The scope for solar PV growth in India is massive, especially growth in distributed solar as over 600 million people - mostly in rural areas - currently don't have access to electricity.

As of yet, few details have been made public on the upcoming policy so it is difficult to gauge what this will mean for the solar PV sector. However, if India's solar ambitions turn out to be as big as their IT ambitions, this could prove a welcomed boost for the industry.  

I am finding it difficult to pick stocks in the solar PV sector for three reasons: (1) the intense sell-side focus - exemplified by the fact that every shop on the Street now has a solar PV analyst - makes it very difficult to gain and exploit an informational advantage; (2) stocks tend to be highly volatile, with the success stories trading at astronomical multiples (e.g. First Solar) and the firms experiencing difficulties getting destroyed (e.g. Timminco); and (3) the industry remains relatively young, with new entrants and emerging technologies continually threatening established market positions.

My favorite way to play this sector and macro events like the India announcement thus remains through one of the two solar power ETFs: the Claymore/Mac Global Solar Index ETF (TAN) or the Market Vectors/Van Eck Global Solar Energy ETF (KWT) . While volatility and high multiples remain a factor for the ETFs, they nonetheless eliminate much of the firm-level risk.

I took a long position in TAN in early March, and this has done quite well for me so far. My time line there was 18 to 24 months and that remains the case today. However, the announcement by the Indian government in September could provide near-term momentum for these two ETFs, especially if the program is to be implemented sooner rather than later.

DISCLOSURE: Author is long TAN       

Posted by Charles Morand at 11:00 AM | Permalink | Comments (2)

Charles Morand

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

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

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

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

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

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

DISCLOSURE: None       
            

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

Charles Morand

There was an interesting post in Barron's tech trader daily on Monday discussing how solar PV stocks are coming under pressure, in part because product prices are falling further than expected. About a month ago, I discussed the potential return effect for households in given states of removing the $2,000 ITC cap. Such measures, it seems, are failing to kickstart demand, and solar recovery might end up being significantly slower than many had been expecting.

Case in point, since hitting a high of $11.49 on June 11, the TAN ETF is down about 12%. KWT, for its part, hit a high of $17.35 on June 10 and is down 11% since. The S&P 500, in comparison, is down about 4% from its June 12 high. While both TAN and KWT are up >30% on the S&P 500 over the past six months, neither is up on the benchmark index over the past 12 months.

I took a long position in TAN in early March at $5.00 when an automatic buy order I had had on it for a while kicked in. At the time, I stated:

This is still very much my belief. I took some profit at $10.00 when an automatic sell order kicked in, and I'll gladly purchase a little more if it goes back down substantially. It must be said, however, that I use sell orders at set return levels to protect profit and not in an attempt to time the market.

Overall, those who are investing in one the two solar ETFs today and hanging on will be happy they did so two years from now and beyond. The road there, however, will be fraught with volatility.

DISCLOSURE: The author is long TAN.

Posted by Charles Morand at 11:21 PM | Permalink | Comments (2)

Different solar incentives encourage different types and locations of solar installations.  Better solar installations will result if we first decide what we want from solar, and then choose the solar incentives we use to match.

Tom Konrad, Ph.D.

Choosing Carefully

This article is based on a presentation I gave at Solar 2009 [11.7 MB].  As with wind, the current incentives for Solar photovoltaics are good for encouraging more solar, but they are less effective at encouraging better solar.  Jigar Shah, founder of SunEdison and Jigar Shah Consulting, told the audience that they should be very careful in calling for a Feed-in-Tariff for solar, saying that "Pigs get fed, hogs get slaughtered," in his keynote address at that same conference.  He was concerned that Germany might become the market of last resort for solar PV because of the supply glut in 2009, and that their government might decide to put a hard cap on the total installations under Germany's Feed-in-Tariff in response.

What do We Want?

Before we advocate for a solar incentive we should look at what we want the incentive to accomplish.  I don't mean the obvious facetious answer "more solar."  James Groelinger, the former President and CEO of EPV Solar, speaking on a panel on investment opportunities in solar, said, "What counts is not modules, systems, megawatts, or capacity; it's energy.... in America we've been rewarding watts installed, while Germany is rewarding kWh produced.  Germany gets approximately 50% more kWh per watt installed than the US, after adjusting for the lower solar resource."

I agree that the relatively low energy production on US systems is probably an indicator of perverse incentives, but Solar should not be considered as solely an energy resource.  For instance, the correlation of PV output with demand is valuable in its own right, and the greater that correlation, the more valuable the energy produced will be, even if greater correlation comes at the expense of slightly lower output.

 We should look at what we want from solar.  We should ask, "What are solar PV's benefits and weaknesses compared to other technologies?"  How important these benefits and disadvantages are greatly depends on how solar is installed.

Benefits of Photovoltaics	Problems with Photovoltaics
Price Stability	Current high cost
No Carbon Emissions	High Embodied Energy
Timing: Correlated with demand	Cloud Transients
Distributed: can be used to defer T&D upgrades	Distributed: May result in stranded T&D assets
Timing: Good complement to Wind
Can be installed on low-value surfaces (roofs, and BIPV)

A look at current incentives show that more could be done to take advantage of more of these incentives.

Incentives for energy production

Many incentives for solar involve direct payments per kWh produced.  These include Renewable Energy Credits (RECs) which consumers often use to buy green power, Renewable Electricity Standards (RES), Feed-in-Tariffs (FIT), such as the one just passed by Ontario and the one in Germany which James Groelinger credits for the higher energy output of German solar farms.   Such incentives clearly encourage production of more energy (kWh), but by not differentiating between when or where the energy is produced, they can lead to perverse incentives.  Energy production incentives typically lead to:

1. South-oriented panels which produce more, but often lower-value, electricity than panels oriented to the southwest.  
2. Large clustered farms which may have quick fluctuations in output when a cloud passes over (cloud transients.)  A recent study, Quantifying PV Power Output Variability presented by Tom Hoff  on the same panel where I presented showed that, if a cluster of PV installation  is sufficiently dispersed (relative to cloud speeds), the variability of solar output from cloud transients will be reduced by a factor of approximately the square root of the number of installations.
3. Installations may cluster on the wrong distribution feeders.  If a local electric substation is nearing its capacity at peak times, placing PV on the distribution system of that substation can allow the utility to delay a very expensive substation upgrade.  On the other hand, most new substation are likely to have significant extra capacity, and placing PV in the areas served by that substation will force the utility to pay back the investment on that substation over a smaller number of kWh, a problem referred to as stranded assets. 
4. The carbon intensity of the electricity displaced by power from PV will vary with time, and, if cloud transients mean that gas turbines must ramp up and down quickly, that will also decrease turbine efficiency and change the carbon intensity of displaced electricity.

From an economic perspective, it makes sense to subsidize peak power production which can help delay a substation upgrade more than pure kWh production, especially if it is from an installation which might strand transmission and distribution (T&D) assets.

Net Metering

Net metering, or allowing the PV owner to sell electricity back to the grid at the same price he pays for it, is also a subsidy.  Net metering may not compensate the utility for the cost of making sure that the power is always there, depending on the tariff.  This is especially true on typical flat-rate residential tariffs, where payments are typically a fixed price per (net) kWh used, and produces incentives very much like the Energy Production incentives discussed above.

A Time-of-Use (TOU) tariff, where a kWh produced when demand is high receives a much higher value than one produced when demand is low, is much better for compensating the utility for the demands a user places on (or removes from) the system.  

In contrast, a typical commercial or industrial tariff, which is based on a low charge per kWh, but a large demand charge payment based on the highest 15 minutes of demand in any given month, can produce very perverse incentives.  Because of cloud transients, PV systems seldom will do much to reduce demand charges, and the low energy payment does little if anything to compensate for the PV investment.  This means that many otherwise ideal spaces on commercial properties are not economically viable for PV installations.  Ron Binz, the Chairman of the Colorado Public Utilities Commission, uses the example of the corners of square farm fields which are irrigated by rotating sprinkler irrigation.  Since farms are normally on demand charges in Colorado, these large areas of otherwise unused, flat space near electric distribution infrastructure are unavailable for PV installations.

Creative tariff structures might be used with net metering to help distribute solar where it could do the most good in helping to defer T&D upgrades.  This could be done with higher per kWh charges for T&D in areas which might soon need T&D upgrades, but probably is not politically possible because of concerns about fairness.

Incentives to Reduce Carbon

If the goal for solar is to reduce global warming pollution, then the best way to do it will be to put a price on Carbon.  This will not only mean that a solar installation which displaces high-carbon electricity (such as coal or inefficient natural gas peaking turbines) will receive a higher incentive than an installation which displaces low-carbon electricity (such as efficient natural gas combined cycle turbines or nuclear,) but it will also take into account the high embodied energy of crystalline silicon PV (if produced using fossil fuels) relative to the lower embodied energy of thin-film technologies.

One weakness of pure carbon pricing (at least from the perspective of solar advocates) is that it does more to encourage less expensive technologies that have quicker energy paybacks.  But if the goal is to reduce overall carbon emissions, that is precisely the result we want.  To take into account the other benefits of solar, other types of incentives will need to be used in conjunction with a carbon price.

Incentives for Investment

Incentives for investment, such as the Investment Tax Credit (ITC) and accelerated depreciation, help with the high cost of PV, but if used alone, without other incentives to reduce carbon or produce peak power, may lead to many installations which don't do much of anything, as highlighted by James Groelinger above.  They are simply an incentive to spend more on solar installations, even if the energy produced has very little value.

By reducing the effective cost of PV, they also blunt some normal market incentives.  Solar manufacturers and installers have less incentive than they otherwise would to cut costs, because their customers are only picking up a fraction of the bill.  Part of any incentive for spending on solar will go to the installer and manufacturers in the form of higher prices.  While this may be a good thing if the goal is to grow the solar industry, a large solar industry is only as useful as the solar installations it provides.

Overall, incentives for investment do not produce many distortions to incentives, and can be an effective way of reducing the cost of solar, so long as they are used in conjunction with other incentives which will assure that the solar installations produce valuable power.

Conclusion

If we want to encourage solar,  we can, and there are many potential benefits to society.  By understanding those benefits, and by not being blind to the drawbacks of solar, we can design incentives which encourage just those benefits we want at relatively low cost, both in terms of price and in terms of the costs that the electric system must bear to integrate solar.

Ask for solar, but be careful how you ask.

Posted by Tom Konrad at 01:58 PM | Permalink | Comments (3) | TrackBacks (1)

Charles Morand

Like Tom, I attended part of the Solar 2009 conference last week. One of the most interesting presentations I heard was by Andy Black, CEO of OnGrid Solar, on the potential impact on residential solar installations of removing the $2,000 ITC limit (link to the actual paper). Prior to changes in October 2008, ITC tax credits for rooftop solar PV installations were capped at $2,000. In the author's own words:

This paper presents revised and expanded financial analyses of residential cases [...]. It will look at Internal Rate of Return (IRR) only (for simplicity of cross comparison) [...] accounting for the increase in the ITC and brought up-to-date with current electric tariffs, incentives (federal, state & local) and, as applicable, Solar Renewable Energy Certificate (SREC) values. The paper then expands coverage to additional US states (NJ, NC, CT, AZ, HI, CO), and also performs a couple of “what if” scenarios to illustrate the effects of changes in individual variables.

The following two tables sum up the author's findings.

There are certain caveats to these results that are discussed in the paper. But if Andy Black is within a 100 basis points of IRR in most cases, we're looking at some very interesting numbers. Residential installations currently account for about 35% of installed solar capacity in the US so this segment is material to the industry.

Ground-mounted and commercial installations will most likely account for the majority of incremental capacity added over the next few years. Credit difficulties, however, are hitting both segments particularly hard (especially ground-mounted). Residential might thus represent a glimmer of hope for the solar PV industry, especially given that module prices are falling rapidly (see the second table).

With the meltdown in equities that occurred in the wake of Lehman Brothers' failure last fall, resulting in a "lost decade" (read: flat for those who bought and held) for the S&P 500 and the Dow, many households are seriously rethinking the wisdom behind putting one's savings in equities. Cash is a lousy asset class, especially in a world where the price of energy will drive crippling inflation, and bonds often provide mediocre real returns. This kind of thinking by German households, prompted by generous government incentives, drove massive amounts of capital into the solar PV industry in that nation.

If households, because of aggressive incentives, are able to generate pre-tax IRRs of upwards of 10% for 10 to 20 years in a nearly riskless venture, I wouldn't be surprised to see some serious money flow into this area. The states covered in this analysis account for about 23% of total US population, an appreciable number. Local governments and utilities have already, in some cases, scaled back incentives following the removal of the $2,000 cap, but even after these reductions households are still be looking at double-digit or near double-digit returns in certain cases.

A surge in demand driven by the residential sector would benefit primarily the silicon-oriented firms with their higher efficiencies, especially in a context where less generous local and utility incentives are counterbalanced by falling module prices.

DISCLOSURE: None

Posted by Charles Morand at 11:10 PM | Permalink | Comments (2)

Tom Konrad, Ph.D.

This continues a series of entries on opportunities in solar stocks, based on a panel at Solar 2009.  The first article introduced the panelists, and took a look at the solar sector as a whole.  The others focus on individual companies.

Pradeep Haldar

• Investors remain bullish on thin film technologies such as CdTe (First Solar's technology.)
• CdTe currently has the lowest cost, but it may not have long term sustainability.

Peter Lynch on First Solar (FSLR)

• If First Solar ever stumbles, gravity will take over. They could fall 50% in a day.
• They are up too high with the P/E's, which is why they are difficult to invest in.
• They have a differentiating factor- the lowest cost- and investors like that.

Investment Action

If you decided to short a solar stock after reading part 1, First Solar should be up on your list.  The next entry will be a solar stock the panel liked. (Link broken until published.)

DISCLOSURE: None.

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

 

Posted by Tom Konrad at 08:32 AM | Permalink | Comments (1) | TrackBacks (0)

Tom Konrad, Ph.D.

The last panel I attended at Solar 2009 focused on investment opportunities in Solar.  This is the first of several entries with ideas from the speakers.   They were:

• Allen Goodman, of ECG Consulting Group
• James Groelinger, of Bellegrove Associates
• J. Peter Lynch, of Salem Financial, Inc.
• Pradeep Haldar, Ph.D., MBA of the University at Albany

Each had perspectives on the solar (mostly photovoltaic (PV) industry, and struck me as very knowledgeable in the field.  The caliber of the industry and investment knowledge on display impressed me, so I'll share with readers some of the panelists thoughts.

Peter Lynch on the Solar Sector

• Wall Street likes “techie glitz” of PV because it means they really don’t have to focus too much on reality.
• In the last 8 weeks, solar stocks have gained 72% on average.  This is unsustainable.
• Solar Stocks have a very bright future, but you'd better be a trader.
• All stocks took off in early march.  When stocks move the good ones move first, and others get swept up.  I believe that the Solar stocks were ones that got swept up. 

Allen Goodman on the Solar Sector

• There are lots of claims [of low-priced PV modules.]  If they can [produce them at that price], that's great, but the challenge is on the companies.
• The key to picking profitable solar companies is to look for ones with key differentiating factors.  For developers, this may be the ability to have a relationship with a customer, obtain financing, and do permitting.  The other end of the spectrum is to have an edge with technology.

Investment Action

I agree with Lynch that if you're going to make money in Solar stocks today, you have to do it as a trader.  I also agree that the current move is unstainable (I recently called it a bear market rally.)  So if you are a trader, the trade today should be on the short side.  Future articles in this series will have a couple stocks that the panel panned, or you can short the sector as a whole, with either of the Solar ETFs,  TAN or KWT.

DISCLOSURE: None.

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

Posted by Tom Konrad at 06:32 PM | Permalink | Comments (1) | TrackBacks (0)

Dedicated legislations have been at the core of some of the most impressive regional growth stories in alternative energy, most notably in Germany with the Renewable Energy Sources Act or in California with the various legislative solar initiatives. On Monday, the Canadian province of Ontario became the latest jurisdiction to join the fray as lawmakers introduced the Green Energy and Green Economy Act. Why should investors care? Because such legislations have been at the core of some of the most impressive regional growth stories in alternative energy. 

As a bit of a backgrounder on Ontario, there is currently about 800 MW of installed renewable power capacity (~95% wind) in the province with around 2,500 MW under power purchase agreement (PPA) and scheduled to be brought into commercial operations in the next few years. In late 2006, the province introduced a renewable power feed-in tariff incentive, the first one in North America. This incentive was suspended in May 2008 due to transmission constraints. By then, there were about 500 MW of solar capacity under PPA linked to the incentive, including one of the world's largest solar PV farms.

To put these numbers into perspective, California, the largest solar PV market in the US by quite a stretch, had around 500 MW of PV installed by the end of '07. Next came New Jersey at 69 MW and New York at 32 MW. None of the 500 MW under PPA in Ontario has yet reached commercial operation, and at least some of it will probably be cancelled given current credit conditions. Nevertheless, these figures provide a good idea of the market's potential is. The Canadian Solar Industries Association estimates that Ontario could install up to 16,000 MW of solar PV by 2025, with the potential on Toronto's rooftops alone estimated at 3,600 MW.   

The Green Energy and Green Economy Act

The Act targets three main areas: (1) renewable power generation; (2) energy efficiency; and (3) the smart grid.

1) Renewable Power Generation

Perhaps the most significant measures here are aimed at removing what had proven to be critical barriers to renewable energy projects reaching commercial operation in the province:

1. Renewable energy projects meeting certain criteria will be guaranteed a connection to transmitters and distributors' networks and will be given priority access over other forms of power generation
2. Transmitters and distributors will have to make the necessary network upgrades to allow for the connection of renewable power projects and the eventual expansion of renewable power capacity
3. Renewable power projects will be exempt from all forms of municipal permit requirements to counter a growing trend of NIMBY groups lobbying their municipal councils to block renewable energy projects  
4. A new office of Renewable Energy Facilitation has been created to help speed up the permitting process (e.g. environmental assessments, etc.)

On the revenue side, the legislation does the following:

1. The feed-in tariff that had been suspended in May 2008 will be reintroduced once new rules have been designed (no timeline provided but Q2 2009 has been thrown around)
2. A system of PPA auctions for large-scale renewable power projects that has been in operation since 2004 will be maintained 

Analysis

The measures aimed at removing barriers to renewable projects are significant. However, until the new rules around the feed-in tariff are released (e.g. pricing, eligible fuels, etc), the exact impact of the law will remain unclear. My own guess is that the government will be very aggressive with ramping up renewable energy installed capacity over the next five years as, as its name indicates, this law is also about the economy. If you believe the government, this bill is as much about creating a counter-cyclical effect as it is about cleaning up the environment. If my thesis is correct and this turns out to be a boon for developers, the following stocks should be watched:

Name	Ticker	Description	Potential Upside Related to Legislation
Algonquin Power Income Fund	AGQNF.PK	Ontario-based renewable power developer with exposure to Ontario (income trust)	V. High
Boralex	BRLXF.PK	Canadian renewable power developer with exposure to Ontario	V. High
Canadian Power Developers	CHDVF.PK	Canadian renewable power developer with significant exposure to Ontario	V. High
Great Lakes Hydro Income Fund	GLHIF.PK	Ontario-based hydro power developer (income trust)	V. High
Innergex Renewable Energy Inc.	INRGF.PK	Canadian renewable power developer with exposure to Ontario	V. High
Macquarie Power & Infrastructure Income Fund	MCQPF.PK	Ontario-based renewable power developer (income trust)	V. High
ARISE Technologies Corporation	APVNF.PK	Ontario-based silicon and PV cell manufacturer with a module installation segment. The module installation segment is focused on the Ontario residential market	V. High
Northland Power Income Fund	NPIFF.PK	Ontario-based power developer with some exposure to renewables (income trust)	High
Brookfield Asset Management	BAM	Infrastructure development firm with exposure to Ontario renewables	Medium
FPL	FPL	FPL Energy unit is one of the world's largest wind park owners and has exposure to Ontario wind	Low

2) Energy Efficiency

The Act introduced a number of energy efficiency measures with a focus on building efficiency:

1. No real property can be sold or leased for an extended period of time without undergoing an energy audit
2. Public agencies will be required to come up with an energy conservation and demand management plan
3. Public agencies will be required to consider energy efficiency when making capital investments or when acquiring goods and services (although the devil will be in the details here with more precise rules to come)
4. Energy distributors will be required to meet efficiency and demand management targets (see the brackets above about the devil)
5. The Building Code will be reviewed to include stronger efficiency measures

Analysis

Energy efficiency measures are clearly targeted at the building stock. There aren't really any good direct plays on this, and won't be until the government releases further information on what it intends to do with its own buildings. Building efficiency firms such as Johnson Controls (JCI) could benefit, although its unclear whether this would be needle-moving. 

3) The Smart Grid

Ontario has been somewhat of a leader in smart grid, with legislation passed back in 2005 requiring every home and business in the province to be equipped with a smart meter by 2010. Hydro One, the largest transmitter, has also begun smartening its network by embedding communication equipment from RuggedCom (RUGGF.PK). The Act contains provisions to expand smart grid capex. The Ontario Smart Grid Forum estimates that C$1.6 billion could be spent on a smart grid ramp up in Ontario over the initial five years of such a program. As I mentioned in a past article, while the absolute amount isn't huge, it is still a fair chunk of change for this emerging industry.

The smart grid measures are:

1. A timeline for rolling out the smart grid and apportioning spending responsibilities to different players (e.g. transmitters, distributors, retailers) will be released
2. Communication standards and other technical aspects will de defined through regulation
3. The regulator (called the Ontario Energy Board, the equivalent of a PUC in the US) will be directed to take actions related to the implementation of the smart grid, although these actions aren't yet defined

Analysis

Once all the rules are released, the legislation will have the effect of formalizing a patchwork of initiatives already underway. In my view, significant smart grid capex can be expected in Ontario over the next few years with a focus on the transmission and distribution infrastructure (rather then end consumers). There are several companies large and small entering the world of smart grid. My personal favorite play on this legislation is RuggedCom (RUGGF.PK): (1) it has already won contracts here; (2) it is part of the home team (based in Ontario); (3) it already generates EBITDA; and (4) even though its stock has withstood the latest storm in equity markets, it's still trading at a reasonable trailing PE compared to peers.   

Conclusion

Many people in the investment world loathe government intervention into anything. However, alt energy has been and continues to be primarily driven by regulation and government policies. In the absence of government support schemes, industry growth rates would be a fraction of what they currently are, and solar PV would not be on the steep cost decline curve it's currently on. It is therefore critical to keep an eye on the policy side to know where growth opportunities will emerge next.

With this new Ontario legislation, my favorite play is the Canadian clean power IPP sector (stocks listed above). The smart grid initiatives will also be worth watching, although more clarity on the rules is required before potential winners can be identified.

DISCLOSURE: Charles Morand does not have a position in any of the stocks discussed above.

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

Posted by Charles Morand at 10:05 AM | Permalink | Comments (0)

I just got around to reading a new report by Merrill Lynch (link at the end of this article) identifying cleantech as "The Sixth Revolution" (the other five being: Industrial Revolution; Age of Steam & Railways; Age of Steel, Electricity and Heavy Engineering; Age of Oil, the Automobile and Mass Production; and Age of Info and Telecommunications). Periodically, sell-side firms will release free cleantech/alt energy reports, which lay out their macro theses but stop short of providing stock picks to non-clients.

I don't generally pay these reports too much attention as I find they rarely - if ever - present new information or look at things in a different way (i.e. they are packed with existing and sometimes dated data and are quite predictable in their orientation). This isn't surprising, as their clients don't pay them to give away all of the goodies. This one, however, was quite interesting. The author, Steven Milunovich, is Merrill's "cleantech strategist." He comes from a technology equity research background and uses his knowledge of tech's historical development path, along with theories of disruptive technologies, to predict how cleantech might evolve.

In his view, once the current funding storm has passed, cleantech will enter a secular growth phase that will last many years, and that he calls nothing short of a revolution. While he likes energy efficiency applications like smart-grid, he points out that, somewhat paradoxically, greater energy efficiency will lead to higher absolute levels of energy consumption. This perspective, based on the Jevons Paradox, states that as efficiency increases and the energy intensity of a unit of output decreases, energy costs also decrease across the system, eventually boosting absolute demand because the increase in throughput outpaces efficiency gains. According to Milunovich, the "counterintuitive conclusion is that the ultimate goal of cleantech should be to provide essentially limitless energy that can be wasted."

Where does he think this energy should come from? Well, a variety of places, but he is particularly bullish on solar, for two reasons: (1) solar is by far the most abundant energy source on Earth, and (2) solar is on the steepest price-performance improvement curve. Interestingly, the author is also bullish on solar because he views the structure of the electricity market as eventually moving from vertical to horizontal, much like technology pre-1990s was dominated by large, vertically-integrated firms (e.g. IBM), only to be overtaken in the 1990s by small firms working on disruptive technologies. He thus sees a much greater role for distributed generation in the future, and it is therefore logical he should like solar given the degree to which solar can be deployed through the building stock as a load-abatement measure.

Here are a few interesting quotes:

"In our view, practical peak oil is real, so oil prices should eventually move back up."

"[U]pgrading transmission adds 30-40% to the cost of renewable energy."

"Energy storage is the holy grail of cleantech and a difficult problem."

"Huber and Mills point out that more than 85% of the growth in US energy demand since 1980 has been met by electricity."

"[O]ur early take is that increasing electrification of the economy will continue with solar the most promising approach."

"DOE's Pacific Northwest National Lab estimates that plug-ins would have to constitute over 80% of the coutnry's 220 million passenger vehicles before new base load plants would be needed."

Find the press release here, and the actual report here (PDF document).

 

Charles Morand                

Posted by Charles Morand at 12:46 PM | Permalink | Comments (0)

It's no mystery by now that the credit crisis has been nothing short of a disaster for solar PV stocks. For one thing, risk has been re-priced on an unprecedented scale, and the solar PV sector is, by most measures, a very risk sector. Rising debt costs in an industry where projects typically use between 50 and 70% leverage were bound to take their toll. It also hasn't helped that most people pre-crisis predicted a significant glut of solar PV supply in 2009 on the back of markedly lower silicon prices. Lastly, concerns over the sustainability of generous subsidy regimes in places like Germany and Spain have been looming over the industry for a few months.  

The net result of all this has been that, over the past three months, solar stocks (represented on this chart by the TAN ETF) have significantly underperformed wind stocks (PWND ETF) and the clean energy space as a whole (GEX ETF). 

At this stage, with all the talk of the a "green" stimulus package from the Obama administration, are there reasons to be cautiously optimistic? With utilities now eligible for the ITC, will utility investors seize the opportunity low module costs will bring in 2009 to get heavy into solar PV?

I believe there are reasons to continue to be more bearish on solar than on the rest of the clean energy space, including wind. Solar PV, unlike other forms of alternative energy, has primarily been a residential story. A 2007 report by RBC Capital Markets estimated that the residential sector would account for 72% of solar PV end demand in 2008, with the balance split between the commercial and industrial sectors. By 2011, although the commercial/industrial sector would make up some ground, residential would still account for 68% of demand.

According to the same report, Germany should make up about 36% of global demand in 2008, California 10% and Japan 18%. For 2009, Germany should account for 26% of global demand, California 12% and Japan 18%. That makes them the three largest markets for both years.

As the financial crisis rapidly morphed into an economic crisis, households have been coming under increasing pressure: in Germany, Japan and California. Moreover, as discussed initially, credit continues to be tight, making it difficult for households to borrow for extravagant initiatives like installing solar panels on rooftops. 

Unlike wind or solar thermal, which are primarily utility plays, solar PV is very much leveraged to the economic health of consumers and households, and it just so happens that those are the segments of the economy that are coming under the greatest pressure right now. I therefore think that solar PV stocks will continue to underperform wind and the clean energy space a a whole for at least the next 12 months.

Posted by Charles Morand at 07:12 PM | Permalink | Comments (2)

2009 is likely to be a watershed year for the solar photovoltaic (PV) industry, and one which many PV manufacturers will not survive.  Even before the credit crunch and plummeting housing market made capital intensive PV much harder to finance, the easing of supply constraints in the market for solar grade silicon meant that PV supply was liable to increase rapidly, putting pressure on marginal producers.  I expect that the loss of PV demand due to tighter credit markets will more than compensate for the added demand due to the extension of the solar Investment Tax Credit (ITC) and the exemption of the ITC from the Alternative Minimum Tax in the United States.  One other change was that utilities can now benefit from the ITC, and this may be an added boost to the market.

With PV demand increasing at a slower rate, and PV supply continuing to grow rapidly, and possibly even accelerating, PV cell prices will have to fall significantly to clear the market.  Low cost producers such as First Solar (NASD: FSLR) will continue to make money on every panel, although their profit margins will shrink, but the real pain is likely to be felt by higher-cost, commodity producers, and those with thinner profit margins. 

With volumes increasing rapidly, but much thinner profit margins for even those producers able to remain profitable in a much more competitive climate, I have sold all my holdings in PV manufacturers (Sharp (SCHAY.PK), Evergreen Solar (ESLR), and Solar exchange traded fund TAN.  

Balance of System

The news is not all bad for the solar industry, however.  If volumes rise and prices fall as dramatically as I expect, suppliers of other parts of solar systems and services, such as installation will also see volumes rise.  Those suppliers with pricing power will still be able to maintain or even expand margins even as their volume expands, with a dramatic effect on potential profits.

Which suppliers will have the most pricing power?  Competition theory suggests that pricing power will go to those market participants 

1. In industries which have barriers to new entrants
2. Suppliers and Customers have little bargaining power
3. Have little internal competition
4. Sell products for which there are few substitutes.

Possible candidates in other parts of the solar supply chain are solar installers, assemblers of solar modules, and suppliers of solar inverters.

Solar installers suffer from fairly easy entry into the industry, and are likely to have fairly weak bargaining power with cash-strapped customers, who can easily choose to not buy solar at all.   Solar module assembly is also fairly low tech, and does not seem to present real barriers to entry.  

One wildcard here may be vertically integrated solar companies.  Sam Weaver, VP of Cool Solar, a solar installer in Boulder, CO, likes SunPower Corporation's (NASD:SPWRA) vertically integrated approach, which the company hopes will allow them to squeeze all components of a solar system equally. 

However, vertically integrated solar companies may be able to gain competitive advantage over companies operating in one or two of these sectors.

Inverters

The inverter industry is in a much better competitive position.  First, there are few active participants, making the inverter market relatively uncompetitive, in comparison to cells, modules, and installation.  In the residential grid-tied market, the major players are privately held Fronius and SMA. [Correction: SMA is public in Germany. Ticket S92.DE]   Sam Weaver says there are also a couple companies looking to enter the market, meaning that it might become more competitive, although probably not so competitive as the PV market. Until it was recently acquired by Schneider Electric,  Xantrex Technologies allowed public investors (including myself) an entry into this market, although they also compete in commercial and utility scale markets.

The utility scale inverter market is more promising for investors, partly because there are more publicly traded companies.  When I last wrote about inverter stocks a year and a half ago, my thought was to avoid the bubbly nature of the solar sector, but still benefit from its growth.  At the time, I listed Xantrex, SatCon Technologies (NASD:SATC), and  Sustainable Energy Technologies (STG.V, STGYF.PK) as possible ways to play the industry.  

Xantrex was bought out at approximately double the price it had been trading in March 2007, wile SatCon is up about 50%.  Sustainable Energy Technologies is down around 40%.  Considering that most alternative energy indices have lost about 50% over the same period, even Sustainable Energy Technologies has been doing fairly well.

Since that time, Advanced Energy Industries (NASD:AEIS) introduced their Solaron high efficiency utility scale inverter line.  AEI has a solid balance sheet and cash flow, while both SatCon and Sustainable Energy may need to raise money in the next year, which leaves them vulnerable if financial markets continue to be very tight.  I have sold part of my holdings in both companies.   The downside of AEI is that they are exposed to many other industries, which I have not yet researched properly, and probably do not have the same growth prospects as the inverter industry.

One final inverter play was highlighted by AltEnergyStocks.com guest author Saj Karsen, who found value in Equus's (NYSE:EQS) stake in a private inverter company.

For investors interested in playing the Solar market, inverters still seem a relatively good bet, in comparison with direct investment in PV companies.

DISCLOSURE: Tom Konrad has owns shares in  SATC and STGYF.

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

Posted by Tom Konrad at 06:14 PM | Permalink | Comments (3) | TrackBacks (0)

On Monday, I told readers that I was getting out of companies some which I feel are likely to need to raise new money over the next couple years.  I also provided a list of stocks I will be buying when I judge we're near the bottom.  This is the first in a series of short articles about those stocks. 

Carmanah Technologies (CMHXF)

I've mentioned Carmanah Technologies (CMHXF) in passing in articles about LED companies.  I first became interested in Carmanah in 2005. The company's integrated LED-solar lighting solutions caught my attention because they were (and are) economic regardless of the price of electricity; the savings come mainly from reduced installation costs.  The downside of this is that they are unlikely to see the spectacular growth that solar photovoltaics will see as solar approaches grid parity in cost.  They struggled with a strong Canadian dollar (loonie) driven by high oil prices.  Because company expenses are mostly denominated in loonies, company earnings tend to fall with a rising oil price, making this company a poor hedge against oil.

Carmanah has done much to recapitalize the company and refocus the business since they were badly hurt by a rising loonie last year, but their currency exposure was  unhedged as of their June quarterly report, so they are exposed to a rise in the value of the loonie (which I expect if oil prices recover.) 

DISCLOSURE: No position.

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

Posted by Tom Konrad at 10:19 AM | Permalink | Comments (0) | TrackBacks (0)

Mea Culpa.

We often get request from readers to add companies to our Alternative Energy Stocks list.  Since the field is very active, we do some quick checks to make sure that the companies at least:

1. Provide enough information to make an informed investment decision.
2. There's nothing obvious which indicates serious investors wouldn't be interested.

We by no means feel that everything in the list is a good investment, but we do feel that our list a good place to start your own research. Usually.

Last weekend, we received a request from a shareholder to add Power-Save Energy Corp (PWSV.ob) to our list.  It fell to me to check it out, and while I did check that they provide enough information to make an informed investment decision (they file audited financial statements with the SEC,) the contents of those statements would have made me flinch, at least if I had bothered to read them.

Non-Existent Internal Controls

Fortunately for us, we have many diligent readers, and one of them quickly pointed out that PWSV did not belong on our list.  Here are a few things I should have read the first time around:

From the auditor's opinion (italics mine):

The Company is not required to have, nor were we engaged to perform an audit of the Company's internal control over its financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Since the auditors don't have an opinion on internal controls (this is not particularly unusual for an over the counter or pink sheet company), I should have looked to see what I thought of any controls they might have.  I would have found:

1. Not only is the CEO Michael Forster also the Chairman of the Board, he is the Chief Financial Officer as well.  Given no separation of duties, it is impossible for the company to have any sort of financial controls.
2. The Board consists of Mr. Forster, a 38 year old relative of Mr. Forster, and a 23 year old whose most relevant experience was managing daily operations at a restaurant.
3. Under the internal review of controls and procedures, "The Certifying Officers [who, you will note above, are actually one person, Mr. Forster] have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and believe that our disclosure controls and procedures are effective based on the required evaluation." At the very least a lack of separation of duties should have been highlighted as a material weakness in this section.

Why Internal Controls Matter

None of this is to say that Power-Save might not be a viable business.  It may or may not be.  I'd have to do more research to find out.  But there is no reason to do more research, because even if the company had discovered a process for turning lead into gold, there is no reason to believe that shareholders would ever see any of the profits.  Mr. Forster does not even need to write out a company check to himself, he can simply grant himself excessive compensation in the form of cash and stock so that all company profits flow directly into his pay packet. 

Off the List

The shareholder who contacted me with the stock is probably going to be unhappy that I not only removed PWSV from our list, but wrote this article suggesting it is a bad investment.  I'm doing this in order to reduce my workload: if you would like to add a stock to our list, please do some preliminary checks of your own before bringing it to our attention.  You'll save yourself money, and save us time, so we can continue bringing you information about stocks that really are worth investing in.

DISCLOSURE: None.

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

Posted by Tom Konrad at 04:44 PM | Permalink | Comments (6) | TrackBacks (0)

I recently attended the Optoelectronic Industry Development Association's (OIDA) "Green" Photonics Forum.  Unlike dirty industries trying to appear green, the Optoelectronics industry does not really have to try to be green.  Two prominent examples familiar to clean energy investors are Concentrating Photovoltaic Solar (CPV) (i.e. using optics to focus light on high efficiency solar cells) and Light Emitting Diodes (LEDs).

The presentations on Tuesday focused on the above technologies, and I was struck by a common problem faced by both: heat dissipation.  According to Sarah Kurtz, a National Renewable Energy Laboratory scientist leading the team working on high-efficiency, multi-junction solar cells used in CPV, one of the key challenges for CPV integrators is bonding the solar cell to the heat sink.  This bond needs to be uniform, without any bubbles, and needs to be able to withstand large, rapid temperature changes, as the amount of light and heat on the chip goes from practically nothing to hundreds of suns.

What can LEDs not do at 150 lumens per watt?

The keynote speaker at the conference was Jay Shuler of Philips (NYSE:PHG) Lumileds.  He's confident that white, high power LEDs which have been demonstrated in the laboratory to produce up to 150 lumens per watt  will make their way to the marketplace in the next couple years.  At this level of light production, commercially available LEDs will surpass even the most efficient light sources available, low pressure sodium lamps (no, not CFLs, which typically produce about 100 lm/w) with much better color rendering.  But there are lighting markets that LEDs will have difficulty penetrating even when they are the most efficient white light source, namely retrofit markets for standard light bulbs (i.e. you will keep your CFLs for some time yet.)   

The problem with fitting into the form factor of a standard bulb in a standard socket is, once again, cooling.  The first commercially available100W replacement  LED bulb actually contains a fan for cooling... a step away from the solid state reliability we would expect from LED bulbs.  Jay suggested that buyers of such bulbs should be very concerned about quality and durability of such bulbs.  

As an aside, I have been using a 60w replacement (using 5w) in an outdoor light, and four 25w candelabra replacements (at 2w each) in a fan since January, without any problem yet.  On the downside, although the candelabra bulbs have a long, shiny base for cooling.  The light quality (soft white, about 3000K color temperature) has been excellent, and seem brighter than I would expect from the bulbs they are meant to replace. 

Can we invest in heat sinks?

Often the most profitable way to invest in an industry is to invest in the suppliers of hard-to find technology for that industry.  For instance, one of the best ways to invest in solar during the silicon shortage from 2004-2007 was suppliers of silicon.  This may be more difficult to profit from than silicon, because heat sinks are not particularly high-tech, but, as Dr. Kurtz pointed out, the connections to the heat sinks are.

This leads me to look for current industry leaders in thermal management, who might have relevant expertise.  A search for "Thermal Management Solutions" led me to several companies such as Rogers Corp (ROG), which is focused on wireless communication and computer markets.  Given this focus, they probably have some expertise to apply to LEDs, but not necessarily any that might apply to the extreme temperatures of CPV.  I also found a few private companies, of which the most promising for this market was Plansee, because of their experience in both optical and military markets, and claims the "ability to braze metal to metal, ceramic to metal and ceramic to ceramic to exacting specifications and tolerances." 

Unfortunately, as a private company, Plansee is not an option for public market investors.  The question remains open for readers: Is there a publicly traded company with experience in thermal management for the extreme temperatures needed for CPV? 

DISCLOSURE: Tom Konrad and/or his clients have long positions in PHG.

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

Posted by Tom Konrad at 01:11 AM | Permalink | Comments (1) | TrackBacks (0)

Evergreen Solar has been in a trading range ($8 to $18) for about two years.  Now it's trading again at the bottom of the range, and with the general market downturn, along with the anticipated wave of new polysilicon supply a lot of investors will be wondering: Is Evergreen about to turn around as it has so many times in the past, or is it going down from here?

Over the past couple years, I have been very successful at trading the stock, but not because of some special insight.  When a stock has so many analysts following it (about 30 in the case of Evergreen), I generally assume that I won't be able to add much in terms of insight.

Instead, I made my profits using cash covered puts (options on ESLR are relatively liquid) and covered calls, a strategy which works best when a stock is trading in a range.

What's Different About Evergreen

Evergreen is fairly unusual in the crystalline silicon solar space in that it is vertically integrated, and manufactures its own wafers, modules and panels.  Evergreen's String Ribbon Technology allows them to make more cells using less silicon than traditional manufacturers, but at a conversion efficiency of 14.5% it is only about 2/3 of that available from the silicon PV industry efficiency leader, Sunpower (NASD:SPWR).  However, because of their thinner cells, they use less than 5 grams of silicon per peak watt (Wp) [see annual report, pdf], as compared to approximately 6 grams per watt for Sunpower.  According to Evergreen 5g/Wp is "less than half the industry average."

Evergreen has contracted for supplies of Silicon sufficient for all their planned increases in production through 2012.  Since silicon prices are widely expected to moderate in 2009, and the price moderation has been expected for some time (I first wrote about this in 2006), the expected price reduction will have been built into the contracts. Evergreen will only be affected relative to unhedged competition if price declines are different that that expected when the contracts were written.

Going Forward

The photovoltaic industry is likely to see a shakeout if supply grows faster than demand in late 2008 and 2009 because the industry will be less constrained by available supplies of Solar grade silicon.  If the demand for photovoltaic panels is elastic enough to absorb the resulting increased supply (albeit at a lower price), other steps along the value chain can hope to take a large portion of the profit which silicon suppliers were formerly taking.

As an aside, I personally will take a serious look at a PV system next year if I can't get the prototype Combined Heat and Power solar system I'm negotiating with a local startup for.  Until now, I have advocated investing in dividend paying renewable energy companies such as Ormat (NYSE:ORA) as being as green and having better prospective returns than buying photovoltaics.  However, alternative energy stocks are a poor hedge for commodity inflation, and a solar system is a perfect hedge for electricity prices, so that, along with lower solar system prices tempts me to to do home improvements beyond radical energy efficiency.

Evergreen Solar, with its wafers-to-panels supply chain, seems likely to be able to capture some of the gains given up by the silicon manufacturers, assuming that all of these gains do not go to consumers and installers, or vanish with the possible expiration of the ITC and reduction in German and Spanish subsidies. There are a lot of "ifs," but Evergreen seems relatively well placed for the coming solar storm.  With the stock price back below $8, I expect we're much closer to a bottom than we are to the recent peak.

DISCLOSURE: Tom Konrad owns shares in ESLR and ORA.

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

Posted by Tom Konrad at 09:30 PM | Permalink | Comments (6) | TrackBacks (0)

Most solar sector watchers will remember the second half of May 2008, when the solar world collective held its breath awaiting to find out what German policy-makers were going to decide about solar subsidies in that country. All this commotion was caused by the fact that Germany, despite lacking favorable physical conditions in the form of ample sunshine, had become the world's largest solar market on the back of a very aggressive incentive program. Germany alone is in fact so critical to sales growth in the solar sector that the mere announcement of a review of the subsidy caused solar stocks to fall and analysts to issue rating cuts. In the end, German politicians decided to take it easy on subsidy cutting, to the delight of investors.

This episode brought home the fact that, while debates among pundits about when solar will reach grid parity are often very informative, this very much remains a sector that survives - and even thrives - on government support. Even when solar does reach grid parity in jurisdictions where electricity prices are elevated, large-scale deployment must still be supported by some form of state policy (e.g. net metering, transmission facilitation, coordination with dispachable supply, etc.)

The Policy Dimension: Key to Understanding Risk

Having a thorough understanding of the policy dimension for solar investors can therefore be very useful in assessing market potential, as none of the much-touted potential of this sector will occur without government intervention over least the next five years. More importantly, however, understanding the political and policy-making processes can be key to managing risk.

One good example of policy-induced volatility is the infamous US Production Tax Credit (PTC) for renewable power. The volatile "on again-off again" nature of this policy, and the fact that the situation was allowed to endure for years, is the principal reason why a healthy wind turbine manufacturing sector never emerged in the US as it did in Europe.

The Ontario Example

Besides Germany, the most recent embodiment of this risk is the province of Ontario, one of North America's largest electricity markets with an output of around 140 TWh in 2007. In November 2006, the province unveiled its Standard Offer Program (SOP), a feed-in tariff offering C$0.42/kWh ($0.41/kWh) for solar, and C$0.11/kWh ($0.108/kWh) for wind, biomass and hydro. With such as generous subsidy, the reaction to the announcement was almost immediate with a number of commercial solar developers rushing in to Ontario. Although the program's rules limited individual project sizes to 10MW, developers found a way around this by submitting several adjacent 10MW projects as different bids.

But there was a rub. Buried somewhere on some website is a document called the Integrated Power System Plan (IPSP), which lays out the province's target long-term electricity supply mix. Reading through this document, one finds out that policy-makers only ever expected there to be about 88MW of solar feeding into the Ontario grid, with another roughly 130MW as distributed generation to offset peak demand. Moreover, provincial officials expected that 218 MW target to be realized over a period of 10 years. Contracts for large-scale (ie. >10MW) renewable generation were to be awarded through a different competitive bidding process favoring wind over solar.

One and 1/2 year into the program, there were already 420MW of solar contracts awarded. Between January, 2007, when the first contracts at C$0.42/kWh were handed out, and the end of April, 2008, committed solar capacity in Ontario grew at a compound monthly growth rate of around 45%. Moreover, while the Standard Offer Program was initially intended to foster small, community-based projects, commercial developers ended up owning the vast majority of committed MWs, seizing all available transmission capacity in the process.

On May 13, 2008, the province abruptly put an end to the program in its current form (PDF document), citing transmission bottlenecks in certain areas (wind also grew very rapidly under the SOP, adding to the problem). Things are currently under review, but from the look of it it seems as though loopholes will be closed so that commercial solar developers and large projects are completely excluded. Needless to say, this will slow down installations dramatically.

Besides transmission problems, it's probably logical to speculate that cost was becoming an issue. The weighted average cost of the power contracted under the SOP (weighted by installed capacity and not production, so likely an overestimate) is around C0.22/kWh. Cut that to $0.15/kWh to make up for the solar capacity factor in actual production, and this electricity is still costing roughly 194% more than the weighted average spot electricity price in Ontario in 2007, which was C$0.051/kWh.

Some Lessons

Luckily for solar panel makers and their shareholders, Ontario never got the chance to become a global solar heavyweight, although with the growth rates it was registering the potential was certainly there This was evidenced by announcements of major panel makers opening offices in Toronto. I say luckily because the effects of this policy turnaround could have been much more pronounced had Ontario established itself as an important solar growth center like Germany.

But the main lesson here is that the project developers who spent money on bids and were later caught empty-handed when the program shut down quite clearly never bothered to read the policy fine print, because if they had they would have realized that the power market regulatory authorities never intended for Ontario to become a global solar hotspot (no pun intended). They would have realized that the SOP was being far too successful for its own good and that something was going to give.

The same could happen elsewhere. Electricity remains one of the most politicized commodities there is because, unlike food and fuel, every day citizens believe politicians have the power to reign in soaring prices through regulation. When a new hot solar market emerges through policy, as is the case with Spain at the moment, investors have to be sure they understand not only the incentive part of the policy, but also how the incentive fits in the jurisdiction's overall long-term energy plans. The last thing one wants to do is invest in a stock as a play on a particular region, only to have that region change its mind.

Another thing to watch out for are residential electricity rates. Bringing a large amount of solar into the grid raises electricity prices, and it's really the percentage increase, rather then the absolute, that matters. In places where power is cheap and abundant, forget too much solar in the near-term - the rate-payer won't go for it, especially when gas prices are rising the way they are at the moment.

Finally, transmission, transmission, transmission. We've said it before, and will repeat it again - the power grid needs massive capacity upgrades and additions if all that renewable energy is to come on stream. Aggressive incentive programs without the transmission capacity to accommodate growth will lend you where it did Ontario, namely nowhere.

Posted by Charles Morand at 06:05 PM | Permalink | Comments (4)

Paul Denholm, a Senior Analyst at the National Renewable Energy Lab (NREL), sees an upcoming struggle between renewable sources of electricity such as photovoltaics (PV) and wind with low-carbon baseload alternatives for space on the low carbon grid of the future.  These baseload alternatives are nuclear and Internal Gasification Combined Cycle coal plants with Carbon Capture and Sequestration (IGCC w/ CCS, refereed to by advocates as "Clean Coal).

This may come as a shock to advocates of the idea that Global Warming is such a big problem that we will need all forms of low carbon electricity, because the heart of that argument is that the choice between nuclear and IGCC w/CCS (if and when it's available) is that the decision is not one of "either-or" but "and."

PV Curtailment

In his seminar at NREL's Strategic Energy Analysis and Applications Center, Dr. Denholm showed what could happen with only an 11% penetration of photovoltaics on a cool, sunny Spring day.

PV Coincidence With Load - Spring

Source: The Role of Energy Storage in the Modern Low-Carbon Grid - .PPT 7MB

Electricity demand in the Spring is typically low, and likely to be lower on weekends, because there is no need for air conditioning, nor much lighting on a sunny day.  The graph above shows a day where PV (even at only 11% penetration) would actually be producing more energy than the total demand on the grid.  While worries about the cost of integration  and even curtailment are well known and studied [pdf] in the context of wind power, integration has typically not been considered a problem with photovoltaics.  In fact, PV is generally considered to bring integration benefits, given the good correlation of PV output with summer peak loads.

The above chart is just a simulation, and PV is a long way from 11% penetration anywhere, but PV curtailment lurks in our future.  A combination of wind and photovoltaics will simply reach that limit sooner (as wind already has.)

The Problem With Baseload

If PV curtailment is not yet a problem because of low penetration, the more baseload power we have, the more difficult it will be to integrate intermittent power sources into the grid.  Unlike Natural Gas Combined Cycle plants, IGCC and Nuclear, like current coal plants, have very little flexibility in how much power they generate.  This means that the more baseload generation there is on the grid, the less "room" there will be between baseload power and current demand for electricity from intermittent sources.  So while higher penetrations of dispatchable power such as natural gas aid the profitability of wind and solar, higher penetrations of coal and nuclear power reduce their profitability.  And vice-versa: a grid with high penetration of intermittent sources will make proposals for new baseload power less attractive, since intermittent power lowers the minimum electricity demand on the grid, effectively reducing the market for baseload power.

Why IGCC is Baseload

I was a bit surprised that Dr. Denholm spoke of IGCC woth CCS as a baseload technology.  Although I consider "Clean Coal" an expensive distraction, I had thought that one advantage of the technology would be to make coal dispatchable.  My thought was that, since IGCC first involves producing syngas (a mix of carbon monoxide and hydrogen) by gasifying coal, and then burning the syngas in a turbine very similar to the natural gas turbines used today (which are dispatchable), it would not be too difficult to separate the steps, and store the syngas for later combustion.  When I asked, he replied that adding storage is an "extremely tricky" problem, because the current technology relies on hot gas cleanup to achieve high efficiencies.  

Squaring the Circle

It's not surprising that we hear about the baseload-intermittent power conflict from Dr. Denholm: his expertise is energy storage.  Energy storage has the potential to mediate between the fluctuations of load and intermittent power, and difficulty of shutting down baseload power plants for short periods.  I've discussed investments in large scale energy storage, but there are also opportunities for smaller scale and shorter time span operations which I will explore in later articles.

UPDATE: As promised: Investments to mediate between intermittent loads, and intermittent power.

Tom Konrad

Posted by Tom Konrad at 05:49 PM | Permalink | Comments (6) | TrackBacks (0)

Timminco (TIMNF.PK or TIM.TO) was, without a doubt, one of the great solar plays of 2007. The Toronto-based company, which has yet to turn a profit, claims it has come up with a process to produce solar-grade metallurgical silicon with cell efficiencies of about 14%. Metallurgical silicon allows for important energy cost savings in the production process (~70%), so being able to approach cell efficiencies reached by conventional solar-grade silicon processes could mean an important cost advantage for metallurgical silicon producers when measured on a per watt basis.

Eventually, certain people began publicly doubting Timminco's claim, partially because no hard evidence had been put forth (besides a few positive client testimonials), and partially because some were eager to cover short positions probably taken while the stock was shooting up. As a result, the stock came under pressure.

Finally, last week, Timminco silenced its critics by announcing that a third-party had verified and lauded its technology, and by upgrading a major contract. The third-party is Photon Consulting, a solar market research agency with a strong reputation.

But, while the Photon folks seem to have nothing but good things to say about the Timminco process, others are doubting whether Photon have sufficient technology and production process expertise to make a call on the veracity of Timminco's claims (from what I could gather, these "others" are mainly competitors). Judging by the stock's moves since the announcement, it seems as though investors are siding with management for now.

The full results of Photon's analysis won't be known until the close of markets tomorrow. Seeing as the Photon principal in charge of this project said that Timminco had the potential to "reshap[e] the silicon industry," it will certainly be interesting to hear the full details of what he has to say. Interested in finding out more about what could be a breakthrough in solar cell manufacturing? Be sure to tune in to the call on Wednesday at EST4:30pm. All details are available here (PDF document).

DISCLOSURE: The author does not have a position in Timminco.

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

Posted by Charles Morand at 12:04 AM | Permalink | Comments (0)

by Tom Konrad

One of the most common arguments against incentives to help people buy solar panels for their homes are that they are a subsidy for the rich, paid for by everyone.  The argument goes: only the rich can buy a photovoltaic system, which, even with subsidies, costs thousands of dollars.  Why should everyone chip in to help rich people buy new toys?

On the face of it, this argument is persuasive.  Why should everyone pay, if only the rich get the benefit?  

Basic fairness dictates that society should only subsidize activities which create societal (rather than individual benefit.)  On closer reflection, however, we see that the bulk of the benefit for solar goes to society, rather than the homeowner-installer.

Let's look at the benefits of a photovoltaic system (numbers are for a 4kW system, installed for $8 per peak watt, with the rebates currently available in to me in Colorado, plus the Federal tax credit.

The owner gets:

1. Electricity for free (approximately 7,000 kWh/yr, worth $630 annually at current prices, but rising in value with inflation.  Production is subject to 1% per year annual degradation.)
2. Cost of $12,000 after rebate and tax credit.
3. An increase in property value, depending on the market.  I'll assume 1/2 the net cost of the system (I've seen estimates as high as the full cost of the system (from solar installers) and as low as zero or even negative for unsightly installations.  So I'll say this is worth about $6,000, but only if the home is sold.
4. Maintenance costs, which I'll assume to be 0.5% per year of the installation cost after the first year (at the very least the inverter needs to be replaced after 10-15 years, and the panels need to be kept clean.)
5. If the homeowner sells his home in 10 years, electricity prices go up 10% per year,  the cost of funds is 7%, the present value of the panels is $8,457, which includes the present value of the $6,000 property value increase.  Many people do this calculation assuming no maintenance.  I consider that unrealistic, but for the sake of argument, the net present value of these cash flows would be $9,431 if there were no maintenance cost. 
6. The feel-good factor, and bragging rights.  For the homeowner to break even on the deal, these bragging rights and feel good factor would have to be worth over $3,500 to him.

Society gets:

1. Lower peak electricity demand, allowing delayed construction of new power plants.  Solar typically produces well on sunny summer days, which is precisely when the power is needed most to run air conditioning.
2. Reduced need to build new transmission and distribution.
3. Local industry and job growth, because the money is spent locally.  The value of this will depend on how much of the system is manufactured locally, but installation (about 50% of the cost) is almost certain to be local.
4. Advances in PV manufacture, lowering future prices for everyone else.
5. Less water use in power generation.  Natural gas fired generation uses up to 180 g/MWh of generation, with coal generation using 300-500 gal/MWh, and Nuclear using between 400 and 720 gal/MWh (EPRI, .pdf).  Using 400 gallons/MWh, our sample system will save 2,600 gallons of water per year (assuming 200 gallons are used for cleaning.)
6. Lower emissions of global warming pollution (about 4.2 tons CO₂ per year, worth about $2,000 at $20/ton, a 10% annual price inflation, and a 7% discount rate for the life of the system.)
7. Lower conventional pollution: SOx, NOx, Mercury, and particulates.
8. Lower fossil fuel  prices due to lower demand for electricity generation (a tiny incremental change, but spread over everyone's fuel purchases.)  I estimate this to be approximately 1/3 of the saved fuel costs, as it was for the New York Energy $mart Program, or a present value of $2,100 over the system life, using the same assumptions as above, except that society retains the benefits so long as the system is producing.
9. A household becoming more aware of how they use energy.
10. A bill for $20,000.

The calculations for the net benefit to society are much more difficult than the net benefit to the system owner.  But as you can see, the system owner is not getting a bargain.  

The question for society is not "Is the system owner living it up at our expense?"  Paying $3,500 for bragging rights and feel-good factor seems far from a bargain to me (but then I like bragging about how much money I save, not how much I spend.)  The question we need to ask ourselves regarding these sorts of subsidies is, are we getting $20,000 worth of value for our part of the bargain?

Solar Consciousness Raising

The $20,000 cost is spread over large numbers of people, as are the benefits.  I used to think that the $20,000 price tag for society wasn't worth it.  While all the factors listed are worth something, I found it hard to believe that they were worth $20,000, especially if that $20,000 could have been used to subsidize energy efficiency measures which could easily save ten times as much energy as the PV system, and hence produce ten times the environmental benefit.

That was before I understood the implications of societal benefit #9: a greater awareness of energy.   Unfortunately, most energy efficiency measures lack the visceral impact to get people excited about energy (although real-time, indoor smart meters have the potential to do so.)  I personally became interested in energy when my stepfather installed a (subsidized) solar hot water system on our house in the early 80s.  Now, my job is advancing the cause of clean energy by increasing the knowledge of investors.

With cost-effective energy efficiency measures, a subsidy can easily be justified based on societal benefits.  For solar PV, environmental and economic benefits may or may not be sufficient justification.  But people who generate their own electricity become much more aware of how they use it.  Awareness of how we use energy is the first step to using it wisely, and helping others to use energy wisely.  Better yet, the rich are more influential than the poor in our political process, which means that raising the awareness of the rich can have a multiplier effect through political impact.

Photovoltaics may not yet be a great investment for homeowners, but homeowners' awareness of how they use energy is a great investment for the rest of us.

Posted by Tom Konrad at 04:21 PM | Permalink | Comments (4) | TrackBacks (0)

Like my #6 pick Sharp, Applied Materials provides investors a way to profit from the spectacular growth of the solar industry without the incredible volatility of the solar sector.  Unlike Sharp, however, AMAT is farter up the value chain, supplying technology and equipment to Solar manufacturers.  

Their strategy is to "become the leading equipment supplier to the solar industry." I find their broad-based strategy of acquisitions in the solar supply sector attractive, because I feel that AMAT's size, financial strength, and reputation in the chip industry should give customers the confidence they need to spend billions of dollars on equipment from AMAT which they might not have if they were buying from the acquired firm.  In other words, the very fact of acquisition should add value to the technology of small acquired firms.  When I asked a lawyer who used to work at AMAT what her impression was, one of her comments was "From a legal negotiating perspective, I found it almost boring (i.e. without challenge) because suppliers and partners would typically cave to our terms given our leadership position in the market."  That probably has not hurt, either.

Thin Film

Recent acquisition in this area include Baccini ($334M, January 2008), HCT Shaping Systems ($483M, Aug 2007), and Applied Films ($464M, May 2006.)  These acquisitions have allowed AMAT to supply entire turnkey production lines for thin film solar, which they call their SunFab.  A 500MW facility was recently ordered by a new Chinese solar manufacturer.  Unlike solar manufacturers, AMAT stands to gain by increased Chinese competition, so long as they can continue to supply the fabs. 

Currently, AMAT is weathering a decline in demand for their core silicon manufacturing products.  This is good news for investors interested in their solar business, because it means that we do not need to pay as much for the non-green chip manufacturing.  

Too Many TVs

However, considerable revenues and profits come from LCD manufacture, an industry also of little interest to clean energy investors (except in the sense that LCD TVs are much more energy efficient that Plasma displays.)  After Philips and Sharp, investors following this series will note that this is now the third company with considerable exposure to the LCD Television market.  LCDs have seen spectacular growth in recent years, but much of that growth has doubtless been driven by a booming world economy.  As a luxury item, sales of new giant flat panel TVs will be quick to suffer from any global slowdown, and this concentration of companies involved in LCD manufacture lessens the protection from diversification investors can get buy buying companies like those in this series, with large clean energy operations as part of a diversified portfolio of businesses.

Investors might choose to ameliorate this risk by waiting for a slump in the market for LCD TVs before buying all three of these companies, or at least buying them slowly over time.  

Other Clean Energy Technologies

AMAT also provides some exposure to other interesting clean energy technologies.  Their Glass Coating Products are used to deposit the special layers used to reduce heat gain or loss through low-e windows.  They are also working to apply their manufacturing prowess to the emerging Organic LED technology, an exciting but emerging sector of energy efficient lighting.  As AMAT says on their website, potential uses of OLEDs are not completely defined.  In that sort of situation, I prefer to get exposure to the technology through a company I can feel confident will be able to apply its expertise no matter what the final uses turn out to be.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in AMAT, PHG, and SHCAY.

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

Posted by Tom Konrad at 05:01 PM | Permalink | Comments (0) | TrackBacks (0)

I don't write frequently about solar stocks, especially photovoltaic (PV) manufacturers.  While the industry is almost certain to be a spectacular growth story, it's also a story that everyone already seems to know about.  Trader Mark put it well: "these stocks are too driven by retail hands."  The PV story clicks with people, and when that happens, they often buy stocks with little regard to what they are worth.  PV stocks are so psychological, we'd all do well to lie down on a couch before buying.

As the IRS is unlikely to allow psychotherapy as an "investing expense," I have looked to other, less popular sectors of renewable energy, and to energy efficiency in this series.  I sidestep the issue by investing in conglomerates and related industries such as electricity transmission and distribution, or agriculture which are less exciting, but will benefit from the same trends.  That is why I'm halfway through this series, and only now talking about the most popular form of renewable energy, solar photovoltaics.

Since Sharp (SHCAY (ADR), TSE:6753) is a conglomerate, its PV manufacturing is often overlooked by solar investors, despite the fact that it's the world's largest manufacturer of solar cells (according to Sharp, independent industry statistics are hard to come by.)  Admittedly, PV accounts for considerably less than 10% of their sales: PV falls under "other Electronic components" in their sales breakdown, and that category was only 9.6% of total sales in 2007.  In the last nine months of 2007, solar sales declined, most likely due to limited supplies of crystalline silicon.  They have taken steps to assure future crystalline silicon supplies, and are aggressively expanding their thin film production.

Thin Film Solar

Sharp is also rapidly expanding their production of amorphous Silicon (a-Si) thin film PV.  I find this particularly interesting, because unlike the other thin film technologies, there is no practical limitation on the quantity of a-Si production due to raw materials, unlike the non-silicon CIGS and CdTe technologies.  (You can read my discussion of the impact of possibly limited Tellurium supplies on First Solar (Nasdaq:FSLR) here by scrolling down to the bottom of the linked page.)

While some a-Si manufacturers have given the technology a reputation for low quality, many manufacturers produce high quality panels.  Amorphous Silicon, like other thin film technologies, tends to have a lower conversion efficiency than traditional crystalline silicon modules, but I was surprised to hear in Sharp's New Year Address that because their thin film more thermally robust in hot climates, their thin film panels actually operate at higher efficiency than their crystalline silicon panels in places like Spain.  For this reason, they are targeting large scale PV installations in Southern Europe with their thin film modules, while their crystalline PV modules are targeted at smaller installations in cooler areas.  I had previously thought that thin film was primarily useful for the same things as conventional PV, and also for Building Integrated Photovoltaics (BIPV.)  I had not expected thin film to have higher efficiency in any context.

Energy Efficiency

PV is less than 10% of Sharp's business, but many of their other products should also be of interest to Alternative Energy investors.  Japan is one of the most environmentally and socially aware countries, and as someone more accustomed to listening to investor presentations from North American companies, Sharp's presentations are a culture shock.  Profit numbers play second fiddle to environmental and social responsibility, the reverse of what I'm normally used to.  

Most of Sharp's other products are already familiar.  They include LCD screens and other components for a wide variety devices, as well as televisions and information equipment.  This is where the company's environmental awareness pays off, with Sharp's LCD televisions often near or at the top of energy saving rankings.  This is in contrast to Philips, which is profiled in this series for their efficient lighting business, not for their televisions.

Historically, United States government ratings only accounted for energy use of televisions in standby mode, a problem which will soon be rectified.  As of November 2008, Energy Star 3.0 specifications (see chart) will come into effect in the United States which will also take into account energy use when the television is on, and will make it easier for consumers to compare the true energy usage of televisions.  This should benefit energy-conscious Sharp relative to competitors, and LCDs relative to Plasma displays.

 

Perhaps even more than Europeans, the Japanese have been thinking about energy for a long time (no doubt in large part because they have to import most of it and therefore pay more for it than North Americans.)  Since most North Americans are only now waking up to the need to save energy, a Japanese company which has long known how to please energy-conscious consumers should be able to use those skills as more consumers become aware of the life-cycle costs of their electronic purchases.

Since a large portion of Sharp's revenues come from consumer products, lower consumer spending and a possible recession in the United States could easily lead to a sharp drop in the stock price.  If that happens, clean energy investors should take that opportunity to acquire one of the world's top solar and energy efficiency companies on the cheap.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in SHCAY.

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

Posted by Tom Konrad at 11:21 PM | Permalink | Comments (1) | TrackBacks (0)

For investors excited about Cree's (NASD:CREE) Light-Emitting Diode (LED) business, here's one more piece of good news: The EE Times Reports that the Fraunhofer Institute for Solar Energy Systems (Freiburg, Germany) claims it has achieved a record efficiency for its inverter designed for PV generators, using Cree's SiC transistors.

I've previously noted that inverters are a good way to participate in the Solar and Wind power markets without needing to invest in the high priced (or foreign) companies which dominate those markets, and even without this news, Cree is a longtime favorite of this blog.  The stock shot up on the news today, but that's no reason not to get your feet wet with cash-covered puts.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CREE.

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

Posted by Tom Konrad at 07:05 PM | Permalink | Comments (0) | TrackBacks (0)

This article is a continuation of my Ten Alternative Energy Speculations for 2008, with picks #8, 9, and10 published last Thursday.  If you haven't already, please read the introduction to that article before buying any of the stock picks that follow.  These companies are likely to be highly volatile, and large positions are not appropriate for many investors.   My least risky picks are part of that same article linked to above; the moderately risky picks are here.  This article contains the most speculative three picks.

#3 Nevada Geothermal Power (OTCBB:NGLPF or Toronto:NGP.V) US$1.29 or CAD$1.26

Geothermal first started catching investors' attention about six months ago.  I went into detail as to the reasons for its appeal, and the factors bringing it to investors' attention in this profile of Geothermal power in October.  

Since then, we have been given an added reason to appreciate Geothermal in the United States.  While the recent energy bill did not contain a national RPS, nor tax credits for renewables, it did give the geothermal community much of what they were asking for since it contained the "Advanced Geothermal Energy Research and Development Act of 2007." 

There are three ways to invest in geothermal power: through the technology, through existing plant operators, and through resource explorers and developers.  The provisions relating to Enhanced Geothermal Power and Co-production in oil fields should help technology and service providers such as Ormat (NYSE:ORA) and United Technologies (NYSE: UTX) over the long term, since they will help open up new opportunities for Geothermal.  Over the short term, which is what this article is about, I expect the "Industry-coupled drilling" provision will be most important, and help explorers and developers of conventional geothermal resources.

According to the Geothermal Energy Association, the Industry-coupled drilling provision "pairs the federal government with geothermal developers to reduce drilling risks and improve drilling precision."  Geothermal exploration and development is a very risky process, so government risk-sharing should greatly increase the value of Geothermal prospects by lowering the effective discount rate at which they are valued.  Coming as it does early in the development process, a reduction in risk could easily be worth more to a company which owns the rights to develop an undeveloped geothermal resource than the later boost to income that would come from a Production Tax Credit, even though the industry-coupled drilling provision is likely to cost the government far less than a Geothermal Production Tax Credit.

US-based geothermal developers are most likely to benefit from this provision.  These include US Geothermal (OTCBB: UGTH, GTH.TO), Sierra Geothermal (OTC: SRAGF, SRA.V),  Raser Technologies, (NYSEArca:RZ), and Nevada Geothermal (OTC BB: NGLPF.OB, NGP.V)).  US Geothermal and Raser Tech are up over 3x from their 52 week lows, while Sierra and Nevada Geothermal are each up about 2x, although the Nevada Geothermal share price was stagnant for the previous two years, while Sierra Geothermal has been following a steady uptrend.

Comparing these last two with the least recent appreciation, Sierra Geothermal has many more early stage projects, while Nevada Geothermal has just four high quality projects nearer to production.  In fact, Nevada Geothermal owns Sierra Geothermal's most advanced project (Pumpernickel), and Sierra's exploration and development efforts will earn them at most a 50% share of the project.   This is only Nevada Geothermal's second most advanced project, after their wholly owned Blue Mountain project which is on track to begin producing electricity in 2009, and for which they have already completed a Power Purchase Agreement and an interconnection agreement with local utilities. Nevada Geothermal is currently funding development of its projects with loans from the likes of Geothermal specialist Glitner Bank and Morgan Stanley, while Sierra Geothermal is financing its exploration needs with dilutive private placements.

Because of the relatively small recent run-up for Nevada Geothermal, its strong financial position, and ownership of a late-stage project (as well as sufficient promising projects to keep them busy with development for many years to come), I see the most potential for robust returns in Nevada Geothermal among geothermal developers.   

#2 Finavera Renewables (TSX:FVR or FNVRF.PK) CAD$0.335 or US$0.3371

I chose to include Finavera in my Top Ten Speculations for 2008 for my own reasons, but AltEnergyStocks.com Editor Charles Morand has been following the company longer and more closely than I have myself, so I asked him to profile it.  You can read what he has to say about Finavera Renewables here or simply scroll down to the next post.

#1 First Solar (Nasdaq:FSLR) $267

When I disclosed that I was short First Solar in the first installment of this series, I received an incredulous comment soon after the article was syndicated on Seeking Alpha: "OUCH!! You have a short position in FSLR? I hope it doesn't come back and bite you!"  I'm sure the commenter is not alone in his conviction that First Solar's rise will continue.  The fact that First Solar has risen so far so fast only because people like the commenter have been purchasing the shares like hotcakes all year.

Shorting is inherently more dangerous than being long, because in a long position you can not lose more than you initial investment.  Shorting a momentum stock, even when it is overvalued, can be especially risky, because momentum tends to be a self-fulfilling prophecy, with more investors becoming interested and driving the price up as they try to buy the stock.  For all those reasons, shorting First Solar deserves to be the #1 riskiest of my 10 speculations for 2008. 

Why did I decide to short at all?  What makes me think that 2008 will be the year that First Solar's bubble pops?

First Solar's valuation seems out of line because of an inherent limitation on their profitability.  Their solar panels are based on Cadmium-Telluride (CdTe) thin film technology, and Tellurium (Te) is one of the scarcest elements in the Earth's crust.  In 2006, First Solar's 60MW of production consumed 4% of the world's annual supply of the metal.  In 2008, analysts expect revenues of approximately 4x the 2006 number, meaning they will need approximately 16% of new annual Tellurium supplies.  PrimeStar Solar, a private company is using a recent infusion of capital from General Electric (NYSE:GE) to quickly begin production of their own CdTe modules.  They do not disclose the timing of production "for competitive reasons," but their hiring and equipment orders speak of an aggressive schedule; I expect they will begin production in 2008.  

With this much demand on short-term Tellurium supplies, we can expect continued price increases.  First Solar cannot set the price of their product in the market, because they will be in direct competition with conventional solar modules as will as thin film modules based on CIGS and amorphous silicon technologies.  With the failure of the US Congress to extend tax incentives for solar or to pass a renewable electricity standard, demand for solar panels may not continue to grow as robustly as it it has in recent years.  If anything, this should cause prices per watt to fall somewhat in 2008.

Ethanol producers were caught in a commodity squeeze this year by using 25% of the United States corn supply.  In contrast to First Solar, ethanol production has only been growing 20-25% a year, much slower than the demand for Tellurium from CdTe cells, and corn production was artificially sustained at an uneconomically high level before the advent of corn ethanol by farm subsidies.  Hence, I would expect a commodity squeeze for CdTe producers at a lower percentage of supply.  My 16% projection for 2008 does not seem out of line to trigger a commodity squeeze, which could cause First Solar to miss (or at least cease to beat) earnings estimates in the coming year.  Missing or just failing to exceed earnings estimates almost always leads to quick price drops for high multiple companies.  According to Yahoo!, First Solar's trailing P/E is about 195.

If First Solar produces 240MW of panels in 2008, and Te prices remain at $100/lb, as they were in 2006, Tellurium cost alone would be $87 million [NOTE 3/8/08: I received a comment that I had lost a decimal in this calculation, with actual Te cost being only $8.7 million... don't take this as gospel, make sure to double-check if this makes a difference in your investment decision.], compared to First Call average estimated Revenues of $800M, and $146M estimated earnings.  I don't know what Tellurium prices were used in those estimated earnings, although I expect it was over $100/lb.  Whatever those estimates were, a $200/lb underestimate would completely wipe out earnings for 2008, and, as the oil price has shown us, even moderate increases in demand for a commodity with inelastic supply can create massive price rises.  What will new demand for Te rising from 4% of supply to 16% of supply in two years do to the price?

UPDATE 1/2/08: Ken Zweibel, President of PrimeStar Solar and former head of NREL's thin film partnership program, got back to me today on a research question for this article, now that the holidays are over.   He couldn't tell me much for strategic reasons, but did say that he isn't skeptical of First Solar's valuation, and "There is more Te from nontraditional sources than people are aware of."  I believe he is referring to Te from oceanic ridges, which I don't believe can be extracted in significant quantity within the next couple years, although a Tellurium price rise like the one I anticipate would lead to mining of oceanic ridges in the medium to long term.  Nevertheless, Ken is responsible for much of what we know about CdTe technology, so his comments should not be taken lightly, and there may be other nontraditional sources which can ramp up production more quickly. 

The other reason to believe that First Solar's meteoric rise might halt in 2008 has to do with investor sentiment.  An unscientific survey of sentiment among Seeking Alpha bloggers (myself excluded) has turned negative (as far as I can tell, only Andrew Ling is still writing positively about the stock), and the Tellurium problem is getting wide attention.  How long will it take the mainstream press to latch on to the Tellurium story?  It's impossible to say, and another run like last quarter could easily squeeze out the shorts.  

Taking this all into account, my short position is only about 0.1% of my portfolio, more of an intellectual experiment than a real bet.  As Keynes said, "The market can remain irrational longer than you can remain solvent."   I wouldn't advise anyone to take a short position in FSLR so large that they could not sleep through another doubling of the stock price. 

If any play is for gamblers, this is it.  But cards are stacking up against First Solar.

Links: Picks #10,9,8; Picks #7,6,5,4. Pick #2 Finavera Renewables

DISCLOSURE: Tom Konrad and/or his clients have long positions in UGTH, SRA, RZ,  NGP,  ORA, UTX, FNV, GE, and a short position in FSLR.

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

Posted by Tom Konrad at 09:33 PM | Permalink | Comments (15) | TrackBacks (0)

Acciona's financing of Nevada Solar One, and a recent series of a financing, a prominent hire, and a big announcement from Concentrating Linear Fresnel Reflector (CLFR) developer Ausra has been keeping long-underappreciated Concentrating Solar Power (CSP) technology in the news recently.  I consider this great news, because the potential for cheap thermal storage of CSP and the gigantic size of the available resource means that CSP is likely to provide the backbone of reliability for any future decarbonized electric grid [Word Doc] where the clear skies which it requires to operate properly and sufficient transmission are available.

But CSP is only one of a broad range of Solar technologies, and here I will outline the framework which helps me understand and predict which ones are likely to be most successful.

To understand the future of any technology, you first need to understand its applications, which will lead to an understanding of the characteristics necessary to meet them.  Broadly, solar power is used to produce heat for climate control and process heat, and for electricity, both on the grid and off.

Daylighting

The oldest solar application is daylighting, the use of windows and other means allowing indirect sunlight to provide effective internal illumination inside buildings.  For individual homes, window and skylights are usually sufficient for the job, but there also exist architectural features such as light shelves and even active sun tracking systems which combine with fiber optics or mirrors [pdf]  to provide light to the interior of large buildings.  Such systems can provide significant energy and maintenance cost savings, as well as increase worker productivity.  They are particularly popular in schools because of studies which show enhanced student learning under natural light.

Thermal Applications

Solar thermal, when used for space heating is needed mostly in the winter in cold and temperate climates.  Because of the fact that it is only useful for part of the year, it needs to be simple and inexpensive to be practical.  Here, passive solar design and proper orientation of buildings is the hands down winner, because passive solar measures are inexpensive to free, with one of the most expensive steps being adding extra thermal mass, something which greatly enhances performance where daily temperature swings are large, and tends to remain fairly inexpensive given its low tech nature.   Passive solar design is almost certain to be a long term winner, although it is unlikely to be a big winner for investors because it does not require special products or materials.   Active solar thermal systems are typically too expensive to economically be used for only the part of the year when the heat is necessary, although when the heat from the system can be switched between multiple applications, such as domestic hot water or electricity generation, it can be economic for an active solar thermal system for at least part of a building's space heating load.  

For process heat, which includes solar domestic hot water, as well as heat for industrial processes [pdf], the active solar thermal systems shine because year round usage can make these still relatively inexpensive systems easily economic.  These systems tend to be either flat plate collector systems, which circulate a working fluid under a black heat collector, or evacuated tube systems, which are somewhat more expensive, but can reach higher temperatures because the heat collector is a solid wire, which avoids problems with boiling the working fluid.  Solar parabolic trough systems are also sometimes used in large scale, high temperature industrial applications.

Electricity Generation

With electricity generation, both time and location become important.   Electric transmission is constrained by infrastructure, and and electric storage is often more expensive than the power being stored, leading to large price premiums for power delivered where and when it's needed most.

The right place

For off-grid applications flat plate photovoltaic (PV) panels, which can be either thin-film or the more traditional crystalline silicon with a battery backup tend to be suitable despite the relatively high cost of power because of the scalability, relative simplicity, lack of moving parts, and low maintenance of the systems.  Concentrating photovoltaic (CPV) is seldome used in off grid homes to reduce up-front costs, because it tends not to work as well as flat plate collectors when there are clouds, and the need for a solar tracking system adds to maintenance costs which can be especially critical in the remote locations where off grid power is usually needed. Another form of practical off grid application is small scale power for lighting or equipment in areas where the grid is available but where the savings from avoided wiring make an investment in PV and a battery pack economical.  A common example of this are the now ubiquitous solar garden lights.

Photovoltaic technologies also have an advantage in distributed generation: placing the power source at the point of use.  The main advantage here is in their simplicity (which allows for low maintenance) and scalability, allowing the sizing of the power source to fit the need.  For instance, an electric utility might place west-facing PV on a transmission base station which is near capacity during times of peak load, thereby meeting a portion of that load and avoiding an expensive upgrade to the base station.

The right time

Since electricity typically requires expensive batteries for storage, technologies which can have inexpensive, built in storage have a cost advantage over ones that only produce power when the sun is shining.  Most solar electric technologies conveniently produce power on sunny summer afternoons, a time which normally corresponds to peak load in climates where air conditioning drives peak load.  This effect can often be enhanced by orienting the panels towards the west or southwest so that they are producing their greatest output in the afternoon.  This produces intermediate power, which is available when electric demand is high, but is also often available at non peak times, such as during the day in the winter.  Although such power is more valuable than other forms of intermittent power generation, which often have no correlation with the load profile, they also cannot be relied on to be available when needed, and are less valued by utilities which are responsible for providing power whenever customers want it. 

Dispatchable power is the most valuable form of generation (per kWh) on the electric grid, because the utility can use it only when demand is high and cannot be met with cheaper resources, while utilities also value base load power, which is almost always available and can be relied on at any time.  Since the sun is not always shining, these forms of power require some form of storage, and this means that they are best met with Concentrating Solar Power, which can be built with thermal storage, a much less expensive way to store power than batteries and other forms of electric storage (with the possible exception of Pumped Hydro, which is limited in its available capacity and location.)

Thin film vs. CPV

The incumbent photovoltaic technology, crystalline silicon is typically very expensive per watt, and there are two approaches currently being taken to cut costs: thin film and concentrating PV.  Thin film is another form of flat plate PV that requires much less and less specialized materials but typically has lower conversion efficiencies and durability than crystalline PV, which makes it inappropriate for applications that require a large amount of power generation in a small area, while concentrating photovoltaic (CPV) uses lenses or mirrors in to focus sunlight on small but very high efficiency cells to generate power at a lower cost.  CPV usually requires the ability to track the sun and few clouds, which means that it is unlikely to be as economic in distributed applications, although some companies are working to overcome these limitations.

Central Power Generation

For central power generation, the main factor in choosing between technologies is cost.  Here, the concentrating technologies (CSP and Concentrating PV) tend to have the advantage, and the ability to use transmission to bring the power to the point of use means that the generation can be placed in areas with a lot of sun and very few clouds where these technologies perform best.  The need for additional maintenance for solar trackers is less of an issue at a central solar plant, and this also give and advantage to the concentrating technologies.

Concentrating Parabolic Trough plants, Solar Tower, and Concentrating Linear Fresnel Reflector generators need large scale (in the hundreds of megawatts) to achieve their superior economics, while Dish Stirling and Concentrating photovoltaic (CPV) technologies achieve their economies of scale at less than a megawatt.  The superior scalability of Dish Stirling and CPV is largely negated by the cheap thermal storage (referenced earlier) available with the first three technologies which is not available with Dish Stirling or CPV.

Conclusions

Whenever a company announces a new technology with higher efficiency, lower cost, or better storage, it's easy to get carried away and think that that one technology is destined to win out over all the others.  I hope you now appreciate that there are as many or more applications as there are technologies, and which technology has the upper hand will depend on the intended use.  When evaluating companies, it's most important to consider the target market, and compare the technology to its true competitors.  This article and the following tables should provide a useful cheat-sheet when you do so.

If You Want to See it in Action

Next Saturday (October 6) is the National Solar Tour in the US.  Click here to find a tour near you and see many of these technologies in people's homes.

Application Table

Application	Category	Dominant/Best Technology	Other Technologies
Daylighting	Lighting	Windows, Skylights	Light Shelves, Active systems
Space Heating	Thermal	Passive Solar Design	Active solar thermal, especially if also used for other applications such as water heating.
Process heat/ Water heating	Thermal	Active Solar Thermal	flat plate or evacuated tube
Distributed generation	Electric	Photovoltaic technologies
Off Grid	Electric	Non-tracking PV with battery backup
Central Power Generation	Electric	Concentrating Solar Power	Concentrating PV, Flat plate PV
Dispatchable Power	Electric	CSP with thermal storage	Others w/ battery backup
Intermediate Generation	Electric	All technologies, should be tracking or west-facing to make production align most closely to peak load.
Base load Generation	Electric	CSP with thermal storage	Others w/ Battery backup

Electric Generation Technology Table

Technology	Best uses	Strengths	Weaknesses
Photovoltaic
Flat Plate	Distributed, off grid	Simplicity, Scalability	Cost
Crystalline	Distributed	Low maintenance, high durability	Cost
Thin Film	Distributed, off grid	Low cost; scalability	Low efficiency
Concentrating PV	Sunny areas, Central installations	Low cost	Higher maintenance
Concentrating Solar Power (CSP)
Solar Trough, CLFR, Solar tower	Central Generation; peaking and intermediate power; base load capable.	Thermal Storage, Cost	Large Scale
Dish Stirling	Sunny areas, Central installations	Low cost; can be hybridized with natural gas; Scalability	Higher maintenance

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

Posted by Tom Konrad at 12:55 PM | Permalink | Comments (0) | TrackBacks (0)

Net metering describes the requirement that an electric utility buy electricity from any of its customers that generate their own electricity (usually with some sort of renewable energy, such as solar or wind) at the same price that they sell it to the customer.  That seems fair, doesn't it?

The Utility Perspective

It doesn't seem fair to the utility.  Utilities do more than just generate and sell electricity to customers.  They also are responsible for transmission (delivering the electricity) and reliability (making sure that the lights work when you flip the switch.)

Taking just the reliability requirement, suppose that a homeowner, call him Sol, wants to install a solar photovoltaic (PV) system on his roof and sell the electricity back to the grid when he was not using it himself.  But suppose Sol had a reliability requirement.  For instance, suppose that whenever Ted, one of his neighbors,  turned on the TV, Sol had to make sure the PV system was working, or the TV would not turn on.  Also suppose Ted knows where Sol lives, and that Ted likes to watch TV at night. 

Ted would probably grow quite unhappy with Sol quite rapidly, and would definitely complain, and might even start pay Sol an unfriendly visit at uncomfortable hours.  Sol would probably think twice about signing up for net metering under those rules.  

Utilities aren't enthusiastic about net metering, either.

The Benefits of Grid-Tied Solar

The example above is something of a straw man.  Unlike Sol in my example, with net metering, utilities are not being asked to do something which they are incapable of doing.  In fact, utilities balance load and demand all the time, and so long as net metered systems only account for a small fraction of a utility's total demand, they are un likely to be a strain on the grid.

In fact, because PV panels usually produce power on hot, sunny afternoons when peak load is driven by air conditioning, solar homes often provide a net benefit to the grid [.pdf] for which the customers are not paid, because most utility customers are charged a flat rate per kWh, which does not take into account the higher value of electricity at times of peak demand.

Peak reduction from near Zero Energy Homes with West-facing PV (blue) for Sacramento Municipal Utility District. Slide 19

The ideal orientation for PV depends on the utility's load profile.  West-facing PV will be better for some, while south facing will be better for others.  

What about Small Wind?

Not all distributed generation is south- or west-facing PV, however, and other forms of generation such as small wind often produce power at times unrelated to peak.  If the distributed generation customer is charged a flat rate for electricity, the costs of servicing the customer may come to exceed what he pays for service.  This is especially likely for a customer with a small wind turbine which may produce very little of its power at high priced peak load times, and a lot at times of low load.  This requires the utility to transmit the power a long distance to where it may be needed, as well as run its least expensive generation at less than full capacity in order to accommodate the extra power generated by distributed wind.  

Many environmentalists will read "least expensive generation" in the line above and think "that's exactly what we want... least expensive generation means coal plants, and it would be wonderful if a utility had to shut those down."  

While coal is the least expensive form of generation for most utilities today, but it may not be for long, and not only because of the cost of pricing un carbon emissions.  In terms of marginal cost of generation (the cost of producing an extra kWh of power) wind is already cheaper than coal because there is no fuel cost.  I no longer recall where I heard this anecdote, but I believe that last winter (2005-6), on an extremely windy weekend in Europe, electricity was trading for free on the wholesale market, and many utilities were shutting their coal plants down.  North America still lags Europe in terms of wind penetration, yet utilities in windy areas are likely to get to high wind penetrations first, and these are precisely the areas to which small wind is also most suited.  In the not so distant future, I can easily see a scenario where a rural utility with a high degree of wind generation of its own might have to shut down some of its wind turbines in the middle of a windy night because of net-metered small wind, forcing the utility to pay retail rates for electricity it would otherwise have gotten for free, and then having to pay to transmit that power somewhere it might actually be used.

The Bigger Picture

This is not to say that small wind is bad and west-facing PV is good, just that each impose different costs or benefits on the system as a whole.  Wind can also be good for a system.  In February of 2006, an unseasonable cold snap caused power outages in Denver in part due to unexpectedly large demand for natural gas for heating.  Cold winter nights also happen to be when the wind blows hardest and most consistently on the northeastern Colorado plains, so a small wind turbine on net metering would have actually helped to reduce the severity of the controlled rolling blackouts Xcel ordered.  If the 400 MW Peetz wind farm (now in phase II of construction) had been operational in February 2006, I think it is unlikely that the blackout would have happened at all.

Graph from Trans-Elect, LLC using data from NREL Wind Performance Projections.  Note that the capacity factor for Peetz in NE Colorado is over 60% in the month of February, when the blackouts occurred, and capacity factor is also highest at night.  The other lines are wind regimes from SE Wyoming and Lamar in SE Colorado.

Having Customers Pay for Costs and Benefits

Net metering is an implicit subsidy for distributed generation, because the net metered customer gains the benefits of the utility's grid (reliability and transmission of electricity) without having to pay for it.  In addition, some forms of net metered generation are given greater benefits than others when electricity is metered at a flat rate.  If the price of electricity varied depending upon the load on the system (Time of Use pricing), then properly oriented PV would often be paid more than it under a flat rate system, and people would be encouraged to orient their solar panels for maximum system benefit, rather than maximum electrical output.   

As for the implicit subsidy of unpaid-for transmission, I believe it should be abolished, and replaced by an explicit subsidy large enough to reflect the social benefits of distributed generation other than increased grid stability, which is accounted for with time of use pricing.  

California Solar Initiative: A Note of Caution

When California mandated that solar customers had to sign up for time of use metering in order to earn solar rebates, solar installers felt that they were not given enough support to understand the new rules (which included a lot more than the switch to TOU.)  Non-specialist customer confusion was understandably greater, and TOU pricing became the focus of a minority of solar customers who were actually charged more than they would have been under flat rates (because their solar system too small to offset enough of their air-conditioning driven usage during the peak period).  The California Public Utilities Commission (CPUC) removed the TOU pricing requirement because of the outcry.

The fact that the CPUC backed down is a tragedy.  In a very real sense, the solar customers who were hurt by the switch to the TOU tariff were the ones who had been receiving an unfair subsidy in the flat-rate system: they used a disproportionate amount of power during peak times, so much so that the benefits of solar systems were too small to replace the lost implicit subsidy.  Customers who suddenly had to pay something closer to the true cost of their electricity usage found that they were paying more than they had been, despite their new solar panels.  They unsurprisingly clamored to get back onto the flat rate where they were able to take advantage of the market inefficiencies which subsidize their air-conditioning chilled lifestyles.

Such homeowners would do a lot more for the environment if, instead of splashing out money on a PV system, they had made their homes tighter and switched to more efficient air conditioning.  For instance, the hyper-efficient Coolerado Cooler (The commercial version of which is sold as the Delphi HMX) works best in the hot, dry climates which were worst hurt by the time of use rates.  As I have said many times, PV holds an unhealthy fascination for people, to the point that money which would do far more good spend on energy efficiency improvements is effectively wasted on solar.  If we are truly more interested in solving the world's climate problems, we will spend limited government rebate money subsidizing energy efficiency improvements with large net benefit for the grid that also reduce carbon emissions, rather than subsidizing expensive solar systems for a fraction of the benefit.

Conclusions

Net metering is definitely advancing.  On August 21, I attended a Colorado Public Utilities Commission (PUC) hearing on distributed generation, and it seemed clear to me that some form of statewide net metering would likely become law in the Colorado in the next legislative session.  See my notes from that meeting for more detail.  I did bring up the possibility of combining net metering with TOU pricing in the meeting.  However, that and other good ideas from participants (including inverted tiered block pricing) or using solar rebates to subsidized increased energy efficiency will probably require considerably more advocacy if they are to make it into law.  

On the bright side, the Colorado Governor's Energy Office did suggest that the PUC investigate west-facing PV as part of a net metering program.  They are likely to be listened to, although inclusion in the final package from the state legislature is chancier. 

The California experience shows that the complexity of such schemes means that care will have to be taken with design, and educational outreach is important.  If the California consumers were helped with efficiency improvements before they installed solar, there would likely have been much less of a backlash, and the efficiency improvements would have done a lot more good than the solar PV systems which would have served as the carrot to induce the efficiency improvements.

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

Posted by Tom Konrad at 04:50 PM | Permalink | Comments (2) | TrackBacks (0)

Avoiding the Rush

Whenever there is a gold rush, the people who make the real money are seldom the gold miners, but rather the suppliers to the miners that come home with the lion's share of the profits.   This is not because there is not an incredible amount of money to be made in mining gold, but because the nature of a gold rush is that too many optimistic miners are encouraged by the early profits of a few to rush to pursue too few opportunities.

To many, the rush into solar stocks seems to be just that sort of gold rush.  The boom in solar IPOs certainly reminds me of the type of feeding frenzy in which incautious investors are likely to get burned.  And we are also seeing some other signs of rampant speculation, where investors are buying poorly managed (or even dishonest) companies with almost the same fervor of well managed ones.  There's little doubt that the future is bright for solar power, but picking solar companies that are going to survive and thrive in that bright future is becoming increasingly difficult in an increasingly crowded field.

Things Photovoltaic Makers Need

In a gold rush like this one it makes more sense to look at the suppliers.  The most obvious suppliers for solar photovolatic (PV) manufacturers are the suppliers of solar grade silicon, from which most PV panels are made.  This is what I was doing during last summer, and my favorite silicon supplier, MEMC Electronic Materials (NYSE:WFR) has doubled since then (a much better performance than I was expecting in such a short time.)  I have since taken most of my (and my clients') gains.  With many wondering how long the silicon supply shortage will last, and the explosion of companies advancing thin film and concentrating photovolatic technologies to get around the shortage, it seems simpler to get off the silicon roller coaster than to predict when prices will peak or guessing which PV technology will be the most economic in a couple years.

Thinking about suppliers to PV manufacturers, we might also think of Spire Corp. (NasdaqGM: SPIR), which supplies solar manufacturing equipment, but that stock is also trading at its 52-week highs, and is up about 50% in the last six months, and has tripled in the last five years, yet is still unprofitable. [UPDATE: Applied Materials (NasdaqGS:AMAT) just won a contract to supply a thin-film production line to Spain's T-Solar Global. As a supplier to the PV industry, AMAT is worth inclusion in my Alternative Energy Blue Chip Portfolio.]

While I'm used to investing in unprofitable companies, I prefer to buy out-of-favor unprofitable companies, rather than ones that have recently had a big run-up.  Which brings me to my current favorite supplier to the PV industry: makers of the inverters which convert DC power from PV panels into the AC power used by most of our appliances and the grid.  (Small inverters are also used in campers to provide A/C power for portable TVs and other electronics.)

Wind turbines also use a similar device called a converter, although wind converters convert the "wild AC" produced by wind turbines into the more domesticated variety used on the grid.  Many manufacturers make both PV inverters and wind converters.  Many also make power supplies which convert AC to DC power, since these are basically inverters operating in reverse.

North American Stocks

Here is a run-down of the major manufacturers traded in the US and Canada:

Xantrex (TSX:XTX or Pink Sheets: XARXF): Makes a range of solar inverters from 10 to 225 kW and wind converters for turbines up to 1.5 MW.  They are also well established small inverters for cars and campers and other power conversion products.  And, unlike many other alternative energy companies, they have had profitable years in 2005 and 2006.  This is likely the safest investment among power electronics manufacturers, but, by the same token, has the least possible upside.  Xantrex's stock has been flat for the last couple years (after falling about 40% from its IPO in 2004: not a lot of excitement here, which is exactly when I like to invest.

SatCon Technology Corp. (NasdaqCM:SATC) operates in a broad range of power electronics businesses, including grid support and power quality, as well as power conversion.  Their wind converters are designed for turbines from 250kW to 2MW and larger.  Their PV inverters are designed for systems from 30-500kW in size.   SatCon is not currently profitable, and is unlikely to become profitable in the next couple years, but the earnings trends seem to be in the right direction, and they are in the rapidly growing industrial segment of the market.  SATC also fell immediately after its IPO in 2002, and has been gyrating rather wildly since then.  It's currently down about 60% from its price at the IPO, and seems to be showing some signs of life.

Sustainable Energy Technologies (Toronto Venture: STG; Pink Sheets: STGYF) makes a low voltage inverter suitable for residential sized systems and charging battery backups that they market as having superior efficiency and reliability, which they also market for use with fuel cells.  In addition, they sell a vertical axis wind turbine.   STG is definitely the most speculative of the three, but also the greenest and purest play on alternative energy.  Given its speculative nature, it's probably best to wait for a pullback before investing.

These companies do not have the market to themselves by any means; major competitors include the private German Compaies SMA (Sunnyboy inverters and Windyboy converters) and Fronius.  Nevertheless, there is little excitement around the stocks (except for STG which is such a tiny company that the only limit on its stock price is speculators' greed) and yet they have as much potential to benefit from the growth of Solar as do the much hyped solar stocks.


DISCLOSURE: Tom Konrad and/or his clients have positions in the following stocks mentioned here: WFR, XTX, SATC,STG.

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

Posted by Tom Konrad at 06:00 PM | Permalink | Comments (2)

Two different opinions on Energy Conversion Devices [NASDAQ:ENER] came out last Thursday (Jan. 11).

Analyst Jeffrey W. Bencik at Jefferies & Co said that ENER was one his top 2 picks in the solar industry for '07, opining that despite continued volatility this should be a rewarding year for ENER investors. He believes that attention will "shift from company specific performance to a top down focus on the evolution of solar incentive schemes."

Jim Cramer, on Thursday's Mad Money, said he could not, "in good conscience, recommend that stock with oil at $51, going to $49. So, [he is] going to say no, no, no. Sell, sell, sell."

Cramer argues that ENER will trade based on the price on oil, while Bencik argues that it will trade based on the evolution of solar energy incentive programs, presumably not only in the US but also in places like Europe, Japan and China. I tend to agree with Bencik here.

Oil and solar power are not substitutes, except in very rare cases. Governments will continue to forge ahead with various schemes to promote alternative energy regardless of what happens to the price of oil, and, ultimately, that is what will drive revenue growth in the sector. Profitability will be driven by a combination of revenue, scale and technological developments. ENER is doing well on all 3 grounds.

Alternative energy investors, as a class, are getting much better at pinning down the factors that are truly driving growth in this space, and the days when a drop in the price of oil caused the whole sector to collapse are coming to and end. Just look at how Suntech Power [NYSE:STP] has performed throughout the latest correction in the price of oil (it is up 19% since Nov. 30, 2006).

ENER is currently trading in the mid- to low- 30s: this could be a good entry point.

DISCLOSURE: I am long Suntech Power.

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

Posted by Charles Morand at 11:22 AM | Permalink | Comments (5)

Suntech Power Holdings (NYSE:STP) got a nice 5.01% pop on Wednesday on news that it had signed a big supply agreement with a Spanish solar firm. This came a day after the company released overall pretty decent quarterly results.

But to some, STP looks richly valued, even after all the good news. Are you one of them? If you have about 5 minutes to spare, I would recommend watching the first segment of yesterday’s Stars & Dogs on Report on Business Television (ROB TV). To watch this video, scroll down to "Stars and Dogs" at 6:00pm. The link will only be available for a week or so. My apologies for not being able to provide an easier way to view the video.

ROB TV is a Canadian financial news network, and Stars & Dogs is a show where the 2 anchors each take the bull and the bear side of the story du jours. The very first item on yesterday’s agenda was STP. At the end of the segment, the show’s producer adjudicates on which side was the most convincing, and on STP he went for the bear argument.

I have owned this stock almost since the beginning, so I’ve seen it soar to unjustified heights and fall to levels where I thought I should buy more. I do find it a tad pricey at around $28 and prefer it in the lower 20s. One thing you should expect, no matter what, is a lot of volatility – the alternative energy sector is a relatively new beast and investors are just beginning to wrap their heads around how those stocks should be valued.

Any thoughts on this?

Posted by Charles Morand at 09:12 AM | Permalink | Comments (0)

Magnetek Inc. (MAG) announced that Manhattan's largest functioning Building Integrated Photovoltaic (BIPV) power system recently began harvesting energy from the sun. [ more ]

Posted by Mark Anderson at 07:01 PM | Permalink | Comments (0)

Xantrex Technology Inc. (XTX.TO) has been awarded US $873,000 from the U.S. Department of Energy's National Renewable Energy Laboratory (NREL) under its Photovoltaics Manufacturing Research and Development Initiative. Xantrex will match the funding from NREL during the course of the project for a total budget of $1.74 Million. This program will take place at the Xantrex facility in Livermore, California.

Xantrex PV inverters are America's leading choice for large-scale solar installations. Presently, utility-interactive, three-phase inverters are available in models ranging from 10 kW to 225 kW, and multiple inverters can be paralleled for larger power installations. [ more ]

Xantrex is one of my favorite companies in the power inverter space. The stock is also acting very well right now and is close to what technicians call a "Golden Cross" with the 50 day MA crossing over the 200 day MA. This is typically a very bullish stock pattern. I would be a buyer of this stock now, but I'm not able to purchase the stock since in only trades on the Toronto exchange.

Posted by Mark Anderson at 11:35 AM | Permalink | Comments (0)

GE Global Research, the centralized research organization of the General Electric Company (GE), announced that it was selected by the Department of Energy (DOE) to lead $11 million of research projects in the development of hydrogen as a fuel source. The programs are focused on near and long term solutions for the production of hydrogen with sustainable, clean technologies. GE Global Research will contribute approximately $2.5 million to the projects with the balance coming from DOE and other industry partners. [ more ]

This project plans to study the creation of hydrogen from solar water splitting, naturual gas/bio production, and next generation electrolyzer technologies to make more efficent fuel cells.

Posted by Mark Anderson at 01:58 PM | Permalink | Comments (0)

You can learn about Solar Energy at the excellent How Stuff Works website using the following link:How Solar Cells Work

Posted by Mark Anderson at 03:27 PM | Permalink | Comments (0)