Tom Konrad CFA

Since the start of March, when shareholders would reasonably have expected to have heard an announcement of the meeting date and the circulation of proxy materials, Finavera’s stock had drifted down 15% (from C$0.20 to C$0.17.)  Some of investors’ worries seem to have been justified, in that the original agreement outlined in December had been for the purchase of all four projects.

Meet The New Deal. (Pretty Much) Same as the Old Deal

I spoke to Finavera’s CEO, Jason Bak, to try to better understand the changes.

A view of Finavera's Miekle Wind Energy project.  Photo Source: Finavera

Despite this change, the most important aspects (for Finavera and its shareholders) of the December agreement remain in place:

• Pattern will still forgive Finavera’s C$9.3 million in debt when Finavera’s shareholders ratify the agreement at a shareholder meeting to be scheduled before the end of June.
• Pattern will provide Finavera with a credit facility at a 10% interest rate to cover its liquidity needs until the end of 2013.
• Finavera will receive 70% of the compensation originally envisioned in exchange for only 54% (on a per-MW basis) of the projects.

Most importantly, the revised deal alleviates the liquidity problems which forced Finavera to seek a deal to pay off an overdue loan to GE late last year.  With the ability to repay outstanding liabilities and still put cash in the bank, Finavera will be in a much stronger position when it comes to acquiring attractive development projects, or even returning some cash to its long-suffering shareholders.  Bak says the use of the funds will be put to a shareholder vote after the cash is in hand and Finavera has potential projects to present to shareholders.

Timeline

Finavera still expects to receive approximately C$9.4 million for bringing its Cloosh wind project in Ireland to financial close in the fourth quarter of this year.  This, along with the C$9.3 million of debt forgiveness from Pattern upon shareholder and exchange approval of the deal should be enough to cover Finavera's outstanding liabilities.

The Tumbler Ridge project already has completed environmental and construction permits, and Finavera will submit Meikle for environmental permitting later this year.  Bak expects both projects will achieve financial close in the second half of 2014, at which point Pattern will pay the approximately C$19 million balance.

Bak says that Finavera will issue an information circular with details on the agreement in the next couple of weeks, after which he will hold a shareholder conference to address shareholder questions.  A shareholder meeting and a vote on the contract will take place by the end of June.

Valuation

In the press release, Bak said, “Based on the Pattern transaction and the value of the Cloosh Valley Wind Project assets, and using a set of conservative working assumptions, Finavera estimates the Company’s net asset value to be $0.41 per share.”  I asked him to walk me through the calculation, in order to assess if I also felt he was being conservative.

• C$28 million from Pattern
• C$19 million in debt
• C$10 million payment for Cloosh
• C$3 to C$4 million residual value for 10% interest in Cloosh.
• No value attributed to Wildmare or Bullmose projects.
• Minus ongoing expenses to achieve the payments listed.

That sums to about C$22-3 million in net cash and assets expected before the end of 2014.  Finavera has 39.6 million shares outstanding after a debt-for-share swap announced in March.  Management and the Board have options exercisable at C$0.205 a share for an additional 1,783,800 shares.  After exercise, Finavera would have 41.4 million shares outstanding and an additional C$365,679 in cash.

At 41.4 million shares, Bak’s C$0.41 per share comes to a net asset value of C$17 million, compared to my C$22 to C$23 million, minus the time value of money and two years of operating expenses.   Finavera’s free cash flow in the first 9 months of 2012 was an outflow of C$1.6 million, so two years of operations and project development should easily be covered by the C$5 to C$6 million difference in Bak’s C$0.41 per share estimate and my back-of-the-envelope calculations.

While less attractive as the original deal, the finalized agreement with Pattern still relieves Finavera’s liquidity problems, and Bak’s reasonably conservative valuation for the company at C$0.41 a share should still produce decent upside for investors who buy today at C$0.17 a share, or even investors who bought at the C$0.225 the stock was trading at when I analyzed the original deal in December.

The 24% decline in price since then more than compensates for not selling Wildmare and Bullmoose.  If Pattern eventually exercises its option to buy those projects as well, that will just be gravy.

Disclosure: Long Finavera

This article was first published on the author's Forbes.com blog, Green Stocks on April 30th.

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

Posted by Tom Konrad at 09:15 AM | Permalink | Comments (0)

Vestas Wind turbines in Sloterdijk. Photo by Aloxe.

Indeed, alongside the expansion of wind markets - notably in Asia and the US, with Europe not far behind - wind technology also continued to show progress over the last year. Key trends appear to focus on larger offshore machines, new versions of existing turbines that have been upgraded and modified to suit a wider range of wind regimes and operating conditions, and a number of developments that aim to reduce installation and operations and maintenance costs.

For example, in January this year A2SEA's new second generation vessel, Sea Installer, erected two Siemens 6-MW test turbines at DONG Energy's demonstration site Gunfleet Sands 3.

“The turbines are getting bigger, and the future sites are further out to sea. This calls for more flexible vessels,” says Jens Frederik Hansen, CEO at A2SEA A/S. The vessel was launched from Qidong in China where it had spent two years under construction.

In autumn 2012 Hochtief also revealed a new vessel. Developed in conjunction with Areva [ARVCF], Innovation is a new heavy lift jack-up offshore installation vessel. Operating in depths of up to 65 meters, its cargo capacity is up to 8000 tons and the onboard crane can lift up to 1500 tons. Innovation was built by HGO InfraSea Solutions, a joint company of Hochtief Solutions and GeoSea.

Areva also showcased its new Single Blade Installation system (SBI) enabling the installation of blades on the hub in all positions up to 330 degrees and at wind speeds up to 12 m/s. By avoiding the need to transport assembled rotors, the system saves deck space and increases the number of machines which can be transported as a single load, Areva says. They add that the 55-ton remotely-controlled yoke was first tested in May at its prototype site in Bremerhaven, with the average time to mount or demount a blade around three hours.

Onshore, for example, Vestas [VWDRY] and SNCF Geodis are using the railways to transport blades, with up to nine 55 meter long blades transportable by train. Although railway transportation of blades is still in its early phases in Europe, Vestas says it expects to reduce costs by 10-15 percent compared to transport by road.

Larger Rotor Diameters, Higher Speeds Explored

Among the major manufacturers announcing new, larger rotor, versions of existing machines, in February Spanish player Acciona [ACXIF] revealed its new 125 meter diameter rotor for the company's existing AW300 platform. Designed to give the 3-MW turbine superior performance at low-wind IEC Class III sites, the AW 125/3000 model stands on Acciona's 120 meter concrete tower and has a swept area of more than 12,300 m2. Design certification for the new rotor is due for completion in 2013, with the first blades installed by the end of the year. The machine will be available for delivery in 2014 for both 50 and 60 Hz markets, Acciona says. It launched the 116 meter rotor version for IEC Class II sites in 2011.

At the recent EWEA 2013 Annual Event in Vienna, Alstom [AOMFF] also announced an upgrade of its ECO 100 3 MW platform, currently designed for medium (Class II-A) wind sites, to medium and high winds (IEC Class II-A and IS Class). The ECO 122 turbine, currently suitable for Class III sites, is also being upgraded to medium and low winds (IEC Class III-A and II B). This upgrade increases the net capacity factor to up to 48 percent for both turbines with rotor diameters of 100, 110 and 122 meters, the company says.

Meanwhile, the first wind farm featuring ECO 110 wind turbines has been inaugurated in Brittany, France, following the signing of a March 2011 contract between Alstom and Eole Generation GDF SUEZ Group for installation of 11 machines. These feature a 110 meter diameter rotor designed for Class II wind regimes and sit on a 145 meter tower.

In a related development, September 2012 saw Alstom sign a deal for the manufacture of their ECO 122 wind turbines in two wind complexes, located in the North-East of Brazil with a 600 MW annual production capacity.

Vestas also revealed a number of new machines over the past year. In the low-wind arena the wind power giant sold its first V126-3.0 MW machines in November 2012, having launched the machine at the Husum Wind fair in September. Finland's TuuliWatti Oy is expected to see delivery of the initial batch of units in the fourth quarter of 2013.

The turbine is the latest variant of the 3 MW platform first launched in August 2010, has a rotor diameter of 126 meters to target low wind conditions (Class III) and features a structural shell blade design. The swept area has been increased by 27 percent compared with the previous model, the V112-3.0 MW, with its 112 meter rotor diameter. Featuring 55 meter-long blades, it is suitable for all three wind classes as well as offshore, Vestas says. Indeed, in June 2012 Vestas released a high-wind version of the machine. The new IEC S uses a beefed-up gearbox modified to handle the increased loads.

“The global market for high-wind turbines is diverse. In traditional and mature wind markets like the European mainland, there are not that many high-wind sites and opportunities left. However, in other markets, there are huge untapped high-wind resources and potential for high-wind specific turbines,” says Knud Winther Nielsen, senior product manager for Vestas Turbines R&D and head of the commercial development of the V112-3.0 MW.

Nielsen's words are backed up with another new product, announced in 2012 by General Electric [GE] and the latest version of its trusty 1.5-MW platform. The 1.85-82.5 machine is destined for high wind sites in Brazil, the company says.

IEC-certified for higher wind speed sites, the new turbine offers an 8 percent increase in annual energy production at 9 meters per second over its previous model. GE says its proprietary Advanced Loads Control allows siting of the 82.5 meter rotor in more aggressive wind regimes.

New Machines, New Manufacturing

Along with new machines, new manufacturing facilities are also being developed which will produce the new generation of products.

For example, in January 2013 Alstom launched construction of two new turbine plants in France. The Saint-Nazaire plants, expected to be commissioned in 2014, will be entirely devoted to assembling nacelles and manufacturing generators for the 6 MW Haliade 150 offshore wind turbine featuring a permanent magnet direct drive generator and a 150 meter rotor diameter. The two industrial buildings will be next to each other and will cover approximately 2.5 hectares in Montoir-de-Bretagne, within the harbor zone of Saint-Nazaire. They will be scaled for a production capacity of 100 machines per year and will take over from the temporary workshop in Saint-Nazaire where Alstom is already producing early series machines. By 2015, two other plants in Cherbourg intended for the production of blades and towers are set to be completed. The blades plant is being developed with LM Wind Power, whose 73.5 meter blades became the first 70+ meter blades to be installed when Alstom inaugurated the turbine.

LM Wind Power vice president of sales & marketing, Ian Telford, states: “Our technology enables us to design and manufacture relatively lighter glass fibre and polyester blades for the length, but above all, LM Wind Power has proven ability to handle the industrialization of these blades, which is not easy.”

Three out of the four offshore wind turbine factories will be financed through the “investissements d'avenir” (investments for the future) scheme managed by the French Environment and Energy Development Agency (ADEME).

Enercon has also announced new manufacturing capacity this year, having proceeded to series production in its new concrete tower factory in Zurndorf in Austria's Burgenland state. At full-scale production, the plant is expected to produce up to 24 tower segments a day - a complete tower - for the E-101 3 MW turbine series. The new factory is set to produce towers for projects throughout Austria, Hungary, Romania, Croatia, Poland, and southern Germany. This latest plant followed the October 2012 start of operations at a similar, slightly smaller, facility in the province of Picardy, France.

Elsewhere, for example, China's Sinovel [601558.SS], is reportedly in advanced discussions with Romanian heavy machinery plant Faur to jointly invest in a wind turbine production facility in Romania.

Onshore Developments

Operating exclusively onshore, Germany's Enercon has announced a slew of developments with its new machines over the last few quarters. In mid-October the company erected the prototype of its new Class IIA 2.3 MW E-92 series atop a 97 meter precast concrete tower in Simonswolde, Ostfriesland in Northern Germany. With a rotor diameter of 92 meters, the machine is designed for lower wind sites and sits between the E-82 2.3 MW and the E-101 3 MW machines. Compared with the 82 meter machine, the E-92 can achieve up to 15 percent more yield, Enercon says. Once the power curve rating has been completed, due as REW went to press, Enercon says it will start series production.

News of the larger 2.3 MW variant followed close behind the announcement of another new machine, a 2.5 MW series with a 115 meter rotor diameter, specially designed for inland locations. Designed for average wind speeds of 7.5 meters per second and gust intensities of up to 59.5 meters per second, the E-115 is particularly suitable for less windy locations, Enercon says. Available with hub heights of 92 to 149 meters the first prototype is due to be installed this year and serial production is expected to be launched in 2014.

Nordex,[NRDXF] another wind major operating exclusively onshore, chose the recent EWEA event in Vienna to unveil its latest turbine. The fourth generation — Generation Delta — of its 3-MW platform has larger rotors, increased nominal output and optimized technical systems, the company says. The new range comprises turbines for strong and medium wind speeds (IEC Class 1 and 2) and includes the 3 MW N117/3000 for medium wind speeds. This is a 20 percent increase in nominal output over its predecessor. Designed for locations characterized by high wind speeds, the N100/3300 is rated at 3.3 MW, resulting in a more than 30 percent increase in nominal output. Larger rotors are being used for both platforms with the N117/3000 adding 17 meters on its predecessor, resulting in a 37 percent increase in swept area and a 10 percent boost to full load hours. Meanwhile the N100/3300 has a rotor 10 meter larger than its predecessor, increasing the swept area by 23 percent, and a taller 100 meter tower. The new machines also come with Nordex's anti-icing system. Commercial deliveries of the new machines are set to commence at the beginning of 2014, with initial projects being installed from mid-2013. Finland's Raahen Tuulienergia Oy will see two N117/3000 turbines installed in the port area of the Northern Finnish town of Raahe. One turbine is to be mounted on a 91 meter and the other on a 120 meter tower.

In mid-2012 Nordex also began series production of its newest variant of the 2.4 MW platform, again featuring a longer 117 meter rotor, the N117/2400 turbine.

GE, meanwhile, announced its new low wind onshore machine, the 2.5-120, at the end of January 2013. Featuring the company's new “brilliant” technology, the turbine includes energy storage capability. With 120 meter rotor diameter, GE says the machine has a maximum hub height of 139 meters - suitable for forested regions - and produces 15 percent more power than its current 2.5 MW model.

Vic Abate, vice president of GE's renewable energy business, said: “Analyzing tens of thousands of data points every second, the 2.5-120 integrates energy storage and advanced forecasting algorithms while communicating seamlessly with neighboring turbines, service technicians and customers.” The first prototype of the 2.5-120, optimized for Class III sites, was expected to have been installed in the Netherlands as REW goes to press. The 2.5-120 will be available at 50 Hz and 60 Hz.

Spanish firm Gamesa [GCTAF], with its range of onshore platforms from 850 kW through to 4.5 MW, unveiled both on- and offshore turbines earlier in 2012. For the onshore sector a new, longer bladed, version of its 2 MW platform has been unveiled. New blades giving a rotor diameter of 114 meters will see this 2 MW machine become available in five different rotor diameters: 80, 87, 90, 97 and 114 meters. Due to be commercially launched in the second quarter of 2014, this Class IIIA machine is designed for use at low-wind sites. The new machine has a 38 percent larger swept area than its G97-2.0 MW turbine and produces 20 percent more energy annually, Gamesa says.

Asia's Wind Technology Giants

Among the leading manufacturers based in Asia, Goldwind [002202.SZ] has been busy with certification of its flagship permanent magnet direct-drive platforms - it offers 1.5 MW, 2.5 MW, 3 MW machines. In February 2013, variants of both its 1.5 MW and 2.5 MW PMDD machines received ETL certification for US and Canadian markets from assessment group Intertek.

The 1.5 MW was initially certified in August 2011, the latest covers series products for low wind speed areas. In October 2012 the company announced that its 'ultra-low' wind 93 meter rotor diameter variant of its 1.5 MW had received domestic certification in China. This machine, the GW93/1500 was launched in April 2012 and is designed for IEC Class S, an annual average wind speed lower than 6.5 meters per second.

During the first half of 2012, a prototype was installed in Zhucheng, Shandong province. Based on operational field data, the company says the turbine can produce close to 9 percent more power on average than the earlier model GW87/1500 series turbines (designed for IEC III class) under the same conditions.

Goldwind unveiled its 6 MW prototype in 2011 and plans to mass produce the turbines by 2014. The company assembled several of the six MW offshore wind turbines this year and plans to put at least one into operation in the first half of 2012, the company said.

Meanwhile, Japan's Mitsubishi Heavy Industries (MHI) has unveiled a novel hydraulic drivetrain. Test operations at its Yokohama Dockyard & Machinery Works began in January 2013, the company says.

Part of a project launched in September 2012 to develop a hydraulic drivetrain for offshore turbines - supported by the New Energy and Industrial Technology Development Organization (NEDO) - MHI says it will accelerate its development of system in the 7 MW class, with installation and operation slated to begin at Hunterston, in the U.K. An onshore demonstration unit in the UK and an offshore floating wind farm project in Fukushima, Japan are slated to begin trial operations in June 2013 and August 2014, respectively, the company says. A mass-produced commercial model will be targeted for market launch in 2015. The Yokohama system is based on an existing MWT100 gear-driven wind generation system, retrofitted with the new hydraulic drivetrain.

Sinovel, another global giant, has continued with its testing program on its 2010-launched 5 MW and its 6 MW machine, launched in May 2011. Sinovel has commercially launched 1.5 MW and 3 MW and is in R&D and early production of its 5 MW and 6 MW turbines. The company is also moving to develop a 10 MW machine, with the project being listed in China's Central budgeting last autumn. The turbine is expected to be installed as a demonstration project in Jiangsu coastal area. China's National Development and Reform Commission awarded Sinovel a grant of RMB42 million (US$6.6 million) to accelerate commercialization of the 10 MW offshore design. Along with Sinovel both Goldwind and Guodian United Power are competing to develop a 10 MW machine after the project was deemed critical by the Chinese government last year.

Also in 2012, Sinovel teamed with Mita-Teknik to co-develop next generation control systems. Sinovel will purchase PLC hardware and the software with source code of the control systems from Mita-Teknik. The same year the company also filed a patent for a reactive voltage control system for a DFID wind generator. However, a fatal crane accident last autumn while attempting to lift a 5 MW wind turbine nacelle at the production facility in Gansu Province and continued wrangles with AMSC over intellectual property have rankled.

India's Suzlon [SUZLON.BO] has also been active developing new versions of its existing platforms. Mid-2012 saw the company reveal its S111 low-wind turbine. This Class III 2.1 MW machine features a rotor diameter of 111 meters. The platform is now available in rotor diameters of 88, 95, 97 and 111 meters. The S111 is available with tower heights of 95 and 120 meters, and will deliver a 20-29 percent increase in annual energy production over the S97 design. The first prototype is due to be operational in late 2013 and serial production is planned to begin in 2014. Suzlon also announced improvements to IEC Class II machine, the S95 first introduced in 2011.

Outlook

It's clear that the wind sector is benefitting from a surplus of choice when it comes to a range of turbines from the world's manufacturers. It's not all good news though. There have been closures and go-slows, with Nordex cutting staff at its Dongying blade manufacturing site in China and Sinovel ordering a go-slow on production, for example. In the U.S., Vestas laid off workers at blade factories in Colorado last year, with the company reducing its workforce in the U.S. and Canada by about 20 percent in 2012.

Nonetheless, while the ebb and flow of global business will inevitably see production capacity ramp up and decline in response to demand, at its core the wind business represents a technology and innovation business. We see evidence for this beyond the new variants and new machines. For instance, in the last year Gamesa raised €260 million from the European Investment Bank for its R&D+I investment program, focused on developing its two new wind turbines. Meanwhile Enercon launched the construction of its new R&D Centre, the Wobben Research & Development (WRD) facilities, scheduled to be operational by mid-2013. Investment in R&D pushes the economic boundaries of wind power today and given evidence, that boundary is being pushed hard.

Posted by Guest Contributor at 09:28 AM | Permalink | Comments (1)

Tom Konrad CFA

On March 7th, Maxwell Technologies (NASD:MXWL) announced problems with revenue timing.  Unlike Lime Energy (NASD:LIME), which I discussed in the previous part of this series, there was no hint of any fictitious revenue.  The disclosure was very specific that “The errors relate to the timing of recognition of revenue from sales to certain distributors.”  The announcement went on to discuss “arrangements … regarding the payment terms for sales” at these distributors.  As a result of the discovery, “certain employees were terminated and our Sr. Vice President of Sales and Marketing resigned.”  Maxwell is reviewing deficiencies in its internal controls.

What it Means

Too-early revenue recognition is one of the most common accounting problems, and often results when managers push employees  to help them hit too-aggressive growth targets.  This makes sense given Maxwell’s recent series of earnings disappointments and reduced growth estimates.   While the terminated employees were most likely the ones who did the book-fiddling, and the Senior VP who resigned gave them the incentives to fiddle, senior management and the board still bear the responsibility for the Senior VP’s incentives, and for failing to catch the problems sooner.

While the announced plans to improve internal controls are absolutely necessary, the company should also re-examine its culture.  Not only should controls make it harder to cheat, but employees and executives should not be rewarded for their numbers, but also for coming by those numbers honestly.

More to Come?

Like analysts at Piper Jaffray, I expect MXWL will remain under pressure until its revised financial statements are released.  I initially also agreed with them that the stock would recover when the filings are made.  

Now I’m not so sure.

I recently began co-managing a green stock focused hedge fund with Jan Schalkwijk, CFA.  In November, when we were discussing Maxwell for possible inclusion in the fund, Jan brought the rapid growth of Maxwell’s accounts receivable.

Although there can be many other causes, improperly recognized revenue usually shows up in growth of accounts receivable (AR).  AR is supposed to be money owed to the company by its customers.  If product has been shipped to a distributor, but payment need not be made until it is sold, then that product should still be considered inventory, not booked as revenue and moved to AR.  Yet this is what seems to have happened at Maxwell.

Between Q3 2011 and Q3 2012, Maxwell’s net accounts receivable grew by $21 million to $53 million.  When Jan brought this to my attention,  I asked Maxwell’s CEO, David Schramm about it by email.  He replied:

I would say there are two factors for the increase in accounts receivable.  First, our sales have been increasing and that naturally drives the receivables balances higher.  The second reason is that a number of customers have been paying slowly.  While it is not unusual to have one customer pay slowly, it is not normal for us to have more than one customer pay late.  In our current case, there are three customers who are paying slower than normal.  We have evaluated these customers and their ability to pay and believe the accounts are fully collectible.

Jan and I were not entirely comfortable that this completely accounted for rapid growth of AR (revenues only grew 10% over the same period.)   Nevertheless, we found Schramm’s statement sufficiently believable to treat the growth of AR as something to watch, not something which would make us sell the stock (then trading below $7.)  We planned to re-assess our decision this quarter, if AR did not begin to reverse course.  We also took comfort in the aggressive buying of MXWL by insiders.  They would not have been buying had they suspected Maxwell’s results were the result of improper revenue recognition.

In hindsight, I suspect the “slow payment” by customers may have been part of how the employees responsible were hiding the early revenue recognition.

We now know the accounts receivable growth was a red flag.    The 10% increase in revenue would most likely be matched by a 10% increase in AR, so revenue growth accounts for only $2 to $3 million of the $21 million increase in AR.  Another $12 million is the misreported revenue that was announced on Thursday.   That leaves a gap of $6 million or so to be accounted for by customers who have recently begun paying more slowly.

To put the AR increase in perspective, I decided to chart Maxwell’s quarterly revenue and AR  going back to the end of 2007.  Perhaps customers had been paying unusually quickly in 2011, as opposed to slowly in 2012.

In order to remove any seasonal effects, I used numbers from the third quarter (Q3) of each year.  I then adjusted these numbers as best I could to account for the changes resulting from the mis-reported revenue contained in the March 7th press release.

Both the as-reported and adjusted numbers are shown in the graph below.

 The graph also shows days to pay, which is the number of days it would take to generate each quarter’s accounts receivable given the current revenue.   If AR had been growing only in proportion with revenue, days to pay should have remained roughly constant.

As you can see, it took 57 days to collect payment from the average customer in Q3 2008, but it took 110 days in Q3 2012.  Even after we account for the misreported revenue announced on March 7th, adjusted Q3 2012 days to pay remained at 89.  If the adjusted numbers are to believed, Maxwell’s average customer was  taking between 70 to 80 days to pay in the four years to 2011, but was taking almost 90 days to pay in 2012.

It seems quite possible to me that behind the growing Accounts Receivable lies yet more mis-reported revenue.  We know that some customers  had payment terms which “had not been communicated to Maxwell’s finance and accounting department and, therefore, had not been considered when recording revenue on shipments to these distributors.”  Is it unreasonable to assume that there are other customers who seem to be paying slowly also have lenient payment terms of which Maxwell’s accounting department is not yet aware?

If we were to assume that all the misreported revenue had already been found, we would have to come up with some other explanation as to why Maxwell’s customers have been paying more slowly in 2012 than they have in the past.  Sometimes the simplest explanation is the right one.

Conclusion

While we will only know the truth when Maxwell files its results, it seems likely to me that the company developed a culture which pushed hitting the numbers even if they had to be fudged.

After accounting for the fudging revealed so far, the recent growth in Accounts Receivable cannot be explained solely by revenue growth over the same period and by the misreported revenue already announced.  While it is possible that Maxwell’s customers have been paying more slowly in 2012 than in previous years for their own reasons, it is also possible that there is more aggressive accounting yet to be revealed.

With this in mind, I have sold my holdings of Maxwell at a small loss.  I may choose to buy the stock back if the price falls enough to account for the revelations I fear may be yet to come.

UPDATE: On March 19th, Maxwell's independent accounting firm McGladrey LLP resigned.  McGladrey stated that it "could no longer rely on management's representations," and that "there are material weaknesses in [Maxwell's] internal control over revenue recognition and potentially, more broadly, in [its] overall control environment."   While this statement adds credence to my suspicion that there could be more misreprted revenue than initially disclosed, it also reflect badly on McGladrey.  Its independent accountants are supposed to provide assurance as to the quality of Maxwell's internal controls.  McGladrey completely failed to detect these weaknesses until after the damage had been done.

Disclosure: Long LIME

This article was first published on the author's Forbes.com blog, Green Stocks on March 12th.

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

Posted by Tom Konrad at 08:58 AM | Permalink | Comments (0)

Tom Konrad

Jeffry Quinn wants to help Zoltek penetrate new markets and increase its global presence.

Quinpario is an investment firm  focused on the specialty chemicals and performance materials sectors, and also based in St. Louis.  The firm was founded in 2012 by Jeffry N. Quinn and several senior executives from Solutia Inc, after Quinn and his team sold Solutia to Eastman Chemical Co. (NYSE:EMN.) Over the eight years leading up to the sale, they had  transformed Solutia from a bankrupt local commodity chemical producer into one of the world’s leading global specialty chemicals firms.

A Troubling Response

Zoltek isn’t bankrupt, but after years of underperformance Quinn and his team are confident it could use their help.  Zoltek’s President, CEO, and Chairman of the Board, Zsolt Rumy thinks otherwise.

Quinpario first approached Rumy privately, with two scenarios to allow them to take a stake in the firm and benefit current shareholders.  According to a letter they sent to Rumy, they proposed either an acquisition of all Zoltek’s outstanding shares at a price “in the mid teens,” or a large investment in the company which would “fund a sizable special cash dividend” for existing shareholders.  The only reply was one of dismissal from Zoltek’s legal council.  Zoltek’s board had not formally considered the proposals, and was unwilling to engage with Quinpario to discuss the matter.

Quinnpario called this “a troubling response given the substantial value to shareholders offered by each of Quinpario’s proposed alternatives.”  I would go further, and say that it’s arguably a breach of the board’s fiduciary duty to shareholders not to discuss a potential offer for the company which valued the stock at approximately twice its market price at the time (less than $7 a share in November 2012.)  While the board will doubtlessly argue that no formal offer had been presented, shareholders would likely have been better served if the board had chosen to explore Quinpario’s ideas in an attempt to turn one into a formal offer.

In an interview, Quinn emphasized to me that his investment firm is “not a hedge fund” and that he and his team are focused on creating shareholder value.  ”We’re not looking to create returns by being a pest.”

Call for a Special Meeting

Yet Rumy and Zoltek’s board seem determined to treat Quinn as if he were only a pest.

In its press release and SEC filing yesterday, Quinpario requested a special election to allow shareholders a vote on removing the current board and replacing them with Quinn and his slate of directors.  Zoltek responded the same day, stating that the request was “deficient in several material respects” and that no special meeting would be called.

Rumy’s Rebuff

In a quote, Rumy stated,

Our Board members own a significant amount of Zoltek’s stock and, accordingly, our directors’ financial interests are directly aligned with those of our shareholders at large. We will continue to focus on building long-term shareholder value by leading the commercialization of carbon fibers.  Of course, if Mr. Quinn`s group were to submit a bona fide proposal that adequately compensates our shareholders for the value of our technology, industry-leading capacity and future growth potential, our Board would be pleased to consider it.

Rumy’s statement about the boards’ financial incentives is misleading.  According the the company’s most recent proxy statement,  the vast majority of stock owned by the board is owned by Mr. Rumy himself.  As Rumy is President, CEO, and Chairman of the company, his interests cannot be considered to be “directly aligned” with shareholders’.  He also has interests in maintaining control of the company he built, and in keeping his job.  Other board members collectively own only 1.55% of outstanding shares, and three directors own less than 38,000 shares each.  Hence, the prospect of future compensation from retaining their positions is likely to be a significant influence on a majority of the board, quite possibly more significant than the lure of raising the value of their current holdings.

Rumy’s implication that Quinpario had not submitted a “bona fide proposal that adequately compensates our shareholders” is also misleading.  While the offers made in November were not fleshed out, they seem to offer “adequate compensation” for shareholders.  Had the board chosen to discus them at the time, they might have well become “bona fide offers” by now.

I have no doubt that Zoltek management will “continue to focus on building long-term shareholder value” under the current board.  The problem is that, if history is any guide, they won’t actually produce much value.  The share price has been flat since 2009, despite a large decline from a high of over $48 in late 2007.  With such a poor track record, an offer of outside expertise should be welcomed.

What Comes Next

If the Company remains committed to the status quo, the window of opportunity will quickly close as others usurp Zoltek’s rightful role in the carbon fiber market.

Zoltek’s board has a staggered structure, meaning that Quinn and his allies will not be able to replace a majority of the current board without a special meeting of shareholders until 2015 at the earliest.  They are unlikely to wait that long.  As Quinn told me, his team sees a real opportunity to increase Zoltek’s penetration of new markets, and to increase its global presence.  While he says that while they won’t “be deterred by short term obstacles, this opportunity will not be around forever. ”

As he wrote in his letter to Rumy, “If the Company remains committed to the status quo, then the window of opportunity will quickly close as others usurp Zoltek’s valuable market position and its rightful role in the carbon fiber market.”  Given this sentiment, I don’t expect Quinn and his partners will tolerate continued rebuffs from the board for long.

In November, when the share price was below $7, they were willing to offer a price per share “in the mid teens.”  If the current board refuses to cooperate, I expect they will launch a hostile bid for the company, rather then submit to the interminable process of trying to replace a staggered board over multiple years.

Zoltek’s investor relations contact did not respond to multiple requests for an interview in time for publication.

Disclosure: Long ZOLT

This article was first published on the author's Forbes.com blog, Green Stocks on March 7th.

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

Posted by Tom Konrad at 09:00 AM | Permalink | Comments (0)

Offshore Wind Farm photo via Bigstock.

• GE Wind: Was No. 3 in 2011. Three-quarters of its business is in the surging US market.
• Vestas (OTC:VWDRY): Was No.1 since 2000.
• Siemens (NYSE:SI): Moving up from ninth. Partly thanks to US exposure, partly to dominance in offshore wind.
• Enercon: Up one spot from fifth. Especially strong in its home market (Germany); also has good presence in markets outside the US and China.
• Suzlon Group (Bombay:SUZLON): Up one spot from sixth, thanks to its REPower subsidiary.
• Other top 10: Chinese OEMs Goldwind (was No. 2 in 2011), Guodian United Power, Sinovel (Shanghai:601558), and Mingyang (NYSE:MY) are in the top 10, but Sinovel is barely hanging onto that grouping. Gamesa (OTC:GCTAF), another former top-5 wind turbine OEM, is weighed down by reliance upon China and a FiT moratorium in its home Spanish market.

Posted by Guest Contributor at 10:59 AM | Permalink | Comments (0)

Tom Konrad CFA

1. While there may be potential bidders willing to pay over C$2.60 per share, none are willing to pay C$3 or more.
2. Ciachurski and the board have already paid themselves the change of control bonus for selling the company, and no longer have that incentive to sell.
3. Bringing the Yabucoa project to financial close will not add significant value for potential bidders.
4. If the Brookfield’s offer expires unsuccessfully, WND will decline significantly in the short term.
5. Ciachurski has a habit of alienating possible buyers.  This reduces the potential pool of bidders, and lowers the price that shareholders can expect for their stock.
6. Brookfield is very close to succeeding; the readers of this article are likely to make the difference.

It’s not as if I or most of my readers are selling at a loss.  Since I started writing about the company shortly before the Algonquin bid in 2011, Western Wind has traded mostly in the $1 to $2 range, so we’re all looking at gains between 25% and 100%.  It’s time to declare victory and go home.

Hi Tom,

I read your news blast today.  I have no problem with your desire to do what you want with your stock I do find the reasoning to border on stupidity.
Do to your conclusions, I am certain your lack of knowledge is the reason you have a very few followers.  I should of done my DD on you first, but now I know why you have no followers.

I do not have the time to respond to anywhere near you babbling comments, but a few come to mind.

1)  AQN [Algonquin Power and Utilities (TSX:AQN, OTC:AQUNF)] and BEP are the largest pure play renewable energy players in NA.  reality check - AQN has a huge portfolio of fossil fuel generating assets, clearly making you a moron when it comes to research and knowledge.

2) I can take my money and invest in FVR.[Finavera Wind Energy (TSXV:FVR, OTC:FNVRF)] reality check - FVR has no production, has been rolled back 10 for 1 and is down 1000% in three years.  FVR has no production or decent revenues.  Looks like you need the public to bail out your position.

3) I am getting paid bonuses not to sell the company - Tom, I could sue you until you are in the poor house for this serious defamation and lies. You printed this now it is easy to sue you.

4) By having low dilution and therefore low equity into our projects our project loans are higher. -  You have exceeded the moron threshold by a factor of 500%.  Our project loans are the lowest in the industry. In fact triple AAA banks that we use could NEVER charge more interest. This would imply more risk which no A rated bank will take on.

5) I do not care what Brookfield did in Brazil, I just want their Canadian dollars - really - yet you published a defaming article about myself last year and now you lie about the WSJ article.  It said many people were indicted and Brookfield hire an armoured truck to carry the pay off bribes.

Anyhow, the 39% like you who have tendered have weakened the case for the 61% who want more dough.

I hope you are aware that I can use unlimited funds to sue you for your defamation. In addition to defamation you have displayed total stupidity in your investment recommendation to sell WND to buy FVR.

Tom, I look forward to seeing you in court and sanctioned by the regulators.

I'm not particularly concerned about the threats, since everything I said is backed up by published documentation.  I do have to wonder where the "unlimited funds" with which he is threatening to sue me for defamation are going to come from.

According to several people I've talked to about Ciachurski over the two and a half years I've been covering Western Wind, such threatening letters (as well as text messages and midnight phone calls) are his standard MO when anyone crosses him.  (Here's a quick note to you, Jeff: If you want to annoy me, you'll have more luck with the midnight phone calls.  With phone calls, it will be annoying to transcribe them for publication.  With email, I can just cut and paste.)

Needless to say, I won't be investing in another a Jeff Ciachurski-run company any time soon.

Disclosure: Long WNDEF, BRPFF, FNVRF, AQUNF.

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

Posted by Tom Konrad at 10:15 AM | Permalink | Comments (0)

Tom Konrad CFA

A month ago, I was convinced that Finavera Wind Energy’s (TSX-V:FVR, OTC:FNVRF) stock was only temporarily trading at depressed levels in the low 20 cent range because investors were disappointed at the deal with Pattern Energy.  Many shareholders had been hoping for an outright sale, and were selling into the thinly traded holiday markets.  I predicted that Finavera stock would “quickly rebound to at least the C$0.30 range over the next few days or weeks, as liquidity returns to the market, and investors revalue the stock based on the agreement with Pattern.”  (My valuation based on the Pattern deal put the present value of a Finavera share at C$0.375, and its value at the end of 2014 at C$0.75.)

My valuation has not changed significantly, but the stock has fallen, after an initial rally. Yesterday, I was able to add to my Finavera position for a mere $0.18 a share.  What happened?

There have been only two news items over the last month.

Conference Call

First, Finavera held an investor conference call on January 9th to explain the Pattern deal.  My takes from the conference were first, that the Pattern deal would definitely win shareholder support, since there was not going to be any buy-out offers forthcoming, and the consequences of rejecting the deal would be dire.

Second, I had misunderstood the Pattern deal originally.  Finavera will be getting funds from Pattern in the form of $9M in debt forgiveness as soon as the deal is approved by shareholders, and many of Finavera’s development costs will be charged to the projects (and hence, effectively, to Pattern.)  This increased my expected value of Finavera slightly.

Option Grant

Last week, Finavera cancelled all outstanding employee and director options (most of which had strike prices of C$1 or above), and re-issued them with new options exercisable at C$0.205 per share.  The grant (1,783,800 options or 4.5% of outstanding shares) seemed large to me, and may have also turned off other shareholders, contributing to the heavy selling this week.

I asked Jason Bak, Finavera’s CEO, to give his justification of the option grants by email.  He responded with the following points:

1. Finavera is operating within its registered stock option plan, which was approved by shareholders in September of last year.
2. There have been no significant option grants in three and a half years.
3. Finavera’s directors have been working entirely without compensation since 2007, and have been significant investors in the company over that time.
4. The option grants are in line with similar Toronto Venture listed companies.

I thought he made good points, especially regarding director compensation, and so my governance concerns were alleviated.  The option grants do change my per diluted share valuation of the company marginally (see below.)

New Valuations

My new understanding of the Pattern deal means that a significant portion of the deal’s value will be realized sooner than expected. The debt forgiveness along with the expected $9.3 million payment for bringing the Cloosh wind farm to financial close should be sufficient to substantially eliminate all Finavera’s liabilities by the end of the year.  This will give Finavera a book value per diluted share of C$0.45 after the receipt of the Cloosh payment.

If Finavera is then able to bring its Canadian projects to financial close by the end of 2014, as expected, the payments for those projects should give Finavera C$0.77 worth of net assets, most of which will be in the form of cash (the balance will be their remaining 10% stake in the Cloosh wind farm.)

Given these valuations, I continue to see Finavera stock as an easy double over the next year, with the potential to double again in 2014.

That is why I’m buying more.  I still have no idea why anyone is selling.

Disclosure: Long Finavera

Finavera's Wildmare Wind Energy Project is one of three projects in Bristish Columbia to be sold to Pattern Renewable Energy Holdings Canada for C$40M.  Photo source: Finavera

This article was first published on the author's Forbes.com blog, Green Stocks on January 31st.

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

Posted by Tom Konrad at 10:18 AM | Permalink | Comments (0)

Tom Konrad

Finavera's Wildmare Wind Energy Project is one of three projects in Bristish Columbia to be sold to Pattern Renewable Energy Holdings Canada for C$40M. An earlier sale to of Wildmare Innergex Renewable Energy fell through in September.  Photo source: Finavera.

While Finavera talked about its plans as a “Corporate Transaction,” most investors (including me) assumed the process would conclude with a sale of the company.  The stock promptly shot up approximately 70% from the 20-25 cent range where it had been trading to the 35-40 cent range in anticipation of a sale.

Market Reaction

As it happened, after reviewing the offers, Finavera decided to accept a financing deal and project purchase agreement from Pattern Renewable Energy Holdings Canada.   According to Finavera CEO Jason Bak in an interview, what sealed the deal was Pattern’s willingness to refinance the GE note immediately, and provide financing at 10% for project development going forward once shareholders approve the deal. While there were offers for outright purchase of the company on the table, none of the bidders would have been able to perform as quickly as Pattern and satisfy GE. As a result, Finavera’s board, which contains four of the company’s ten largest shareholders and collectively owns 35% of the company’s stock, chose to sign the deal with Pattern.

Since many investors had been anticipating an outright sale, the announcement of the deal sent some scurrying for the exit. Thin trading over the holidays compounded the problem, and Finavera’s stock plummeted from near $0.40, where it had been trading before the announcement, to the low 20 cent range, which created a tremendous buying opportunity. I personally nearly doubled my holdings on Thursday and Friday.

Valuation

While the Pattern deal does not provide immediate liquidity for shareholders, it does make the company much easier to value. Over the last year, investors’ biggest concern about Finavera has been the lack of financing, a problem which the Pattern deal will solve. In addition, the deal sets a price for Finavera’s project portfolio in British Colombia, to be paid when the projects reach financial close (i.e. all permits are in place and the project is ready for construction.) Bak estimates that this will be achieved for the more advanced projects in 2013, and the later projects in 2014.

Hence, Finavera should receive approximately C$40 million for its projects from Pattern before the end of 2014, in addition to C$9.3 million for reaching financial close on its Cloosh wind farm in Ireland in 2013. Offsetting this against Finavera’s existing liabilities of C$18.3 million (about C$2-3 million of which Bak says are likely to be renegotiated) we have a net cash value of Finavera at the end of 2014 of about $30 million.  This assumes that the renegotiated liabilities and the residual value of Finavera’s 10% stake in the Cloosh project mostly cover ongoing development costs. With roughly 40 million diluted shares outstanding, that places the value of a Finavera share at roughly C$0.75 at the end of 2014.

Some allowance needs to be made for the time value of money, as well as the possibility that site development will not go as smoothly as Bak expects.   If we use a 50% discount to cover that risk, we still arrive at a value of C$0.375 per share., or 67% more than the current price of C$0.225.  I expect Finavera to quickly rebound to at least the C$0.30 range over the next few days or weeks, as liquidity returns to the market, and investors revalue the stock based on the agreement with Pattern.

Update: On January 7th, Finavera announced a conference call to discuss the deal with investors and the financial community.  The call will be held on January 9th at 8am PST.

Disclosure: Long FVR

This article was first published on the author's Forbes.com blog, Green Stocks on December 30th.

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

Posted by Tom Konrad at 08:46 AM | Permalink | Comments (2)

Offshore Wind Farm photo via Bigstock.

The extension of the production tax credit (PTC) and Investment Tax Credit (ITC) is expected to save up to 37,000 jobs and create far more over time, and to revive business at nearly 500 manufacturing facilities across the country. Wind energy PTC, and ITC for community and offshore projects, will allow continued growth of the energy source that installed the most new electrical generating capacity in America last year, according to the American Wind Energy Association (AWEA).

The version included in the deal would cover all wind projects that start construction in 2013. Companies that manufacture wind turbines and install them sought that definition to allow for the 18-24 months it takes to develop a new wind farm.

Leaders of the Senate Finance Committee included that version in a "tax extenders" package they assembled in August, which made it into the overall fiscal cliff deal that passed the Senate early Tuesday morning and the House Tuesday night. President Obama is expected to sign the bill into law swiftly.

The Energy Information Administration said that wind set a new record in 2012 by installing 44 percent of all new electrical generating capacity in America, leading the electric sector compared with 30 percent for natural gas, and lesser amounts for coal and other sources. 

However, America's wind energy workers have been living under threat of the PTC's expiration for over a year and layoffs had already begun, as companies idled factories because of a lack of orders for 2013. Uncertain federal policies have caused a "boom-bust" cycle in U.S. wind energy development for over a decade.

Half the American jobs in wind energy – 37,000 out of 75,000 – and hundreds of U.S. factories in the supply chain would have been at stake had the PTC been allowed to expire, according to a study by Navigant Consulting.

"On behalf of all the people working in wind energy manufacturing facilities, their families, and all the communities that benefit, we thank President Obama and all the Members of the House and Senate who had the foresight to extend this successful policy, so wind projects can continue to be developed in 2013 and 2014," said Denise Bode, CEO of AWEA for the past four years who recently announced that she is stepping down.

"Now we can continue to provide America with more clean, affordable, homegrown energy, and keep growing a new manufacturing sector that's now making nearly 70 percent of our wind turbines in the U.S.A.," said Rob Gramlich, who took over as AWEA's interim CEO yesterday.

About the authors: Renewable Energy World's network editors help deliver the most comprehensive news coverage of the renewable energy industries. Based in the U.S. and the UK, the team is comprised of editors from Pennwell Corporation's myriad of publications that cover renewable energy.This article was first published on RenewableenergyWorld.com and is reprinted with permission.

Posted by Guest Contributor at 09:30 AM | Permalink | Comments (0)

The Stohr DSR has an all carbon fiber body (Photo credit: Rhots/Wikimedia Commons)

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

Posted by Debra Fiakas at 09:19 AM | Permalink | Comments (0)

Doug Young

Rice farmer in India with wind turbines.  Photo courtesy of Vestas Wind Systems (VWDRY)

While this kind of financing to support developing sectors isn't unique to China, this particular announcement is quite large, with Ming Yang saying in a separate statement that it will team with China Development Bank and locally based power giant Reliance Power (Mumbai: RPWR) to "raise" up to $3 billion in financing for new projects. (English article) I use quotation marks around the word "raise", because I've no doubt that all of the money will come from China Development Bank and other state lenders, which are almost certainly providing the money under direct orders from Beijing to rescue the struggling sector.

Let's quickly have a closer look at this latest news, which comes as China's broader new energy sector suffers due to a big global supply glut, created largely by the massive building of new capacity in China over the last decade with strong support from Beijing. Under this new framework deal, China Development Bank will coordinate and arrange financing for new wind power projects to be co-developed in India by Reliance and Ming Yang. The 2 partners have previously announced plans to co-develop new projects with 2,500 megawatts of capacity over the next 3 years, so this financing deal appears to be an extension of that plan.

This latest news indicates that China Development Bank will likely become the centerpiece for Beijing's broader rescue package for the new energy sector, as this policy lender is already reportedly at the center of a broader plan to rescue struggling solar panel makers. That plan would reportedly have China Development Bank provide emergency financing for about a dozen of the country's biggest solar panel makers, which would then become consolidators for the broader industry that includes many more companies that are posting massive losses.

The sector has also been hit by anti-dumping actions in both the US and Europe, its 2 biggest markets that account for the big majority of its sales. Ming Yang is one of the few new energy companies that is still profitable, reporting a tiny profit of less than $1 million for the third quarter of this year. But that profit was down 97 percent from the previous year, with revenue also down by nearly 60 percent, and it looks like Ming Yang could easily join many of its Chinese new energy peers by reporting a loss in the fourth quarter.

Investors seemed to sense a certain gloom and desperation in this latest announcement, bidding down Ming Yang shares by 2.2 percent after the news came out. That's hardly the reaction that Ming Yang was hoping for, but seems to reflect broader investor gloom towards China's new energy companies as they move closer to a Beijing-led bailout. When that bail-out finally comes, it could easily include conditions that cause these companies' shares to become either greatly diluted or completely worthless, creating big losses for shareholders. Look for that package to come most likely by the end of next year's first quarter, creating further turbulence in the already-weak market for Chinese new energy stocks.

Bottom line: The latest state-led financing for Ming Yang indicates China will bail out the new energy sector using its China Development Bank, with a broader plan likely by the end of next March.

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

Posted by Doug Young at 08:34 AM | Permalink | Comments (1)

Tom Konrad CFA

Western Wind and the Toronto Hedge Funds

Last October, Western Wind Energy (TSXV:WND, OTC:WNDEF) received an unsolicited takeover bid of $2.50 a share from Algonquin Power (TSX:AQN, OTC:AQUNF) to buy the company.  Before the bid, the stock had been trading in the $1.20-$1.25 range, but President and CEO Jeff Ciachurski felt that it did not fully value the company’s projects and assets, including approximately $1 per share of US tax assets which the Canadian company Algonquin would not be able to use.

Large shareholders at the time were in favor of the sale, including at least one shareholder owning 18.6% of the stock who had entered into an agreement to support Algonquin’s bid.  However, in the face of Western Wind’s vociferous opposition, Algonquin decided a hostile takeover was not in its interest, and withdrew the offer and terminated the lock-up agreement.

A group of shareholders, which management identifies as Toronto-based hedge funds, were unhappy to be unable to book a quick profit, and took steps to begin a proxy battle to take control of Western Wind’s board.  The intent was to take control of the company’s board and put Western Wind up for sale.

Western Wind's Kingman I Wind & Solar park. Photo courtesy of the company.

Proxy Battle Looms

That proxy battle would have taken place at Western Wind’s annual meeting, due this September.

In a conference call two weeks ago, Ciachurski said he had no plans to sell the company until 2013 at the earliest.  Today, the company announced plans to sell the entire company and its assets as soon as possible.  What changed?

Although I’m now entering the realm of pure speculation, it appears to me that management believes that the recent share price fall in the wake of a disappointing federal cash grant for the company’s Windstar project has allowed the hedge funds and their allies the opportunity to gain control of enough of Western Wind’s stock to win a proxy battle.  With two weeks having passed since Western Wind CEO and President Jeff Ciachurski announced he would lead a delegation to Washington in the hopes of getting the full grant re-instated, Ciachurski likely now believes that additional grant money will not be forthcoming, and disappointed shareholders are more likely to vote against management in any proxy battle.

[UPDATE: A company spokesman contacted me to say that my speculation regarding the Windstar cash grant is incorrect, and that the delay is related to difficulty scheduling time with a judge.]

Since Ciachurski now seems to believe he would lose a proxy battle, and the new board would be likely to put the company up for sale anyway, he has decided to steal their thunder, and put the company up for sale himself.  The press release mentioned that,

The CEO of Western Wind receives a bonus within his Compensation Agreement that pays out increased amounts of cash on obtaining the highest share price on the sale. Western Wind emphatically states that the CEO and Board are highly motivated to achieve the highest sales price, and are the only parties able to achieve the highest sale price possible.

In particular, this “increased amount” is $2 million which Ciachurski will receive if the sale price is $3 a share or more and an extra $1 million for each additional dollar above $3, according to Western Wind’s 2011 proxy statement.

Likely Sale Price and Timing

If Ciachurski believes that he has a better chance of eliciting an offer of $3 or more for Western Wind than would the new managers after a successful proxy fight, he has a strong incentive to conduct the sale himself.  We know they would be satisfied to sell the company for $2.50 a share, so he justifiably worries that they might sell for less than $3, if only to expedite the sale.

With the company already up for sale, other shareholders are much less likely to vote for a slate of directors whose platform is to put the company up for sale.  Further, with a sale already in progress, the Toronto funds will likely not go through the trouble and expense of staging a proxy battle, unless they believe that Ciachurski would cancel sale process after the annual meeting.  But since such a cancellation would destroy any trust most shareholders have for Ciachurski, I would expect the sale to go through (although the search for a buyer could drag on if Ciachurski is unable to find a buyer willing to pay the magic $3 per share or more he will want to hold out for.

I expect Western Wind will sell for something more than $3 a share.  This is easily possible, since the value of the company’s assets based on discounted cash flow is north of $5 a share, so a protracted sale process is far from inevitable.  Even if Ciachurski wants to delay a sale, he will have limited flexibility to do so.  This morning’s press release listed three milestones:

1. Financial completion and start of major construction on the 30-MW Yabucoa Project, Puerto Rico. This will add $160 million to Western Wind’s balance sheet to approximately $560 million at time of sale;

2. Negotiating the balance of the cash grant proceeds from treasury;

3. Completion of the mezzanine loan facility from our senior lender in the amount of $25 million, which can repay the high cost corporate notes;

Negotiations with the treasury are unlikely to drag on for months: The original grant process is supposed to take only 60 days, so it seems unlikely that Western Wind’s appeal will task that long.  The completion of the mezzanine loan facility is also unlikely to drag out for more than a month or two.  That leaves the start of construction of the Yabucoa Project, which the company expects to begin by October, and almost certainly to begin by December.

Champlin / GEI Acquisition

The all-share deal to acquire a 4 GW development pipeline from Champlin / GEI Wind Holdings is almost certainly off.  In a conference call exactly two weeks ago, Ciachurski said that this deal would be finalized “in the next two weeks.”  If it were going to be finalized at all, there would have been a mention in today’s news release.

The stated motivation for the Champlin/GEI deal was to provide a long term development pipeline for Western Wind, and that pipeline is unlikely to be useful in the case of a quick sale, while the 8 million shares of stock which were to be issued in exchange for the pipeline would lower the expected sale price.  Further, the unstated motivation for the deal was likely that Ciachurski wanted those 8 million shares in friendly hands, supporting him in any proxy battle.  Since a proxy battle is now unlikely, this motivation no longer applies.

Conclusion

A sale agreement will almost certainly be finalized sometime this year, even in the event Ciachurski cannot get his $3 price.  But we will not have to wait months in order to get a lot more information about the process, and even see some bids.  In order to avoid a proxy battle at the annual meeting, the company will need to provide enough information to shareholders to make it clear that a sale is virtually certain.  That means that before the late August record date for the annual meeting, Western Wind will likely have selected two M&A advisory firms to advise on the sale.  I think it’s also likely that we will see one or more initial bids or expressions of interest  before the end of August.

A sale may not be finalized until towards the end of the year, but expect Western Wind shares to continue rising rapidly, as more details of the expected sale emerge over the next few weeks.

Disclosure: Long WNDEF.

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

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

Posted by Tom Konrad at 09:49 AM | Permalink | Comments (0)

Tom Konrad CFA

On July 23rd, Finavera Wind Energy (TSXV:FVR, OTC:FNVRF) announced a deal to sell its 77 megawatt Wildmare Wind Energy Project to Innergex Renewable Energy (TSX:INE, OTC:INGXF.)  The sale will come as a great releif to Finavera’s long-suffering shareholders, who have seen the stock halve in value since the start of the year.

I included Finavera in my annual list of clean energy stocks this January because, even at the time, Finavera was trading at a fraction of the value of its wind projects, despite a weak balance sheet.  Since then, Finavera has moved its projects forward, receiving important environmental andconstruction permits, but limping along on the finance side with a small (but dilutive) private placement and loan with more dilutive warrants, with the two deals totalling only a little more than $1 million.

The $22 million received from Innergex for Wildmare should put an end to shareholder dilution, since it is sufficient to pay off Finavera’s entire $11 million debt burden and allow Finavera to advance the company’s other projects.  As CEO Jason Bak said, “This transaction illustrates the significant asset value Finavera has created for shareholders and provides a strong return on our investment in the development of wind energy for British Columbia. This transaction creates a stable platform for long term growth and allows Finavera to recycle capital and fund the ongoing development of its remaining portfolio of projects.”

The money, along with another $8.8 million which the company expects from its partnership in an Irish wind farm moves Finavera out of the asset-rich and cash poor renewable developers which have been languishing for the lack of funds, and firmly into the camp of asset rich firms with strong balance sheets able to profit from the availability of cut-price development projects.

Disclosure: Long FNVRF

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

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

Posted by Tom Konrad at 09:44 AM | Permalink | Comments (0)

Sen. Mark Udall

Colorado Senator Mark Udall is persistent by nature. He's a mountain climber who has scaled some of the world's most daunting peaks, from Mount McKinley in Alaska to Mount Aconcagua in the Andes. That dogged pursuit has served him well in his recent career spent navigating the perilous cliffs of Washington's Capitol Hill. And now he has at least one more mountain to climb — the seemingly intractable extension of the Production Tax Credit (PTC), the wind industry's defining subsidy and the financial tool that has helped his rugged home state become a leader in wind energy generation and wind manufacturing.

Udall’s approach is equal parts steady ascent and unflagging determination. His base camp is the Senate floor and from there he plans — to critics, annoyingly so — to make the extension of the PTC a daily topic of discussion. In a town notorious for the filibuster, the Democrat’s approach is slightly different in that he’s scheduled time each morning for when Congress is in session. And so it will be that every morning from now through the August recess, Udall will remind his colleagues why the PTC has gained widespread bipartisan support across much of the country, and why Congress should extend the soon-to-expire tax credit soon enough to keep the industry from contracting — and taking jobs with it.

This is the same refrain that has echoed through the halls of Congress and numerous statehouses since the end of last year. The industry’s growth, which is expected to surpass 10 GW of new installations through the end of this year, is closely aligned with the PTC, which pays out 2.2 US cents per kWh generated. That credit has helped to make wind energy a lucrative and worthwhile pursuit for developers and utilities alike, and its relative stability over recent years has allowed projects to move ahead with confidence. That strong pipeline has in turn ushered in a new era of US manufacturing, which has sprouted up across much of the country — all to support the growing industry.

Without promises of an extension, development plans have skidded to a halt, orders have dried up and large manufacturers are plotting their escape — or at least a scaled-back presence. At stake, according to a recent Navigant study, are as many as 37,000 jobs, a staggering number for an industry that currently employs about 75,000 workers. And extension, meanwhile, would add 17,000 jobs, according to the same study.

The industry has been down this path before, but the last time the PTC was allowed to expire the only real victim was project development. That was in 2004 and at that time about three quarters of the industry’s supply chain came from imports. Now, the US wind industry boasts about 500 manufacturing facilities, many of which are centered in places like the Southeast, where wind energy is a rare find, but where wind manufacturing is seen as one of the few bright spots for an economy that’s struggling to find traction.

Ideologically, the wind industry may find its broadest support among Democrats. But wind generation remains strongest in staunch conservative pockets like the Midwest, where turbines line farms across Texas and Iowa. And in states like Oklahoma and Kansas, the industry is ramping up to become a political force.

That’s why the PTC is a rarity. It’s a political hot potato, yet it’s one with wide support that has prominent Republicans and Democrats calling for its extension. Most agree that the tax credit is worth the $4 billion–$5 billion bill that comes with a one-year extension. According to PTC supporter Senator Charles Grassley, Republican of Iowa, members of his party are reluctant to move ahead with legislation until they can find budget savings to offset that expense. So far, the support has produced lots of nods and handshakes, but not enough legislators willing to jump into the hot seat and vote for its extension. The hot seat, of course, is boiling at the moment because of a perfect political storm. The general election is just months away and a centerpiece of the criticism is President Obama’s pursuit of a clean energy policy. And nipping at its heels is the growing reality that fundamental tax reform will follow the election. That has industry insiders and analysts trying to read Washington’s swaying tea leaves. How will tax reform come together? Will any type of tax policy receive a long-term extension in this political landscape? And how does wind differentiate itself amid the coming fray?

The Timetable

At Windpower 2012, the American Wind Energy Association (AWEA)’s annual conference in Atlanta in June, Republican strategist Karl Rove told those in attendance that the worst thing that happened for the wind industry was when Obama put the PTC extension on a Congressional ‘to-do list’ ahead of its August recess. Republicans say it won’t happen because Obama is failing to show leadership on the issue, and that the ultimatum proves their point. Democrats contend that there’s no way House Republicans especially will give Obama a political victory on the eve of the November election. Either way, few are giving a pre-election agreement much hope, even if Udall does succeed in giving the issue mainstream prominence each and every day.

That pushes the real political horse-trading into the tight window between the end of the election in early November and the new Congress in mid-January. By then, the PTC will be one of many cutthroat issues on the agenda, and it could get lost in the fray as the Bush tax cuts, the payroll tax holiday and the potential raising of the debt ceiling take precedence.

According to Tim Kemper of the Reznick Group, the PTC’s best bet is that it gets passed early in the lame-duck session (taking place after the election for the next Congress has been held, but before the current Congress has reached the end of its constitutional term). 

If that happens, the industry may have enough deals waiting on the sidelines to retain some of that 2012 momentum. The later a deal is struck, the more difficult it will be to salvage 2013, which according to Bloomberg New Energy Finance could see as little as 500 MW of new installations. IHS Emerging Energy Research, meanwhile, has projected the market could drop from 11 GW in 2012 to just over 2 GW in 2013.

This small window of opportunity comes as America debates the future size of its government, and ultimately what role taxpayers will play in energy investment. The recent economic downturn has paved the way for fundamental tax reform, and programmes like the PTC could get caught in the line of fire.

The last big tax reform came in 1986, and it was the type of divisive, laborious process that makes rewriting the tax code in 2013 a long shot. That realisation could, perhaps, bode well for a one-year extension, but that would really put pressure on the industry to secure something longer term.

Many in the industry don’t think a one-year extension will do much to secure the confidence of international companies and investors. That thinking extends to statehouses across the country — those places where jobs are the driving issue of the day. One such place is Arkansas, home to major manufacturing operations for everything from blades (LM Wind Power) to turbines (Nordex(NRDXF) to Mitsubishi). The notion that a one-year extension, especially with looming tax reform, will give companies the confidence to stay or invest in his state is a nonstarter for Democratic Governor Mike Beebe.

‘We don’t need it renewed for a year,’ he told the industry at Windpower. ‘How in the world do multimillion dollar investments get made ... how in the world can business or industry chart a course ... how in the world can the transmission system be expanded as it needs to be ... how in the world can all these capital decisions be made when you’re making public policy for something as important as this tax credit on a year-to-year basis and you don’t know whether it’s going to be renewed? That’s insane.

‘I can’t imagine with the sort of [bipartisan] support that there would be any hesitancy at all not only to renew, but to put in a cycle that people can be assured that they can make decisions two years, three years and five years down the road,’ he added.

Companies React

For legislators like Beebe as well as Governor Sam Brownback of Kansas and Senator Charles Grassley of Iowa, both Republicans, there’s little secret why they are among those leading the crusade. Wind has become big business in their states, and the success and impact of the industry easily cuts along party lines. And that’s certainly why Udall is heading up the charge from the Senate floor.

Earlier this year, when Danish wind giant Vestas (VWDRY) announced it was cutting more than 2300 jobs in Europe, it took the opportunity to warn that it could slash its presence in the US in half if the PTC failed to be extended. Many of those 1600 potential job losses could come in Colorado, where Vestas has spent about $1 billion building three manufacturing plants and one engineering facility. Those operations employ about 1700 people.

And it’s not just Vestas. Vermont-based NRG Systems, which manufactures wind measurement technology, had to cut jobs in May for the first time in its 30 years. President and CEO Jan Blittersdorf said, ‘Anything we can do to get past this and back to steady growth is fine by me.’

Mitsubishi Heavy Motors scrapped plans for a manufacturing plant in Beebe’s home state of Arkansas, which certainly didn’t diminish his passion for strong policy. And in rural Virginia, an area with few inroads in wind generation, a 45-MW wind farm targeted for completion by the end of this year was pushed back to 2015.

From developers to turbine manufacturers, the wind industry has already seen a stark downshift in its production plans. And while many are busy moving ahead to close out a strong 2012, they’re looking at the stark realities of 2013.

Where the Market is Going

As industry giants react to the lack of orders for 2013, they’re turning to other markets to fill the void. During a visit by Grassley to the Acciona (ACXIF) plant in Iowa, company officials said they’re turning to Canada to fill their own pipeline. That’s a similar approach to that reportedly considered by Siemens (SI) and Gamesa (GCTAF), who see the smaller Canadian market as a way to weather the short-term downturn.

Canada in 2011 installed more than 1200 MW of new wind energy capacity and has plans to install 1500 MW in 2012. The country, which boasts stable policies in Ontario and Quebec, has surpassed 5000 MW of cumulative capacity, and it has plans to top 10,000 by 2015. Partnerships with companies rooted in the US market may soften the jobs impact there. But those companies are also sure to explore their options in Latin America, where wind has been gaining serious momentum.

Whether such a strategy would work for long depends on transportation costs — the main reason that domestic wind projects have drawn manufacturing to the US. For a company like TPI Composites in Newton, Iowa, the blades they make are not necessarily less expensive to produce than those coming in from places like China. But transporting 50-metre blades to construction sites can push transportation costs to $15 to $20 per mile, said TPI CEO Steve Lockard. The US wind industry has evolved out of a need for transportation efficiency in a way that’s unnecessary for relatively lightweight industries like solar. So from the US wind industry’s point of view, feeding long distance markets may keep the jobs intact, but it won’t create the long-term stable economics it’s working to achieve.

Absent consistent federal policy, domestic developers and manufacturers may look for other ways to regain their post-PTC footing. According to Kemper, as they view the prospects of a zero-build year, they’ll be forced to reconsider what constitutes an acceptable deal. And they’ll also be driven by existing state policies. Ultimately, we may see some states increase their wind incentives as a way to drive production and manufacturing within their own borders. While this likely won’t make up for the potential loss of the PTC, it could lessen the blow from its demise.

Dan Shreve of MAKE Consulting recently released a report that looks at the US wind industry from 2013 to 2016 under a series of scenarios, ranging from no extension to the adoption of a Clean Energy Standard. While MAKE expects the PTC to get a one-year extension, there are other factors at play that could weigh down the industry over the next few years regardless of an extension.

According to the report, none of the policy scenarios it looked at supported more than 7 GW of new installations per year, and the more likely scenario was peaks of about 5 GW through 2016, with significantly lower figures in the short term.

The reasons for the lower wind installations have much to do with the expectation of continued low natural gas prices and a lessening commitment from utilities in states with a Renewable Portfolio Standard (RPS). Those states, says the report, have made great strides in meeting the RPS and they’ll need to invest less in wind to maintain their pace.

‘Strong year-on-year build cycles, plus effective “banking” of renewable energy credits (RECs) ensure that many utilities are already in compliance and can use cheap REC purchases from existing capacity,’ the report says. MAKE’s baseline scenario estimates RPS policies will drive little more than 15 GW of new capacity through 2016.

While this changing policy landscape paints a murky portrait, it will force the industry to in many ways stand on its own ahead of schedule. This, says the report, will drive innovation and cost savings in ways that may not lead to massive installment numbers, but will position it better for future success.

Posted by Guest Contributor at 10:44 AM | Permalink | Comments (0)

Tom Konrad CFA

The Windstar Wind Farm. Photo credit: Western Wind Energy

Yesterday, I wrote about Western Wind Energy’s (TSXV:WND, OTC:WNDEF) plans to increase the 1603 cash grant for their Windstar wind farm.  But that was not the only thing discussed in Monday’s conference call.

Investor Frustration

During the Q&A, many investors were concerned about Western Wind’s recent deal to acquire a 4 GW wind development pipeline from Champlin/GEI Wind Holdings.  

The concern was that the company would be issuing 8 million shares for the assets, but the company has revealed very little about the projects.  With the federal Production Tax Credit (PTC) set to expire at the end of 2012, many development projects will not be viable.  In the absence of more information, the entire four gigawatts of potential could effectively be worthless.

On the other hand, the loss of the PTC doubtlessly affected the price paid for the assets.  Champlin/GEI had invested “almost $20 million” in the pipeline so far, and Western Wind is acquiring the pipeline for 8 million shares, at a notional value of $2.50 per share ($20 million.)  At the current market price of only $1.25 a share, that’s $12.5 million, but if we consider Western Wind’s net asset value per share, which I put at over $5 per share, then the company is paying over $40 million for the assets.

What is the development pipeline worth?  I think it’s safe to assume that most of the 4,000 MW of projects will not be built without the PTC.  But the company has spoken of a near term project 75 MW project Hawaii, which they say is viable without the PTC.  Given that Hawaii has extremely high electricity prices (most electricity is generated from oil) and an aggressive renewable energy mandate, it’s quite believable that a project in Hawaii would be economical without the PTC, despite the high cost of building anything in Hawaii.

The company has also claims that other projects in the pipeline will be viable without the PTC, but has given few details.

“Trust Me”

In response to investor’s questions during the conference call, President and CEO Jeff Ciachurski was not particularly forthcoming.  He says he cannot reveal more details about the projects in the pipeline because it would provide ammunition to opponents who want to reduce the price paid for wind power in the power purchase agreements he negotiates with utilities.  Like investors’ concerns about lack of transparency, Ciachurski’s worries are valid.  If the company tells investors it will receive a high rate of return on a project, utility customers will use that statement in front of regulators to try to reduce the amount the utility pays the company for electricity.  In other words, information is a two-edged sword.

From his tone in conference calls, Ciachurski seems offended by the implication that the Champlin/GEI deal will not be a good one for investors.  He asks us to consider his track record, management’s ability to grow its assets and projects.  The value of Western Wind’s projects has been validated in two ways: by the in-depth due diligence of the leading banks among the project lenders, and by the independent valuation the company commissioned last year, on which I based my $5 to $6 valuation of the stock.

Western Wind’s 2004 annual report shows only $200 thousand in liabilities on the balance sheet.  On March 31, 2012, the most recent quarterly report shows $360 million in liabilities.   Over those seven years, the amount of money banks were willing to lend grew at a compound annual growth rate (CAGR) of 187%.  The book value of assets on the balance sheet also grew, from $3.3 million to almost $400 million, a 93% CAGR, although this greatly understates the growth in the value of Western Wind’s assets, since they are shown on the balance sheet at cost, not on a discounted cash flow basis.

Data source: Western Wind financial statements and press releases. Note that assets are shown at book value, and are much lower than they would be in a DCF analysis.

The company has issued shares to fund some of this growth: shares outstanding rose six-fold, a CAGR of 27%, but not in a dilutive way.  Even using just the balance sheet values of net assets, net assets per share grew from $0.29 to $1.85 (after the receipt of the reduced cash grant), or over 30% CAGR.

Given that track record, I’m willing to give Ciachurski and his team the benefit of the doubt on the Champlin/GEI pipeline.  I agree that Western Wind could reveal more about their pipeline than they are without tipping their hand in PPA negotiations, such as a list of projects giving their locations, potential megawatts, wind regime, and a rough idea of how much progress has been made on them.

In short,  I don’t like the secrecy, but I’m willing to put up with it because I’m able to buy Western Wind shares at a tiny fraction of what I see as their true value.

Data source: Western Wind financial statements and press releases. Note that assets are shown at book value, and are much lower than they would be in a DCF analysis.

Rumors

There are some who say any trust in Ciachurski is misplaced.  I’ve received comments on my articles saying that “ the executives have been plundering the company for years with impunity,” but if such plundering occurred on any large scale, we would not have seen the asset growth discussed above.  I was also contacted by a Vancouver-based private investigator, who claimed to be working for a group of investors who had been swindled by Ciachurski.  He asked me to publish his research linking Ciachurski to convicted felons.  But he was unable to substantiate the linkage, other than to repeat hearsay from unidentified individuals.

The company says such allegations are the work of a group of Vancouver based hedge funds, who have been buying the stock near current prices ($1.25 a share) and want to sell the company to a buyer like Algonquin Power (TSX:AQN, OTC:AQUNF), which made and offer of $2.50 a share last October.  Even if the unsubstantiated allegations about Ciachurski “plundering the company” were true, the plundering has been minimal, since shareholder value has increased substantially during the  supposed plundering.  That’s hardly typical of a company with unscrupulous management: Shareholder value in such companies almost always goes down, not up.  We only have to look to wind turbine and solar manufacturers to see many examples of honestly run renewable energy companies with rapidly dropping shareholder value.

Although I’m not averse to a quick profit (most of my stake, like that of the Vancouver hedge funds, was acquired around the current price), I agree with Ciachurski that the best time to sell Western Wind will be after the company’s recently completed projects have been producing cash for a few quarters, and the Yabucoa solar project in Puerto Rico is complete.  The company expects that each of the next seven quarters will be record quarters for revenue and earnings, and they can say this with a good degree of confidence.  The revenue in question depends only on the wind blowing, the sun shining, and utilities with good credit ratings paying for the power generated.

At $1.25 a share, I don’t see much downside.  If the Vancouver funds manage to force an immediate sale, I get a quick 2x profit.  If Ciachurski gets his hoped for sale in 2014, I get a 4x or even 8x profit after only a couple years.  That seems worth the wait.

UPDATE: Western Wind has just announced that they are selling the company. Looks like the disgruntled shareholders (and anyone looking for a quick profit) won.

Disclosure: Long WNDEF, AQUNF

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

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

Posted by Tom Konrad at 04:18 PM | Permalink | Comments (0)

Tom Konrad CFA

The Windstar Wind Farm. Photo credit: Western Wind Energy

On July 10, shares of Western Wind Energy (TSX:WND, OTC:WNDEF)plummeted because of a $12.2 million shortfall in the 1603 cash grant from the US Treasury for the company’s Windstar wind farm compared to the application.  In order to reassure skittish investors, the company held a conference call on Monday, July 16.

“I’m sure the company was already engaging in discussions with the Treasury while the grant was being processed.  Why should new discussions achieve a different result?”

Western Wind President and CEO Jeffrey Ciachurski disagrees.  Here is his argument:

• The Treasury was hit by a flood of 1603 tax grants for rooftop solar leaseback projects with “inflated” developer fees.  As a result, the Treasury went against IRS guidelines and put a 5% cap (as a percentage of other expenses) on all developer fees for both solar and wind projects.
• Wind projects are generally more complex than solar projects, and typically have developer fees at 10% to 30% of costs.
• Western Wind’s independent advisers’ opinion is that a developer fee between 27% and 41% of assets would be fair for Windstar, based on the  fair market value of the project.
• Western Wind applied for a relatively conservative 20% developer fee for Windstar.
• Western Wind’s earlier Mesa project had a 15% developer fee, which was granted in full.

Ciachurski went on to say that, in 95% of cases, Treasury is right about developer fees, but in the case of Windstar and a few other extremely profitable wind farms, they are wrong, and so he and his advisers need to go to Washington to make the case in person.

Will they succeed?  I hesitate to predict.  For me, I think it’s best to wait and see.

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

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

Posted by Tom Konrad at 11:23 AM | Permalink | Comments (0)

Tom Konrad CFA

The Windstar Wind Farm. Photo credit: Western Wind Energy

Western Wind Energy (TSX-V:WND, OTC:WNDEF)recently announced that it had received the much delayed 1603 cash grant for its 120 MW Windstar wind farm, which was completed last year.

Good News, Bad News

The good news is that the grant was finally issued after over a month and a half after the Treasury’s normal 60-day cycle of considering the grants.   This will come as a relief to investors who may have been wondering if the grant might be denied, although I concluded that there was not much chance of Western Wind not receiving the grant when I looked into it two weeks ago.

The bad news is that the amount received is a 12.5% ($12,221,994) less than the amount applied for.  Since the average 1603 grant award is 97% of the amount requested, this shows that there is a serious disagreement between Western Wind and the Treasury about what costs can be legitimately included in the application.  According to the company, the discrepancy was “apparently due to changes in the administration of the program by the Treasury Department which has reduced the suggested guidance on the amount of any developer fee which can be included in the 30% cash grant amount.”

Western Wind management believes that the whole grant should have whole grant should have qualified, despite the changed guidance, and plans to “engage in discussions” with the Treasury in the hope of getting the original amount reinstated.

Of course they would engage in such discussions (it only costs them a little in legal fees, when compared to the eight-digit potential gain,) but I think investors should write that $12M off in their valuation of Western Wind.  If it comes through, it will be a nice upside surprise, but I’m sure the company was already engaging in discussions with the Treasury while the grant was being processed.  Why should new discussions achieve a different result?

(NOTE: Since this article was written, Western Wind held a conference call to answer that question. I detail why management thinks they will succeed in getting the full grant reinstated here, and discuss investor concerns about lack of transparency here.)

Valuation

What should this mean for the stock?  I think we should look back to the stock price in May, before the grant was delayed.  At that point, WNDEF was trading at about $1.50.  The company has 70.66 million shares outstanding (including the 8 million to be issued in the acquisition of the Champlin/GEI wind pipeline, or about 78 million fully diluted.)   Based on the average grant-to-application for 1603 grants, the “expected” grant was 97% of the $90,556,707 applied for, or $87,840006, putting the shortfall at $9,505,293, or $0.135 a share.

On the other hand, if Western Wind cannot recover the $9.5M, that amount will be subject to 100% bonus depreciation, and so can be used to reduce taxable earnings from the WindStar farm this year.  Assuming a (conservative) effective tax rate of 25%, 4 cents a share will effectively be recouped through bonus depreciation.   So if we totally write off the chance of recovering any of the tax grant, the loss amounts to 9.5 cents a share, and WNDEF should be trading around $1.40 based on prices in May, before the grant was delayed.

This calculation ignores the fact that, even in May, Western Wind was trading well below the value of its assets, which are worth on the order of $400 million, or between $5 and $6 a share.   Even if we ignore Western Wind’s pipeline, the value of the company’s completed Windstar, Kingman I, and Mesa projects comes to $230-240 million, or about $3/share, even after the smaller-than expected tax grant.

That makes today’s sell-off to $1.23 / C$1.26 a share a little confusing.  The market does not like surprises, and may take a some time to digest the actual numbers.   I just bought a little more of the stock, but this is intended as a short term trade, since the purchase brought me above my target allocation.

Disclosure: Long WNDEF

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

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

Posted by Tom Konrad at 12:44 PM | Permalink | Comments (0)

Tom Konrad CFA

The Windstar Wind Farm. Photo credit: Western Wind Energy

It’s now more than three months later, and no tax grant.  The stock is down 24% since May 22, when the grant was expected, but management remains confident they will get the grant.  In the company’s May 30 quarterly earnings announcement, the company said,

Our application has exceeded the 60 day program guidance review period and we continue to monitor our application status on a daily basis. We are not aware of any issues associated with our application and through our network of advisors we believe a majority of the applications are delayed.

The Western Wind CEO Jeffrey Ciachurski had to attest to this statement under the Dodd-Frank rules, so we can be confident he believes the grant is just delayed, and will not be denied.  In a phone interview on Friday, he told me flat out that “There is no risk to the cash grant,” and “most 1603 applications are running late.”   He also told me that the company has attended legal seminars on 1603 grants, and the average deviation (amount the grant is reduced by Treasury) is 3%, so we can expect Western Wind to receive about $88 million.

According to Western Wind, the reason the 1603 grants are running late is because of a flood of solar applications as the program expired at the end of 2011, and because there is pressure on Treasury to vet applications very carefully given the current charged political climate in Washington.

When I was at the Renewable Energy Finance Forum, Wall Street last week, I tried to get independent confirmation of the company’s statement that most 1603 grants are running late.  No one was able to give me direct confirmation.  Most industry insiders told me they would not be surprised if that were the case, but they did not have any personal knowledge.  I also asked Richard Kauffman, Senior Advisor to the Secretary of Energy in the Department of Energy (DOE).   Although DOE helps the Treasury vet 1603 grants, he had not heard anything about grants being delayed.

I also got in touch with a source at Treasury, who was not willing to talk on the record.  That source did say that Treasury’s “policy”  is a 60 day turnaround.  The source said that I should not assume that the grant would be denied just because it had not yet been granted, as there are reasons a grant might take longer than 60 days to process.

Conclusion

Western Wind is still confident they will receive the tax grant, and the Treasury Department did not deny that many 1603 grants are delayed.  It makes a certain amount of sense to me that if most 1603 grants are running late, Treasury is not willing to come out and say that’s the case: it would not make them look good.  The fact that my Treasury source did not deny that grants are running late and was unwilling to go on the record, lends credence to the possibility that many grants are late.  After all, if everything were running smoothly, why not just say so?

Overall, I think the chances of Western Wind receiving the grant are very high.  I recently bought more stock at $1.15 on the gamble that I’m right, but to be perfectly clear, it is a gamble.  While the chances seem very low to me, if Western Wind does not receive the tax grant, it could easily bankrupt the company.  Western Wind had only $272,720 in unrestricted cash on hand at the end of May, and has substantial project-related debt that it plans to pay down with the grant proceeds.  If the tax grant were denied, I can’t imagine there would be many lenders willing to step up and fill the breach.

On the other hand, I can’t find any reason to believe that the Windstar project should not qualify for the 1603 grant.  If the grant were to be denied, what would be the basis for denial?

Disclosure: Long WNDEF

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

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

Posted by Tom Konrad at 12:14 PM | Permalink | Comments (0)

Tom Konrad CFA

Offshore Wind Farm photo via Bigstock

Wind tower stocks having opposite day, or rather opposite week.

When US-based wind power companies won a preliminary injunction to impose countervailing duties  in a trade dispute against China, their stocks fell.  They have continued to fall for the four trading days since the announcement.   In fact, as the chart and table below show, wind tower stocks Trinity Industries (NYSE:TRN) and Broadwind (NASD:BWEN, red) have fallen more than the wind industry stocks as a whole (NYSE:FAN, green) and Siemens AG (NYSE:SI), the German energy conglomerate which argued against the tariffs.

According to a Dow Jones story Thursday, Siemens and Vestas (OTC:VWDRY) are the most likely companies to be hurt, since they are the biggest customers for Chinese wind towers in the US.   While Siemens stock has declined less than the industry as a whole, only Vestas stock has declined as might be expected.

The Chinese wind tower companies hit by the tariffs are not publicly traded.

Yesterday, a reporter from the Financial Times‘ Deal Reporter called to ask me if I had any insight into the unexpected market reaction.  My thoughts are these:

• These wins are not a big deal for these wind tower companies, since wind tower markets are fairly local because of high transportation costs.
• Wind tower stocks  are probably not declining from fear of Chinese retaliation, since that would likely affect the whole industry, not just wind towers, yet FAN is down less than any of the involved parties.
• This trade dispute may be less about onshore wind towers today than offshore wind towers tomorrow.

Offshore vs. Onshore

There are several reasons I think this may case may really be preparation for a bigger dispute over offshore wind towers to come.

1. Almost by definition, offshore wind farms will be accessible from ocean trading routes.  Even proposed offshore wind in the Great Lakes is accessible via a series of locks.
2. The towers and pilings are a much larger proportion of the cost of offshore wind farms than they are for onshore farms.  According to Walt Musial, manager of offshore wind and ocean power systems at the National Renewable Energy Laboratory, turbines only account for 32% of the cost of an offshore wind farm.  Onshore, the turbine accounts for 75% of wind farm costs.
3. Siemens, the only company to argue against the tariffs, is a big player in offshore wind.

Conclusion
I think the stock market is telling us that the $222 million of Chinese wind tower exports today are small potatoes.  This is just a prelude to the real fight, the fight over offshore wind towers.

Disclosure: No positions.

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

Posted by Tom Konrad at 11:21 AM | Permalink | Comments (0)

Wind Tower photo: Samdogs via PhotoRee

The United States Department of Commerce has once again ruled in favor of American companies who say Chinese manufacturers are receiving unfair government subsidies.

American wind tower manufacturers filed a trade complaint in December against Chinese companies, and on Wednesday the DOC made its preliminary determination on countervailing duties. According to Wiley Rein, the lead counsel for the group that filed the petition, commerce found that mandatory respondents, Titan Wind Energy and CS Wind China, received countervailing subsidies from the Chinese government at rates of 26 percent and 13.74 percent, respectively. The agency also ruled that the duty against imports of all other Chinese utility-scale wind towers is 19.87 percent.

The DOC is scheduled to make a separate preliminary determination on its anti-dumping investigation against wind towers from China and Vietnam on July 26. According to trade experts who weighed in after a similar set of investigations in the solar industry, anti-dumping tariffs are often set higher than countervailing duties. The petitions filed assert dumping margins of 64.37 percent for China and 59.11 percent for Vietnam. The case covers wind towers that are at least 50 meters tall and designed to support large-scale turbines with capacities greater than 100 kilowatts.

"This is an important step in remedying the harm caused by unfairly traded wind tower exports,” said Alan H. Price of Wiley Rein. “We look forward to further relief when antidumping duties are announced in about two months."

The Wind Tower Trade Coalition (WTTC) includes Trinity Towers (TRN), DMI, Broadwind (BWEN) and Katana Summit, said Dan Pickard of Wiley Rein shortly after the group filed the complaints.

The law firm is also representing the Coalition for American Solar Manufacturing (CASM), which filed a trade complaint against Chinese solar manufacturers in October. The DOC has ruled in favor of CASM on both the countervailing duties and the anti-dumping tariffs. The anti-dumping rates were set at 31 percent in what has become a fierce and hotly debated issue in both the American and the global solar industries. That ruling has drawn sharp rebukes from a large segment of the American solar industry, as well as the Chinese government, which is quickly ramping up its own investigations. The issue, though, has played well politically, with key Democrats backing the tough measures.

While China has risen to dominance in the global solar industry, its manufacturing presence is much smaller in wind. However, members of the WTTC say that they are being forced out of the industry because of the price of towers beings shipped to the United States.

The American wind market continues to put up strong installation numbers, but the industry is fighting to extend the Production Tax Credit, a key financial component that backers say is critical to the market’s continued growth. However, no deal has been reached, and many manufacturers have stated that they may turn away from the U.S. market without an extension.

Posted by Guest Contributor at 11:28 AM | Permalink | Comments (0)

Tom Konrad CFA

Wind Turbines photo via Bigstock

A rising tide may float all boats, but a stiff wind separates the wheat from the chaff.

Over the last week, it’s become clearer which wind developers are the wheat, and which are the chaff.  Stronger developers with deeper experience are buying projects from their weaker kin.  At least two such deals were announced last week.

On May 15th, Western Wind Energy  (TSXV:WND, OTC:WNDEF) signed a deal to acquire the entire 4,000 MW wind energy development pipeline of private Champlin/GEI Wind Holdings, with near term projects in Hawaii and Utah.

On May 18th, Alterra Power (TSX:AXY, OTC:MGMXF) continued its quest to become a major global renewable energy developer and producer,  and announced a deal to buy four sites in British Colombia from private sellers led by English Bay Ltd.  Alterra estimates the early-stage sites have the potential for generating capacity over 1,000 MW.

Preserving Cash

A large part of the reason wind development projects are changing hands is access to cash.  Financing for wind projects has become much harder to come by.  If you can’t get financing to develop your project, it makes more sense to sell it to someone who can.

Western Wind should soon receive a $90 million cash grant from the US government for a previous wind projects completed in 2011.  Alterra received $38.5 million from a group of Icelandic pension funds in return for an increased stake in its HS Orka geothermal facility.

Despite the cash inflows, both buyers are paying the sellers in shares and, in Alterra’s case, royalties on any future production.

Prices

The sticker price for the Western Wind deal was $20 million dollars,  but the deal will be paid for in shares of Western Wind, which will be valued at $2.50.  According to a Western Wind spokesman, Champlin/GEI had invested “almost $20 million” in the pipeline so far.   Since WNDEF closed at $1.61 the day before the deal, Champlin/GEI are effectively accepting a third less than what they paid to develop the pipeline.

Alterra is paying 1.34 million shares, worth C$549,000, in addition to the promise of future royalty payments.

The discount and the fact that no cash is changing hands points to hard times for sellers of wind prospects in the current environment.  No developer invests $20 million cash in the hope of receiving $13 million in shares for it a few years down the road. The flip side of this is that it’s a good time to be a buyer.  Even without cash and at a discount, buyers can pick and choose wind farms they want to develop.

Location

Western Wind has often repeated its plans to focus on wind farms in markets where Renewable Portfolio Standards (RPS) or high local electricity prices make wind farms profitable without (currently expired) federal subsidies.  Western Wind management estimates that approximately 40% of the 4,000 MW Champlin/GEI portfolio (1,600 MW) would be economic even in the absence of the federal Production Tax Credit (PTC.)  The crown jewel of the portfolio is a 75MW wind farm in Hawaii.  Hawaii not only has an aggressive RPS, but wind power there displaces electricity generated from (very expensive) oil.

Alterra also chose its projects carefully.  Of the eight wind farms under development by English Bay, Alterrra chose three near proposed Liquefied Natural Gas (LNG) export terminals.  British Colombia is experiencing rapid growth in industrial power demand from both mining and natural gas sectors, and British Colombia is the only region in North America to pass a Carbon Tax.

What the Deals Mean for the Wind Industry

There is a saying among stock traders that “Price follows volume.”  A fall-off in trading volume is often a sign of a stock peaking, and a pick-up in trading volume can a bottom.  The same patterns appear in other markets as well.  These two deals (and the many other which have been done over the last few months) look like signs of better (or at least no worse) times ahead for wind developers with projects to sell.

The increased number of deals is also a sign that buyers are finding prices attractive.  It’s drawing new entrants.

Just this month, a new type of entrant to the renewable energy business came to my attention: a Real Estate Investment Trust (REIT).  Power REIT (AMEX:PW), is planning to expand on its existing rail infrastructure asset by purchasing renewable energy infrastructure.  As far as I know, PW will be the first company to bring the tax-advantaged REIT structure to renewable energy.  Owning shares of a REIT with renewable energy assets will be much more like owning a piece of a wind or solar farm than owning shares of a traditional power producer: REIT profits are not taxed at the company level, and pass directly through to the shareholder.   This structure should be particularly attractive to  investors like charities and individuals investing through retirement accounts, since REIT payments are taxed as income, not at the reduced rate used for qualified dividends.

Power REIT is looking at many prospects, and has not ruled out solar investment, but the picture of a wind farm on its home page is probably not an accident.

What other outside investors will be breezing in to pick up wind farm bargains?

Disclosure: Long WNDEF, MGMXF, PW

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

Posted by Tom Konrad at 08:10 AM | Permalink | Comments (0)

Slower than expected economic recovery in the U.S., combined with the eurozone sovereign debt crisis and most recently the Chinese government's effort to 'overhaul' the local wind industry, have completely transformed the wind industry supply chain. So concludes the latest in the biennial supply chain report from BTM Consult ApS, now a part of Chicago-based consultancy firm Navigant, Inc.

This comprehensive analysis reveals that over the past five years the industry has seen a dramatic turnaround, with a negative supply situation (2005-2008) for some key components and materials transformed into the current position with a significant surplus. Furthermore, with overcapacity now the case for most key components and materials, turbine prices have dropped to a level where both original equipment manufacturers (OEMs) and sub-suppliers are failing to see profitability, suggesting a tough time for the industry and a likely restructuring.

Indeed, in response to a slump in demand and fierce competition based on both quality and price, some suppliers have already reduced or suspended production with even some Chinese companies shuttering their businesses. But BTM believes it is not necessarily a bad thing for wind to be forced to provide products with low cost and high quality. They argue that clear underlying trends of 'a flight to quality' and consolidation have actually brought more opportunities to qualified suppliers with strength in both technology and finance. This is becoming vital, in particular to cater for the offshore wind market, where turbine OEMs already face a sourcing challenge for large components and equipment (for turbine manufacture and installation) and an even greater challenge in achieving rapid industrialization.

A Supply Chain in Flux

According to BTM, there have been significant changes in the supply chain for the wind power manufacturing industry over the past five years, most recently triggered by the worldwide economic downturn. The tight supply chain situation has been eased since the severe global financial crisis weakened the growth rate of wind power deployment two years ago. A balance of supply and demand was finally reached for all key components and materials in 2011 due to a slower than expected economic recovery in most industrialized countries. In fact, there is an overcapacity for many components and materials using standard processes.

In a buyer's market, fierce competition for both quality and price has already pushed many suppliers, mainly from China, to the edge of collapse. Although established European suppliers are better positioned compared to newcomers in terms of perceptions of quality, reducing the product cost without sacrificing margins is still a challenge. Clearly, more consolidation will be seen in the supply chain in the next few years.

Apart from the key strategic parts, components and materials are being increasingly outsourced by large European turbine suppliers to Asia, particularly China which is the world's largest wind power equipment manufacturing base. Although some European turbine OEMs are still hesitant to move away from their established suppliers, due to concerns over quality, economic pressure derived primarily from the decline in turbine prices is challenging turbine vendors, especially those who want to compete in the Chinese market, to accept higher risks to stay in the business.

Following the dramatic growth in installations, leading European turbine and key components suppliers had already shifted part of their manufacturing capacities to China and the U.S. — the world's two largest markets in terms of wind power installed capacity. However, manufacturers face important strategic decisions in diversifying their markets due to the uncertainty of developments in the US and the challenge of overcapacity in China. Suppliers are currently moving into new strategic markets such India, the UK and Brazil. Recently launched local content requirements in Brazil, Canada and India are also encouraging such a trend.

Overall, under current market conditions, many manufacturing facilities which had been geared to the fast growing wind market are running at part-load. There will therefore be enough capacity in the supply chain to cater for growth, assuming that the market follows BTM's demand forecast for the next five years. The recent introduction of multi-MW offshore turbines (mostly 5-6 MW) by turbine manufacturers in both Europe and China, however, means that there may be a tight supply chain situation for some strategic components, partly because it takes time for the supply chain to prepare for mass production of such large parts.

Key Components

During the wind energy boom period, investors were increasingly favoring a vertically integrated approach to turbine manufacture.

More recently, however, the attitude towards investment has clearly changed from one of urgent enthusiasm to one of caution. With a buyers' market, the pressure on the supply chain to meet market growth has gone, resulting in fierce competition for both product price and quality. In addition, the economic turmoil has significantly slowed down the availability of cash. Against this background, turbine manufacturers are much more willing to outsource components.

At the same time, with the average capacity of wind turbines steadily increasing, especially for the next generation of multi-MW offshore machines, the requirements from turbine manufacturers for both new technology and high quality components have limited the number of independent suppliers which can keep up with the pace of development. BTM indicates that these two factors have combined to create the current mainstream wind supply chain strategy.

Enercon is the only supplier in the Top 15 with full vertical integration in the manufacture of turbine components. Although the rest of the suppliers all have in-house capacity for producing vital components such as blades, gearboxes, generators and control systems, they still source a part of their supply from independent sub-suppliers. It is clear that blades and control systems are key components that most turbine OEMs prefer to produce in-house. With the secure supply of gearboxes becoming threatened, several large turbine vendors have adopted a strategy of buying out gearbox suppliers, but this situation has changed as supply chain bottlenecks have eased up with the recession.

Summary of Supply Status

This assessment indicates that although today the technical capacity for key materials exists on a global basis, there are a number of underlying issues which are a cause for concern.

The supply of castings and forgings, when considered on a global basis, suggests overcapacity. Both are, however, characterized by a strong regional imbalance in supply, with forgings in the US being in short supply and fears of tightness in Europe by 2014, despite a significant over capacity in China and South Korea. Severe overcapacity is complemented by fierce competition in both price and quality during a time where both higher raw material prices and labor costs plague European and North American suppliers. Partner selection still remains a key challenge in meeting the strict quality specifications, an issue of growing concern as quality requirements increase with the trend towards increasing turbine size, a key concern for gearbox and bearing suppliers.

For the key materials used in the production of blades it is clear that there is no challenge in meeting demand with evidence for the necessary investment to ensure capacity is sufficient. Similarly, there are no concerns over the woven and stitched fabrics as close coordination between the suppliers and the market ensures that the necessary investment has been put in place to meet demand. The only concern remains in the pre-preg market where only a small subset of companies are providing pre-pregs. Despite recent investments, demand for pre-pregs is expected to be tight for the next few years until new suppliers enter this part of the value chain. Glass fiber is still expected to maintain its position as the material of choice for the general blade industry, although demand for an increase in the stiffness-to-weight ratio in blades catering to the offshore wind segment could mean that carbon fiber will increasingly come into favor. In terms of resins, there is a short-term tightness in the epoxy market due to the market supply of bisphenol A but there are no major long-term constraints expected for either epoxy or unsaturated polyester based solutions. It is still expected that epoxy resins will maintain the lion's share of the market in all regions.

China is home to 97 percent of the world's rare earth elements, a critical material in permanent magnet generators. With China gradually implementing export quotas, it has caused panic in the wind industry. Despite tightness expected for the next two or three years, there are positive movements from both the supply and demand side. Longer term, it is expected that a combination of new reserves, adaptive strategies from OEMs and governments as well as greater resource transparency will ensure that the industry has access to the resource.

There are no reports of any serious constraints in the supply chain for key components and materials at present, despite an increasing concern over the potential supply of rare earth materials. Based on the current supply chain situation that a lot of capacity will be available if European suppliers' newly established facilities come into full operation, and a significant surplus of supply has been identified in China, there will be enough capacity in the supply chain to meet the modest annual growth rate of 15.5 percent up to 2015, the report's authors state. Nonetheless, the recent trend for introducing multi-MW turbines (mostly 5-6 MW) by leading vendors indicates a sourcing challenge for large components and a challenge to get these industrialized quickly enough. This challenge can be eased, however, once the supply chain gains the confidence required to invest heavily.

More immediately, the report concludes, the wind energy boom has come to an end because of the ongoing global financial and economic crisis, with the previous tight situation in the supply chain easing in 2010. Due to the global economic recovery being slower than expected, and a slump in demand from the second quarter of 2011 onwards, not only has a balance been reached between supply and demand and but in most cases a significant surplus has been identified, prompting a flight to quality in a buyer's market.

Posted by Guest Contributor at 11:58 AM | Permalink | Comments (0)

Posted by Guest Contributor at 06:34 PM | Permalink | Comments (0)

1. The company is more managed for cash than for growth (lower R&D going forward);
   
2. Excess capacity is removed
3. Business risk is dramatically reduced by cooperating with others on the development and sale of off-shore turbines
4. Efficient organizational and management structures are implemented
5. Strong anchor investor or cooperation partner is found for Vestas
6. The company is managed and management is controlled by people deserving the trust of the investment community.

Posted by Guest Contributor at 10:50 AM | Permalink | Comments (0)

Tom Konrad CFA

Image via Wikipedia

Sticker Shock

As I discussed in my article on investing in offshore wind power, Nstar (NYSE:NST) recently agreed to buy 27.5% of Cape Wind's 420MW planned output. Since National Grid (NYSE:NGG) has had a power purchase agreement (PPA) to buy 50% of the farm's output since 2010, Cape Wind now has enough capacity contracted to raise money for construction.

The Nstar PPA has yet to be negotiated, but prices the PPA with National Grid specifies prices starting at start at 18.7 cents per kWh, and increasing 3.5% annually. That's quite expensive, when you consider that the 2010 average wholesale price of power on the New England ISO was 4.5 cents per kWh.

Looking at those numbers, you would expect that when Cape Wind comes online, National Grid and Nstar customers will be seeing rate increases. But it's not that simple.

Auction Dynamics

Electricity prices on the New England ISO are set in hourly auctions, with each generator bidding the price at which they would be willing to generate power. All generators receive a payment equal to the benchmark price, which is the marginal cost of production for the most expensive generator needed to meet demand.

Since the most expensive dispatched generator sets prices for all generators, lowering the marginal cost of generation by adding Cape Wind to the mix (since wind's marginal cost of generation is zero) will have the effect of lowering the price for all power on the New England market, an effect known as price suppression.

How much lower? A 2010 Study by Charles River Associates [pdf] found that Cape Wind would lower prices on the New England wholesale market by 0.122 cents on average. Since Cape Wind itself would be producing about 1% of all power on the New England market, the extra 14 cents per kWh on that power would be offset by a savings of .122 cents per kWh on all other power. By my calculations, the combination of price suppression and the increased direct price of power from Cape Wind, the net effect on the average price of power in New England of Cape Wind would be an increase of only 0.02 (one fiftieth) of a cent, assuming the Charles River Associates study is accurate. That's almost certainly less than the likely error in any such calculation, meaning that the extra cost for Cape Wind would be effectively zero. Put another way, even if customers pay a 12.2 cent per kWh premium for power from Cape Wind, the net effect on utility bills would be zero because of price suppression.

The December 2010 New England Wind Integration Study [pdf] (NEWIS), reached a similar result, finding that if 20% of the New England ISO's energy were supplied by offshore wind, it would reduce the average annual Locational Marginal Price for power by $9 per MWh, or 0.9 cents per kWh. This effect alone would justify a 4.5 cent per kWh price premium for offshore wind up to a 20% penetration. although 4.5 per kWh cents is a much lower premium than the 12.2 cents per kWh that the 1% penetration of Cape Wind would justify, these two results are similar because the first offshore wind farms built would have larger effects on the power market for each GW added.

Timing of Offshore Wind

One of the reasons offshore would do so much to reduce wholesale electricity prices is that offshore wind tends to be available when demand on the New England Grid peaks. While we're used to onshore wind being poorly correlated with load. In the Great Plains, where most US wind has been built, the wind blows strongest at night and in the winter, and is often nearly still on the hottest summer days when demand peaks. In contrast offshore wind sites in New England have much higher summer capacity factors, according to NEWIS.

NEWIS also looks at the capacity value of wind under various scenarios. Capacity value is the percentage of wind's nameplate capacity that is available when system load peaks. In other words, capacity value is the percentage of capacity that is actually available when it is most needed. In the Great Plains, capacity values are usually in the 15% to 20% range, but NEWIS found that capacity values for wind New England to be in the low 20% range for scenarios dominated by onshore wind, while the best scenarios analyzed had capacity values in the low 30% range, when about half that wind was offshore.

Image Source: Bill Henson NEWIS overview

Dollar Wise

While it might seem foolish to pay over 18 cents per kWh for new offshore wind generation today, wind power is not nearly as expensive as it seems. Because of price suppression, the extra cost to New England customers of Cape Wind is likely to only be a fraction of a cent per kWh on their electricity bills. As the offshore wind industry in the Northeast develops, the cost of developing offshore wind farms is also likely do decrease, since current prices are predicated on relying on expertise and equipment imported from Europe and the offshore oil industry in Gulf of Mexico.

According to several speakers at Offshore Wind Power USA in Boston last week, the surest way to develop a local offshore wind industry and gain the benefits of lower offshore wind prices, economic development, and lower pollution and carbon emissions, is to give industry certainty that there will be consistent building of offshore farms for several years to come.

Will it be worth it? If we continue to rely on cheap fossil powered electricity generation in the Northeast, we're likely to end up like the guy who buys the cheapest furniture he can find, only to have it break within a few months, leaving himself still needing furniture and having a pile of trash to get rid of. Not only will we eventually have to buy renewable power like offshore wind, we'll have more pollution caused by mining, drilling, and burning fossil fuels which we'll have to clean up. Anyone worried about how wind turbines might look cluttering up our coastal waters might pause to consider what is in our water now: the mercury we worry about in seafood all comes from burning coal. Just because something is out of sight does not mean it's not causing problems.

The British have a phrase for buying something cheap only to spend more money in the end: “Penny wise, Pound foolish.” Perhaps that's why the British are so far ahead of us in developing offshore wind.

This article was first published on Forbes.com.

DISCLOSURE: None.

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

Posted by Tom Konrad at 12:54 PM | Permalink | Comments (0)

Tom Konrad CFA

In my recent article on investing in offshore wind, I suggested that the market for offshore wind turbines was too competitive for turbine manufacturers to be a good investment at this time, but that companies which supply the power conversion and connection to the grid might be better.  I listed the following companies:

• Prysmian (PRYMF.PK) and General Cable (BGC), which supply power cables.
  
• ABB Group (ABB), and Alstom (AOMFF.PK) which supply many aspects of the power conversion and interconnection hardware needed to tie wind farms together and to the grid.
• Siemens (SI), which also supplies power conversion and interconnection equipment as well as being the leading supplier of offshore wind turbines.

In order to choose the best of these, I've put together the following chart comparing some of my favorite valuation ratios:

Interpreting the Chart

The chart shows earnings, free cash flow (FCF), and dividends as yields (i.e. divided by stock price) so that they can easily be compared to each other and between companies, while the Debt/Equity is a ratio (100%=1) so that I can display it on the same graph. 

For dividend, earnings, and FCF yields, higher is better since these are different measures of the company's ability to generate a return on the stockholder's investment.  In a quality company, free cash flow should also be similar to earnings, and, if not, further investigation is warranted into the quality of the company's earnings.  Both earnings and FCF yields should be significantly higher than dividend yield, since both are needed to maintain the dividend payment over the long term.

Finally, a low debt to equity ratio (leverage) is good, because, all else being equal, a company with low leverage will have less volatile earnings and more financial flexibility.

The Companies

I was not able to obtain 2012 and 2013 earnings estimates for the German Prysmian Group, but this does not concern me overmuch, since I'm not interested in a company with such a high debt burden and negative free cash flow.  Siemens' tiny FCF, and Alstom's negative FCF also allow me to remove them from consideration quickly.

That leaves ABB and General Cable.  At first glance, General Cable is the more attractive of the two because of its predicted rapid earnings growth.  However, as a conservative investor, I find ABB's 3.4% dividend attractive, although the fact that it is barely covered by FCF is a little worrying. 

Conclusion

An ABB transformer. Photo by author.

Overall, I choose ABB Group (ABB) as my top offshore wind stock.  ABB's very low debt (Debt/Equity = 0.24) means the company is well positioned for today's troubled economy.

I also like ABB's focus on building its cleantech businesses: ABB was named Cleantech company of the year in 2011.  So in addition to having exposure to offshore wind, ABB pays a decent dividend, has good exposure to cleantech, and is likely to remain profitable through any economic bumps in the road. 

Finally, ABB is well placed to catch any favorable breezes that arise as the offshore wind industry takes sail.

DISCLOSURE: No positions

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

Posted by Tom Konrad at 10:10 AM | Permalink | Comments (3)

Offshore Wind in the United States

Europe

Offshore Wind as an Investment

Offshore Wind Stocks

Conclusion

Offshore wind is destined to be a significant part of the energy seascape in the coming decades, and the industry is just getting its sea legs at the beginning of what will prove to be a long voyage.  As of yet, I feel it it too early for most stock market investors to embark on this particular cruise, except perhaps on the sturdy platform of a large company with businesses in many other sectors, but which stands to benefit from the future growth of what promises to be a large and prominent renewable energy sector.

DISCLOSURE: Long GLDD.

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 05:56 PM | Permalink | Comments (0)

By Lou Schwartz

The Year of the Dragon has gotten off to an inauspicious start for the Chinese wind industry and in particular, Sinovel Wind Group Co. (Shanghai:601558, a.k.a. Sinovel), China's leading wind turbine manufacturer.

In early February, with the official end to the “Spring Festival” only days away, Sinovel reported decidedly chilly preliminary estimates of its FY2011 performance, confirming that Sinovel and indeed the whole Chinese wind industry had, in the words of one Chinese wind industry insider “entered a winter that would be hard to endure”.

Sinovel estimated that its net income for FY2011 declined by more than 50% compared with 2010 profits of 2.856 billion Yuan (~$450 million USD). The decline in profitability of Sinovel in 2011 was attributed to several factors: intense competition in the Chinese wind turbine market, delays in the development of certain wind farm projects and a series of mishaps that adversely affected the grid, which were caused by turbine defects evident during low voltage ride through (LVRT) events.

According to an official with Longyuan Power, the detection of turbine defects, which brought about the low voltage ride through issues has resulted in new rules, which, among other things, require that all wind turbines undergoing upgrades to address this problem obtain the approval of the State Grid Electric Power Research Institute prior to being put back in service. These inspections, being time consuming, have put further pressure on turbine manufacturers. This is an issue that certainly impacts Sinovel because of its large base of installed turbines, and particularly because some of the most prominent incidents occurred at the Gansu Province, Jiuquan wind farm, where Sinovel’s turbines predominate.

In addition to the fiscal and technical challenges Sinovel faces this year, the company also is confronting legal claims of more than $1.2 billion USD and a worldwide public relations blowback as a consequence of the souring of its relationship with AMSC (AMSC), formerly American Superconductor Corporation; indeed Sinovel has become a poster child for U.S. government complaints about Chinese trade practices in discussions with Xi Jinping, China’s incoming leader, who is visiting the U.S. this week.

As previously reported, AMSC has filed for arbitration and also has filed three civil lawsuits in Chinese courts against Sinovel and companies related to Sinovel, alleging breach of contract and intellectual property theft. And while the initial impression is that the Chinese legal system has settled into its role of protecting Sinovel through delay and favoritism, the existence of the litigation has had a decidedly chilling effect on Sinovel’s ambitions to become a serious player worldwide. This was in evidence in November 2011 when Mainstream Renewable Power put on hold its deal for Sinovel to supply it with up to 1 GW of wind turbines.

Sinovel has ridden the wave of rapid wind energy development in China to become the largest producer of wind turbines in China and as a consequence of China’s rapid growth in wind power production, the world’s second largest turbine manufacturer. In 2010 4386 MW worth of Sinovel turbines were installed; in all, China installed a total of 18,928 MW in 2010, which gave Sinovel a 23% market share. The early estimates are that China’s installed wind capacity in 2011 grew by 20,666 MW, but of that total, Sinovel’s installations decreased to 3700 MW and its market share declined to 18%, leading one to speculate that 2010 may have been Sinovel’s high water mark.

(Total installations in 2009 in China were 13,750 MW and Sinovel’s share was 3510 MW or 25.5%; in 2008 wind turbine installations in China totaled 6246 MW and Sinovel’s share was 1403 MW or 22.5%.  In 2011 Goldwind Science and Technology’s wind turbine installations totaled 3600MW; in third place was State Power with 3000MW of installations; and in fourth place was Guangdong Province’s Mingyang Wind Power (MY) with 1500MW in installations. The precipitous decline in installations from foreign turbine manufacturers continued in 2011 with the Vestas (VWDRY.PK) being number one among foreign manufacturers with only 660MW, followed by GE (GE) with 400MW.).

Because Sinovel’s rapid growth has been accompanied by a decline in market share amid intense competition, and shares of Sinovel now are selling for 50% of the price they fetched when the dispute with AMSC became public last year, the company enters this year under increased financial pressure; this financial pressure in turn has necessitated Sinovel to return to financial markets to, among other things, supplement its working capital, despite having gone public in a blockbuster IPO in January 2011 (raising the equivalent of nearly $1.5 billion USD on the Shanghai Stock Exchange).

So how does China’s wind industry plan to pass this harsh winter? Of course, simply suffering is a time-honored tradition. One of the most evocative phrases used by the Chinese is “Chi Ku” (to “eat bitterness”) and apparently the Chinese wind industry already is eating a large amount of bitterness.

Next there is hope that the Chinese government will step up the pace of wind turbine installations and on this point there was encouraging news this week when the Chinese government announced the start of the second Offshore Wind Power RFP process for an anticipated total of 1500-2000 MW of installed capacity. At the same time, the State Energy Administration announced its goal of supporting the development of a total of 30,000 MW of offshore wind capacity by 2020; to put this ambitious goal into perspective, presently China has just 1380 MW of offshore wind power installed. Some are estimating that the offshore wind market alone will be worth 100 billion Yuan (~$16 billion USD) through 2020.  

Because we have seen this movie played out countless times in a wide array of Chinese industries, we know that the central issue for the Chinese wind industry is how to avoid the cutthroat price competition that juices the sector as it debilitates the industry’s players. There has been a remarkable decline in wind turbine prices over the last four to five years: in 2008 the price of a 1.5-MW wind turbine in China was ~$1.48million USD; by late 2011 the price of a 1.5-MW wind turbine had dropped almost in half to ~$762,000 USD!

The Chinese accomplished this feat of halving the price of a MW of wind power, in large part by rapidly developing an indigenous manufacturing industry that has been able to produce turbines and their components at substantially lower prices. If for nothing else, the Chinese are well known for their penchant to incessantly pressure their suppliers to sell at increasingly uneconomic prices. But here is the interesting point: one of the few categories of suppliers to the wind turbine industry that didn’t make price concessions over the past several years were foreign companies with technology that the Chinese needed but hadn’t been able to replicate indigenously. The prime example of this, of course, is the electrical components and control systems produced by AMSC. A simple “back of the envelope” calculation displays in high relief this conundrum: while the price of Chinese wind turbines and most of their components were declining steadily over the past four to five years, the cost of electrical and control systems supplied by AMSC under its 2008 contract with Sinovel remained constant, so that what accounted for (approximately) 9% of the total cost of a Sinovel wind turbine in 2008, grew to be a 12% item by late 2011!

This dynamic clearly gave Sinovel the incentive (as claimed by AMSC) to steal AMSC’s intellectual property or (as claimed by Sinovel) to develop its own indigenous capability in electrical components and control systems so that Sinovel would be able to reduce the cost of its turbines in this hyper-competitive environment in China today and hopefully halt the slide in its market share.

One somewhat perplexing aspect of this tale is that Sinovel’s relationship with its key technology supplier has become rocky just when the technological requirements that may give Sinovel a competitive edge going forward have grown. With an increasing number of 6-MW turbines, the expected rapid growth of offshore wind farms, and myriad grid connection issues, one would expect that Sinovel might be able to claw its way back up the market share ladder with a superior command of technology. And this is what makes the falling apart of the Sinovel/AMSC relationship mystifying.

Did Sinovel’s chairman, Han Junliang, just spectacularly miscalculate or did he know or believe that Sinovel could keep up with the growing technological requirements that might set Sinovel apart, with or without AMSC? In the glow of its $1.4 billion USD IPO in early 2011, did Sinovel feel at liberty to make off with AMSC’s crown jewels hoping that it could innovate beyond the AMSC technology platform or perhaps hoping that the cost benefits would be enough to keep Sinovel in the game long enough for it to figure out what to do next? Did Han Junliang underestimate how rising competition would affect Sinovel’s profits or is it precisely because he saw that those profits were rapidly shrinking that he felt compelled to lower Sinovel’s costs at the expense of AMSC?

In any event, it remains to be seen how Sinovel will weather the harsh winter that has now beset China’s wind power equipment manufacturing industry. And it will be fascinating to see whether the much anticipated innovation revolution that many insist is imminent in China will arrive in time to benefit Sinovel. In the interim, the best approach for Sinovel may be to settle with AMSC and allow the partnership to resume based on a new paradigm that fairly compensates foreign technology, which in turn allows for a gradually declining return per unit in recognition of the changing economics of the wind turbine industry. Stay tuned.

Lou Schwartz is a lawyer and China specialist who focuses his work on the energy and metals sectors in the People's Republic of China. Through China Strategies, LLC, Lou provides clients research and analysis, due diligence, merger and acquisition, private equity investment and other support for trade and investment in China's burgeoning energy and metals industries. He can be reached at lou@chinastrategiesllc.com.  This article first appeared on Renewable Energy World.

Posted by Guest Contributor at 06:13 PM | Permalink | Comments (0)

• Solar Subsidy Sinkhole; Re-evaluating Germany's Blind Faith in the Sun;
• Solar Subsidy 'Insanity' Will Cost Consumers; and
• Solar Energy Row is an 'Undignified Spectacle'

Posted by John Petersen at 08:41 AM | Permalink | Comments (5)

Posted by Tom Konrad at 01:24 PM | Permalink | Comments (1)

Posted by John Petersen at 04:20 AM | Permalink | Comments (8)

• Better buiding design and insulation;
• Smarter power management systems;
  
• Telecommuting;
• Denser cities with shorter commutes;
• Smart transportation management to reduce congestion;
• Buses and carpooling;
• Bicycles and ebikes;
• Shifting freight to rail from trucks;
• Smaller vehicles that use lightweight composites to replace industrial metals;
  
• Deploying solar and wind with battery backup for remote power and in developing countries;
  
• Shipping efficiency technologies, such as better hull coatings, slow steaming, etc.; and
• Recycling, recycling and recycling
  

Posted by John Petersen at 09:28 AM | Permalink | Comments (26)

Posted by Debra Fiakas at 12:12 PM | Permalink | Comments (0)

Posted by Tom Konrad at 11:45 AM | Permalink | Comments (0)

Posted by Tom Konrad at 04:28 PM | Permalink | Comments (0)

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

Posted by Tom Konrad at 09:29 AM | Permalink | Comments (0)

Posted by Tom Konrad at 08:09 PM | Permalink | Comments (13)

DISCLOSURE: Long AMSC.

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

Posted by Tom Konrad at 08:05 PM | Permalink | Comments (3)

• The Bonneville Power Administration, which serves 3.5 GW of installed capacity in the Pacific Northwest;
• The Australian Energy Market Operator, which serves 1.8 GW of installed capacity in New South Wales;
• The Independent Electricity System Operator, which serves 1.2 GW of installed capacity in Ontario;
• The Alberta Electric System Operator, which serves 0.8 GW of installed capacity in Alberta; and
• The EirGrid, which serves 1.4 GW of installed capacity in Ireland;

1. I downloaded detailed production data from each power authority for the months of January and July 2010 and then calculated an average wind power output for each six hour interval;
2. I then calculated a maximum and an average power output for each system during January and July 2010;
3. I used the average power output of the systems to calculate a conversion factor that would bring all five systems up to the average power output of the BPA;
4. To compensate for time zone differences I shifted Australia by three intervals (6 hours each) the BPA by two intervals and Alberta and Ontario by one interval; and
5. I constructed a stacked graph to show what the combined power output of the five systems would be if they were each built-up to the point where their effective production capacity was equivalent to the BPA.

Posted by John Petersen at 05:16 PM | Permalink | Comments (0)

Posted by Debra Fiakas at 02:31 PM | Permalink | Comments (0)

Posted by Tom Konrad at 06:10 PM | Permalink | Comments (5)

• Wind turbines will generate on average 30% of their rated capacity;
• The wind is always blowing somewhere and geographic dispersion will eliminate instabilities;
• Periods of widespread low wind are infrequent; and
• The probability of very low wind output coinciding with peak electricity demand is slight.

1. Average output from wind in the UK was 27.18% of capacity in 2009, 21.14% in 2010, and 24.08% between November 2008 and December 2010 inclusive.
2. There were 124 occasions from November 2008 through December 2010 when total generation from the windfarms metered by National Grid was less than 20 MW from an average capacity of over 1,600 MW.
3. The average frequency and duration of a low wind event of 20 MW or less between November 2008 and December 2010 was once every 6.38 days for a period of 4.93 hours.
4. At each of the four highest peak demands of 2010 wind output was low being respectively 4.72%, 5.51%, 2.59% and 2.51% of capacity at peak demand.

• The nature of wind output has been obscured by reliance on “average output” figures. Analysis of hard data from National Grid shows that wind behaves in a quite different manner from that suggested by the study of average output ... or from wind speed records which in themselves are averaged.
• It is clear from this analysis that wind cannot be relied upon to provide any significant level of generation at any defined time in the future. There is an urgent need to re-evaluate the implications of reliance on wind for any significant proportion of our energy requirement.

Posted by John Petersen at 09:19 AM | Permalink | Comments (17)

A Great Deal for Plutonic Shareholders, Not bad for Magma

Tom Konrad CFA

As a shareholder of Magma Energy Corp. (MGMXF.PK), I'm reading through the joint information circular [PDF] on the proposed merger of Plutonic Power Corp (PUOPF.PK) and Magma to form "Alterra Power Corp." I'm not thrilled with the merger, although I plan to vote for it, now that it's arranged.

Overall, I think the merged Alterra will be a stronger company than either company alone. Both companies are in capital intensive niche Renewable Energy industries, so the added scale and diversification of Alterra should better enable the merged company to borrow money to finance projects at lower rates. Obtaining financing at favorable rates is essential to the profitability of renewable energy projects.

My misgivings about the merger arise from the price. Magma shareholders will have a controlling stake of 66.5% of the merged company, with current Plutonic shareholders owning the balance. Plutonic shareholders are being paid a 32% or 17.5% premium, based on pre-merger market capitalization or book value, respectively. That would be a normal buyout premium, except that Magma was a much stronger company, and so Plutonic shareholders also gain more as part of the merged entity. Although the two companies work in different renewable energy industries, their projects have much in common. In addition to raising finance, environmental permitting, grid interconnection, and negotiating with utilities are crucial to the success of any renewable power producer, and a larger company with more projects may be able to make more effective use of employees with specialized local knowledge or skills in these areas.

Before the merger, I considered Magma shares a good buy, but I would not have bought Plutonic shares, because the company would have needed to either do a deal like this or raise money in the next year or so. This put Magma in the stronger bargaining position, and so I would have liked to see a smaller premium paid for Plutonic shares. That said, since two thirds of Plutonic shareholders will need to vote for the merger in order for it to be a success, this premium is probably necessary to gain sufficient support. Passage by Magma shareholders is a virtual certainty, since the owners of 38.7% of Magma shares have already committed to vote for the deal, and only 50.01% support is needed.

As a Magma shareholder, I think the deal is acceptable, and will be a way for Magma to pursue opportunities for growth beyond Geothermal power, part of the company's current strategy. I also like Plutonic's Run of River and Pumped Hydroelectric assets, although until this proposed merger, I was unwilling to buy the company's shares because I felt its balance sheet wasn't strong enough.

Overall, I'm in favor of the deal. Too bad they couldn't have come up with a better name. Apparently "Alterra" means "Other Earth" or "Other land" in Latin, but it doesn't do much for me. I liked both Plutonic and Magma better.

Plutonic shareholders will gain an instant 32% premium on their shares, while the shareholders of both companies can look forward to steadier growth.

DISCLOSURE: Long MGMXF.

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

Posted by Tom Konrad at 04:24 PM | Permalink | Comments (0)

• Lost electric power from Japan's ruined nuclear plants must be replaced with oil, natural gas and coal because alternative energy technologies like wind and solar can't possibly take up the slack;
• Cleanup and reconstruction must increase total Japanese demand for liquid motor fuels;
• Japanese demand for industrial metals and construction materials must skyrocket; and
  
• Crushing limitations on Japan's base-load power generating capacity must:
• complicate supply chains for equipment, components and materials from Japan;
• increase the cost of Japanese exports;
  
• increase demand for all types of electric efficiency technologies;
  
• increase demand for HEVs and other fuel efficiency technologies;
• increase demand for grid-based energy storage systems; and
• force utilities to shed non-essential loads and abandon their support for plug-in vehicles.

Posted by John Petersen at 03:07 AM | Permalink | Comments (10)

Posted by Dana Blankenhorn at 12:20 PM | Permalink | Comments (0)

by Michael Giberson

American University’s Investigative Journalism Workshop has published reports detailing the extensive political connections in the United States developed by Chinese wind power company A-Power Energy (APWR) in its effort to build a 600-MW wind farm in West Texas. A-Power (APWR) and their Chinese and American partners were seeking $450 million in section 1603 grants and U.S. Department of Energy loan guarantees to help fund the project. New York senator Charles Schumer objected to the idea that stimulus funds would flow to Chinese workers and sought to block the project’s access to the funds. A-Power chose to fight politics with politics, announcing a turbine factory in Nevada (home of the Senate Majority Leader Harry Reid, project being developed in conjunction with prominent Reid supporters in Las Vegas) and making friends with the United Steelworkers union which had initially opposed the project.

The key U.S. partner to A-Power on the project is U.S. Renewable Energy Group, described in the article as “a Dallas investment firm with strong ties to Washington and the Democratic Party.” On its website, US-REG describes itself as a developer of “renewable energy projects throughout the nation,” but the only project specifically mentioned anywhere on its website is the proposed project with A-Power (here is the US-REG summary touting the benefits of the proposed project). Reading the “About the Team” materials on the website suggests a group of very well-connected lawyers and investors with little direct experience in developing renewable energy projects.

In this particular story, a key company is Chinese and the well-connected movers and shakers are Democratic, but there is nothing especially “Chinese” or “Democratic” about the practice of political capitalism revealed here.

Earlier reports from the Investigative Journalism Workshop detailed that about 88 percent of the section 1603 grant money went to non-U.S. based companies, including companies from Spain, Germany, Japan, and Portugal. (Note that the location of the corporate headquarters likely has little to do with where the money gets spent or who ends up better off because of the subsidy.) Another report indicated that $1.3 billion in stimulus funds went to wind power projects built before the stimulus bill was passed.

A US-REG press release issued in response to the article complains that it “contained a number of biased statements and inaccuracies about US-REG and its Texas wind farm project.” But they don’t do a point by point rebuttal, mostly just reaffirm what a wonderful thing the project will be.  Well, to be fair, their response specifically claims: no U.S. government money has been received (they WANT a lot, but they haven’t received any yet and it begins to look unlikely unless the Section 1603 program is extended), and no U.S. government official has been asked to intervene with the DOE loan guarantee application.

The response also specifically claims “Without these federal incentives, most American wind projects would be forced to lay off workers, go out of business or sit idle until energy prices rise, further stalling much needed growth in the American renewable sector.”

I think they could have been clearer: without the incentives, the wind power companies would not have hired workers in the first place, so those workers would have been engaged in other kinds of productive work instead, perhaps even self-sustaining lines of work not dependent on continuing federal incentives.

NOTE via Seeking Alpha: Recent financial filings by A-Power suggest that the West Texas project will not get built. If the project does not receive Section 1603 grants and the DOE loan guarantee by December 31, 2010, A-Power’s partners have the right to dissolve the partnership. They report, “In our view, it is not likely that Spinning Star [the project's name] will be able to arrange the requisite construction financing by December 31,2010….”

Added: HT to the Dallas Morning News Texas Energy and Environment blog.

Michael Giberson teaches Energy Economics and Energy Policy at the Center for Energy Commerce in Texas Tech University's Rawls College of Business. This post is a revised version of an article that first appeared at the Knowledge Problem blog.

Posted by Guest Contributor at 08:34 PM | Permalink | Comments (1)

In spite of the recent global economic slowdown, the growth of new wind energy developments has so far continued unabated. Wind turbine technology has evolved considerably in the last decade, and new wind farms are steadily popping up across the globe. To meet rising demand for renewable, clean sources of energy, the push for more efficient wind energy technologies has moved from a proverbial light breeze just a few years ago, to a steady gale today.

The Global Wind Energy Council (GWEC) recently predicted that the world’s wind power capacity will increase by 160 percent in the next five years, with global installed wind capacity estimated to reach 409 GW by 2014, up from 158.5 GW in 2009.¹ This surge in wind energy projects can be attributed to increased demand as governments look for cleaner sources of energy to reduce greenhouse gas emissions and meet growing energy needs.

Yet experts warn of a front of high pressure blowing in from the East, which could effectively calm this storm of development — at least in the short term. The newest wind turbine technologies largely depend on rare earth metals, quirky elements that are used to make special magnets that dramatically increase conversion efficiency. Yet the corresponding demand for these materials is hampered by the fact that almost all of the world’s supply is concentrated in China, where strategic investments in rare earth element extraction and refining in the 1980’s has given it cost advantages in the production process and an effective monopoly of the industry.

The GWEC’s prediction indicates the generation of an additional 250.5 GW of wind energy will require 167,000 tonnes of rare earth metals.² To put that in perspective, China, which currently produces 95 percent of the world’s rare earth elements, only produced 150,000 tonnes of rare earth metals in 2009.

China has shown that it is willing and able to control exports in rare earth metals by restricting supply. This market power is resulting in significant price instability, and is affecting a wide range of industries that rely on the astonishing properties of these elements to produce everything from smart phones to hybrid vehicles.

“Even in the face of a global recession and financial crisis, wind energy continues
to be the technology of choice in many countries around the world. Wind
power is clean, reliable and quick to install, so it is the most attractive
solution for improving supply security, reducing CO2 emissions,
and creating thousands of jobs in the process.”
Steve Sawyer, GWEC Secretary General

China and North America remain the largest two potential markets for wind power expansion.  Despite the lagging global economy, this has hit US markets particularly hard, government grants and incentives have kept wind energy growth on track, albeit at a conservative rate.  Although there are a number of large-scale projects in the regulatory approval stage In Canada, the adoption rate and scale of investment is amongst the provincial governments can be described as inconsistent.

Conversely, China’s wind energy developments have expanded at an incredible rate.  In 2009, China accounted for one third of the world’s new wind farm development. That year, the country generated 25.9 GW of wind power, overtaking Germany as the world’s largest producer.

China has announced that in the next ten years it will construct an additional 133 GW of wind turbine generated electricity.  This plan will inevitably contribute to a steep rise in demand for use of Chinese neodymium and other rare earth metals just to service the country’s domestic wind turbine market.³ To account for this, China will be forced to either ramp up production or slash exports.  This increased internal demand could be at the heart of much of the recent tightening of export quotas and shipments by China.  The effect of their actions has fundamentally shaken the countries around the world out of their slumber with respect to the stability of their REE supplies.

Neodymium is one of the rare earth metals typically used in permanent magnets. Modern high-efficiency neodymium magnets for wind turbines use close to half a metric tonne of the element per  turbine. Other rare earth metals used in wind turbines include praseodymium, dysprosium, and terbium.

Earlier versions of wind turbine technology relied on electromagnets, which use copper coils fed with electricity from the generator itself.  While effective, these generators were bogged down with excess weight. Companies such as Siemens (SI) and General Electric (GE) later developed turbines that use direct drive generators using permanent magnets. The motors turn at the same speed as the rotors and therefore have to be much larger to develop the same power. Yet the weight of the larger unit is significantly less. By using neodymium in the magnets, the weight of the generator can be further reduced. According to experts at Holland’s Delft University of Technology, a 15-mm-thick segment of permanent magnets can generate the same magnetic field as a 10- to 15-cm section of copper coils.⁴

Europe was an early adopter of wind power technology, and European governments have focused strongly on sustainable energy policy in recent years. But Europe’s capacity is expected to remain somewhat stagnant in the near future.  By 2014, it is expected that Asia will surpass Europe in total wind energy generation. South Africa has also recently disclosed plans for an aggressive foray into the wind power industry, with two huge projects in the assessment stage.

The reality is that China, despite backing off from earlier suggestions that it will limit exports, will be forced to adjust if it hopes to meet its domestic targets. New wind projects currently in the assessment stage in the US alone could soon outstrip the supply of Chinese rare earth exports. Therefore it is incumbent on the industry to identify, secure and develop new non-Chinese sources of these valuable materials. “That’s a serious issue,” says Henrik Stiesdal, chief technology officer of Siemens’s wind power unit.⁵

The reality is wind turbines can be built without rare earths, but the older permanent magnet technology is dramatically less efficient than those built with neodymium-based magnets, and depending on the project, their return on investment may be too far off to be considered.

Not everyone is convinced the drop in the supply of neodymium will halt the wind turbine industry. Though rare-earth magnets will be employed for a significant percentage of the large electrical generators used in wind turbines, smaller units may be engineered using other technologies that do not use rare earths. Ferrite magnets, for example, while much less efficient than neodymium magnets, are also considerably cheaper and in some cases may close the efficiency gap.⁶

It is clear that while direct drive technology using neodymium is superior to older wind turbine technology, its potential is ultimately dependent on the ability of the industry to develop and secure new sources of supply rare earth metals.

——

^{1, 2} – Global Wind Market Hits 155 GW
³ – The Battle Over Rare Earth Metals
^{4, 5} – Wind Turbines Shed Their Gears
⁶ – Magnetics Business & Technology – Summer 2009 Edition (PDF)

Posted by Guest Contributor at 06:27 PM | Permalink | Comments (0)

Bill Paul

As reported last week by Environmental Finance magazine in its online edition, Beijing has effectively shut out international operators with new regulations requiring any foreign offshore developer to enter into a joint venture with a Chinese company under which the foreign firm must be a minority partner. “In reality, most of the international developers cannot, or are not willing to, do a joint venture with (a) Chinese partner,” Environmental Finance quoted the policy director of the Global Wind Energy Council as saying.

The wind council official called the new regulations “shocking,” but for investors they may be inviting.

With China expected to rapidly ramp up offshore wind generation, certain Chinese wind power companies could see their underlying valuations rise the more Beijing’s new offshore policy becomes apparent.

One in particular is China Longyuan (Symbol CGYG.OB), which just went public in December. Another possible beneficiary is Xinjiang Goldwind, which trades locally under the symbol 002202. Goldwind has announced plans to ramp up production of offshore turbine machines.

Still another potential beneficiary is Datang International Power (Symbol DIPGY). World wind-power leader Vestas of Norway (Symbol VWDRY) has called Datang an important wind development company.

DISCLOSURE: No position.

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

Bill Paul is Managing Editor of  EnergyTechStocks.com.

Posted by Bill Paul at 08:28 PM | Permalink

Part 2 of 2

Bill Paul

Neither Daewoo Shipbuilding & Marine Engineering Co. Ltd., which trades OTC under the symbol DWOTF, nor Ener1 Inc., which trades on NASDAQ under the symbol HEV, is an obvious candidate for having hidden potential.

Heck, Daewoo isn’t even a green energy stock. Or is it?

Lost in the hubbub of Copenhagen and Congress, there’s been important news about both these companies that strongly suggests – at least to me – that each has plenty of undiscovered potential that will really start paying off over the next 18 to 24 months.

South Korea’s Daewoo Shipbuilding was just awarded a contract by German utility RWE AG’s (Symbol: RWEOY) renewable energy unit for up to three vessels specially designed to install offshore wind farms. The contract reportedly could be worth upwards of half a billion dollars, depending on whether RWE picks up the option on the second and third ships. The first ship is scheduled to be completed in 2011.

A couple things: at present, offshore wind power is going gangbusters thanks to healthy project returns that one European investment bank puts at around 15%. But installing the new large wind turbines under often harsh conditions requires a special kind of vessel. Daewoo’s reportedly will be the first – quite possibly the first of many. (Simultaneously, Daewoo just said it may build a wind power equipment plant in China.)

As for Ener1, seasoned green investors may think they know everything about this lithium-ion battery manufacturer. If Pike Research is correct, the future is bright for all li-ion battery manufacturers, Pike having just forecast that the global li-ion transportation battery market will total nearly $8 billion by 2015, compared with $878 million in 2010.

But the big li-ion winners should be those companies whose batteries also meet the critical need of providing energy storage for power grids. The really big winners should be those companies whose li-ion batteries also go into cars whose manufacturers can provide the rapid recharging infrastructure that consumers have indicated they want.

Tuck this away: Ener1 is the battery supplier in the world’s first project linking grid storage, electric vehicles, rapid recharging infrastructure and solar power. Other participants in the just-announced Japanese project include Mazda Motor Corp. (Symbol MZDAY) and Kyushu Electric Power, which trades in Tokyo under the symbol 9508.

Footnote: in Part 1 of this series, we explored the undiscovered potential of PFB Corp. (Symbol PFB), Vodafone Group (Symbol VOD), and Telefonica S.A. (Symbol TEF). For more please see: http://energytechstocks.com/wp/?p=2194.

Bill Paul is Managing Editor of EnergyTechStocks.com

DISCLOSURE: None

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

Posted by Bill Paul at 05:21 PM | Permalink | Comments (0)

A Bet on Wind Industry Growth

Tom Konrad, CFA

Wind Works Power Corporation (WWPW.OB) presents investors in publicly traded wind power stocks a new type of opportunity with the potential for high reward, and a complementary risk profile to existing plays.  

In the past, I've lamented the dearth of choice in publicly traded wind power stocks on North American markets, but both the number and types of opportunities are growing, allowing investors to diversify risk or to make more narrowly focused bets on how they expect the sector to evolve.

I classify wind stocks into three types:

1. Wind turbine manufacturers
2. Wind industry suppliers
3. Wind farm developers and owners

Each type comes with its own risks and rewards.  

Turbine Manufacturers

Turbine manufacturers are either large, established firms or feisty startups.  The large firms (Vestas (VWSYF.PK), Gamesa (GCTAF.PK), GE Wind (GE)) are capable of producing steady profits, but unlikely to see large multiple returns because of their large size and increasing competition.  They are also well known and followed by industry analysts, so a small investor has little chance of gaining an informational edge.  Small turbine manufacturers AAER, Inc. (AAERF.PK) and A-Power (APWR) hold the promise of large potential rewards if they manage to break in and get their products accepted.  However, breaking in to an established industry, even with superior technology is always extremely risky, and has become more so since the industry swung from turbine undersupply to glut between early 2008 and now.

Suppliers

Wind industry suppliers were a good bet when the industry could not build enough turbines.  A good rule of thumb is that the companies most likely to benefit when supply is tight are the suppliers of critical components and services very high up the value chain.  Since these suppliers do not often account for a large percentage of the cost of a turbine, they can earn extremely high margins without destroying the industry's overall economics.  In contrast, when the industry is in oversupply, these same companies often feel the squeeze much more than turbine manufactures who use their increased bargaining power and ability to switch suppliers to squeeze prices.

Wind Farm Developers and Owners

In the current state of oversupply for wind turbines, wind farm developers are in the best position.  If they have financing and all the permits and agreements in place needed to build a wind farm, the most expensive part of wind farm development, wind turbines are readily available at reduced prices.  To date, the vast majority of wind farm developers are also wind farm owners: they develop and build their own farms, and plan to profit from the sale of power and associated tax incentives.  Such companies range from Babcock and Brown Wind Partners (BBWF.PK) and the Algonquin Power and Utilities (AQUNF.PK, until recently known as the Algonquin Power Income Fund) at the established end, to Western Wind Energy (WNDEF.PK) in the middle to Sky Harvest Windpower (SKYH.OB) and NaiKun Wind Energy (NKWFF.PK), each with a single project in the early development stage at the startup end of the spectrum.

The more established developers have the most stable business model, because the revenues from existing farms allow them to fund new investments (At least in part) from the revenues of their established farms.  Once built, a wind farm is a stable business, with some fluctuation in revenues due to changes in weather conditions from one year to the next, and some risk of maintenance problems, but very little market risk for the power sales, since nearly all wind energy is sold under a pre-negotiated Power Purchase Agreement (PPA) to a local utility.  The flip side of this stability is slower growth, and less opportunity for outsized gains, since the expected revenues from the farm are well known far into the future.

Startup developers with only early projects are much more risky bets, since they have no ongoing source of income and must return to the capital markets periodically for funds.  Their advantage lies in the fact that the amount of capital needed in these early stages is much less than what is actually needed to build a wind farm.  If they are able to negotiate the hurdles of assembling a land package, navigating through the permitting process, signing an advantageous PPA, and establishing a grid connection, they can acheive outsized returns on their relatively small capital investment as successive levels of risk are removed from the process.  They can then go about the more certain and capital intensive business of actually erecting their wind turbines and collecting the revenue from the electricity generated, graduating into the ranks of wind farm owners.

Wind Works Power

Wind Works Power Corporation (WWPW.OB) focuses solely on the early, low capital, high risk, high reward stages of wind farm development.  Their strategy is to work on shepherding  several early stage projects through the hurdles of land package assembly, permitting, PPA negotiation, and site preparation with the intent of selling the projects to later stage developers who actually build and operate the wind farms. By working on several projects at once, Wind Works is able to diversify much of the project-related risk away, giving them a somewhat less risky profile than single-project companies such as Sky Harvest and NaiKun.

Rather than being capital-intensive, the early stages of wind farm development are very people-intensive.  Wind Works' key employee is CEO Dr. Ingo Stuckmann.  Dr Stuckmann has decades of experience developing wind farms around the world.  Surrounding him are people with strong connections to the power industry of Ontario, where Wind Works' first farms are located, and a former general manager at Nordex, a leading turbine manufacturer.  In other words, the team has the experience and connections necessary to manage wind farm development from start to finish.

Risks

While the potential gains of Wind Works' model are enticing, there are also substantial risks.  The source of the foremost risk is the same as the source of the potential reward: Investors are staking their money on a very people-intensive process that relies on just a few key people.  Wind Works does not have any proprietary technology, patents, or manufacturing capacity that might give them an edge in the market place.  Investors need to believe that this team will  be able to bring project development forward at a reasonable pace while dealing with unpredictable changes in regulations, environmental permitting, and managing the sometimes capricious sentiment of local residents and landowners.  While this is a process that Dr. Stuckmann in particular understands and has managed many times before, his experience is in no way unique in the industry, and better capitalized players with more resources could out-compete Wind Works for the best development locations, spots in the interconnection queue, and PPAs with utilities.

Even if the development process goes smoothly, investors are making a bet on the market conditions for wind farm development at unknown points in the future.   For the last year, there has been very little demand for ready-to-build wind farms because development companies have had trouble getting the necessary financing due to the financial crisis.   That is beginning to change, and is being helped by regulatory encouragement.   Ontario has passed North America’s first Feed-in Tariff, a generous incentive structure for encouraging renewable energy development that was pioneered in Dr. Stuckmann’s native Germany.  The United States has given wind developers the option of receiving an up-front cash payment for up to 30% of a wind farm's cost in lieu of the former Production Tax Credit, which tied payments to electricity production.  Assuming continuing support, these and other such incentives should make ready-to-build wind sites more valuable than they have been in the past.

The Payoff

In essence, Wind Works is positioning itself high up in the Wind Farm value chain.  When wind turbines were in short supply, the companies to own were suppliers of wind turbine components.  The credit crisis lead to a near halt in wind farm development, which is just starting to ease, but government policies such as Ontario's Feed In Tariff, Renewable Electricity Standards in many US States, and possible regulation of carbon emissions are all driving demand for completed wind farm, even while supply is constrained by lack of credit.  North America is building up unmet demand for wind farms.  If the credit situation improves, or governments step in to fill the gap, we may see ourselves in a situation where wind farm developers have all the turbines and credit they need, but not enough approved sites to build on.  Wind Works' business plan is ideally suited to take advantage of just that situation.

DISCLOSURE: This article is paid research.  The author was paid a flat fee by Resultz Media Group for researching, writing and publishing this article.  The opinions expressed here are the author's own, and neither payment nor publication could be withheld based on those opinions.

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 10:34 AM | Permalink | Comments (1) | TrackBacks (0)

Portfolio theory can lend insights into which carbon abatement strategies policymakers should pursue.  If policymakers listen, what will it mean for green investors?

Tom Konrad, Ph.D., CFA

Good Info, Not Enough Analysis

I've now read most of my review copy of Investment Opportunities for a Low Carbon World.  The quality of the information is generally excellent, as Charles has described in his reviews of the Wind and Solar and Efficiency and Geothermal chapters.  As a resource on the state of Cleantech industries, it's generally excellent.  As an investing resource, however, it leaves something to be desired.  Each chapter is written by a different expert in a particular field, which means that the information is up to date, and comprehensive, but this approach means that there is little attempt to compare the potential of the different investment opportunities presented.  What is the point of in-depth research into carbon abatement technologies if we do not then take the next logical step and emphasize the technologies with the greatest potential for carbon abatement and investment returns?

A Portfolio Approach

The most useful attempt at investment decision-making is buried in the otherwise uninspiring last part of the book. A summary of a 2007 report from the London Accord, A Portfolio Approach to Climate Change Investment and Policy is buried among self-promoting chapters from companies such as Nissan (NSANY)and BP (BP) promoting their (real) investments in clean technology,   The report uses a Monte Carlo implementation of Modern Portfolio Theory to determine low-risk mixes (portfolios) of carbon-mitigation strategies, and was written by Professor Michael Mainelli of Z/Yen Group, and James Palmer.

While intended primarily for policy decision-makers, A Portfolio Approach attempts to determine which portfolio of carbon reduction technologies is likely to produce a desired level of climate change at the lowest cost (or highest investment returns) at the lowest risk of failing to achieve the reduction goal.  Phrased this way, it is easy to see why portfolio theory is an appropriate tool, since it is designed to minimize systematic (overall) risk even when all individual strategies in the portfolio have significant risks of achieving the expected returns and carbon reductions.

Data

The data on various carbon reduction strategies came mainly from the 2007 IPCC Working Group report, "Mitigation of Climate Change."  This report is not complete, omitting some technologies with significant CO₂ reduction potential, in particular solar thermal collectors such as solar hot water heaters and larger installations for process heat in industrial processes.  "Solar," as referred to in the report, refers solely to solar Photovoltaic and Concentrating Solar Power (CSP.)

One decision I found questionable was to ignore the carbon reduction potential of investments with "negative abatement costs on the basis that these investments should be undertaken under any business-as-usual scenario, and are not strictly investment measures as a response to climate change." (p5/22)  This is circular logic.  For an investment with negative cot to exist, there must be a market failure.  Almost by definition, in a well functioning market, all investments with negative cost will have already been made.  Simply saying that these investments "should" be made assumes that these market failures will correct themselves without any effort on the part of policymakers.  Why should energy market failures correct themselves in the future if they have not already?  

In the authors' defense, they run one scenario (#3) in which investments with negative abatement costs are allowed, and they state "Further examination of negative abatement proposals seems in order, as it should be important to understand why these investments fail to be made under current financial conditions.  Neglected negative abatement may justify regulatory intervention by policymakers, e.g. imposing minimum building or transportation efficiency requirements." (pp.17/22 and 18/22)  

From the hedging in this statement, and the fact that they spend less time discussing scenario 3 than either of their other two, I conclude that something prevents the authors from giving market failures the attention they are due.  I find this an extremely common failing among financial practitioners, and believe it is an unfortunate and common consequence of in-depth training in financial modeling.  Most financial models contain an assumption of market efficiency, and do not produce meaningful results in cases of large and persistent market inefficiencies.  Without tools to model market inefficiencies, practitioners are prone to ignore them, convincing themselves that the inefficiencies are unimportant or will cure themselves.  Most of the critiques of "Green Jobs" programs are based on this fallacy.

Put another way, if you have a hammer (a modeling technique which assumes market efficiency, such as modern portfolio theory), you tend to see all problems as if they are nails (efficient markets.)

Results

Since the authors only look at scenarios 1 and 2 (those which ignore negative cost investments) in depth, these are the scenarios I will focus on.  I believe the results of these scenarios are still relevant answers to the question, "After negative cost investments in energy efficiency have been made, which positive cost investments should we pursue?"  Even if all the necessary carbon reductions could be achieved with negative cost investments, it would most likely be unwise to pursue such an approach to mitigate climate change: like all investments, there is no assurance that the expected reductions/returns will be achieved.  Pursuing a wide variety of carbon-reduction strategies provides the greatest chance that some such strategies will achieve the expected reductions, and others will exceed expectations, thus making up for any investments in the mitigation portfolio which do not achieve the expected reductions.

The chart below shows a series of "frontier portfolios": That is, portfolios of carbon abatement investments which achieve specified levels of carbon abatement at minimal cost.  The vertical axis is gigatons (Gt) of equivalent CO₂ emissions (CO₂e) reduced annually, and the horizontal axis is the annual investment needed to achieve this level of reduction.

There are diminishing returns for carbon abatement, with the cost of incremental abatement increasing significantly above 15 Gt CO₂e per year, and no practical increase in abatement beyond 20 15 Gt CO₂e and $400B expenditure per year.  

For comparison, to stabilize the atmospheric concentration of CO₂ at 350 ppm, a goal which, according to Joe Romm, will require 8 Gt CO₂e (approximately portfolio 2) of reduction by 2030, and another 10 Gt CO₂e (for a total of 18 Gt CO₂e, or portfolio 4) by 2060.  Since the model does not include negative cost investments in energy efficiency or solar thermal collectors, it is likely that these levels of abatement could be achieved at considerably lower cost by incorporating these opportunities.

The pie charts in the first column show the fraction of carbon abatement expected from each investment in the selected frontier portfolios, while the second column shows the cost of each investment.  The two columns differ because different investments produce different levels of abatement per dollar of investment.  For instance, the cost wedge for Biofuels in portfolios 3 and 4 are much larger than the corresponding abatement wedges.  This indicates that abatement with biofuels is more expensive on a per-ton basis than for the other investments in those portfolios.

I will focus on portfolios 2, 3, and 4, since those are the portfolios which deliver the necessary levels of abatement, which we will need to ramp up to over the coming years and decades.

Forestry

The most striking thing about these portfolios is that Forestry dominates CO₂ abatement, as well as cost in portfolios 2 and 3.  The more aggressive portfolio 4 has three relatively large cost wedges: Building Efficiency, Forestry, and Biofuels.

Unfortunately, according to the report's authors, the carbon abatement from Forestry is very uncertain.  To make matters worse, the methodology used in the report is extremely sensitive to the expected returns (or abatement, in this case) of particular investment classes.  Small errors in the expected returns can lead to frontier portfolios which are dominated by a single investment class, in this case Forestry.  The report notes that "forestry abatement potential is highly uncertain." (p.8/22)  While we can conclude that forestry is likely to be a significant part of our carbon abatement strategy, there is a good chance that forestry will not dominate the mix as it does in the model.

For stock market investors who want to allocate part of their portfolio to forestry, I recently wrote about investing in forestry stocks and forestry exchange traded funds (ETFs). While I was focusing on the potential for forestry to benefit from biofuels and bio-electricity in the article, any marginal demand for forestry services (including carbon sequestration) should benefit this sector.

Hydropower

Hydropower is also a significant investment in these portfolios.  Much of this investment will probably take place in the developing world, but there are also significant opportunities for upgrades to facilities at existing dams in the developed world.  I looked at the potential for hydropower stock market investments last year.

Biofuels

Biofuels also contribute significantly to all the portfolios, especially in the higher abatement scenarios, although the costs are high relative to other investments.  I don't believe that this is very realistic if we are also going to have large contributions to carbon abatement from forestry.  My guess here is that the authors did not take into account the negative interactions between forestry and biofuels, where an increase in one will drive up the costs of the other because of competing land and water use.  Land used for forestry cannot also be used for biofuels, and vice versa.

Wind

We see significant contributions from wind in portfolios 3 and 4, and the costs and potential for wind are much better understood than for many of the other scenarios.  Better yet for stock market investors, investments in wind are simple, with two wind energy ETFs allowing a simple investment in the sector.  Of the two, I have a slight preference for FAN (you can see my reasoning here.)

Efficiency, in all its Forms

Finally, port folio 4 shows considerable investment in Building Efficiency and Industrial Efficiency (which we usually refer to as just Energy Efficiency), while portfolio 2 has a good slice of Transport efficiency (what we usually call Clean Transportation.)  Keep in mind that these slices are only investments that do not have "negative cost," that is they do not cost less than new investments in conventional generation.  Since efficiency dominates investments with negative cost, the total investments in all forms of efficiency are likely to be many times what we see in these graphs.  While there is not yet an energy efficiency ETF available, there is one focused on clean transportation, the Global Progressive Transport ETF (PTRP).  I also have a few stock picks in clean transport.

For industrial and building efficiency, there is no ETF, but here are five of my favorite efficiency stocks, and you can find a much larger list of energy efficiency stocks here.  It's also important to note that smart grid stocks will fall into this category as well, at least for the purposes of the report.   Here are five of my favorite smart grid stocks.

Geothermal

Geothermal also has a small slice of portfolios 2 and 4.  This is significant given the small current size of the industry: even these small slices imply rapid growth for an underappreciated sector.  I mentioned three geothermal stocks to consider here, but I have since sold my stake in Raser Technologies (RZ), and will probably not repurchase it.  Our Twitter followers saw that first.  Charles did a good run-down of the public geothermal stocks in June.   

Other Thoughts

It's also worth looking at what is not in the efficient portfolios, but since this entry is already quite a thesis, I'll save that for later.

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.

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Posted by Charles Morand at 02:21 PM | Permalink | Comments (6)

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

Tom Konrad, Ph.D., CFA

The Algonquin Power Income Fund (AGQNF.PK) has been one of my star performers in an excellent year.  Is it still a good investment at these prices?

 Since I recommended the Algonquin Power Income Fund (AGQNF.PK/APF-UN.TO) in January as a renewable energy income stock for 2009, the company is up 69%, in addition to the C$0.02 monthly dividend, worth approximately another 8% through August on the US$1.82 purchase price, making it the second-best performing of my ten picks (after Cree, Inc (CREE).)  However, since the major basis for my recommendation at the time was the stock's extremely cheap valuation and high yield, I thought it was worth revisiting, on the occasion of the company's Q2 update [pdf]. 

Major events in the first half  were Algonquin's planned acquisition of a 50% stake in California Pacific Electric Company (Calpeco), the former California assets of NV Energy (NVE), and the fund's plan to convert into a corporation and acquire some tax loss assets through a deal with Hydrogenics Corporation (HYGS).

Calpeco

The Calpeco deal gives Algonquin some exposure to electricity transmission and distribution (in which their partner Elmira has management expertise) in addition to their current exposure to renewable energy generation.  Since I like the potential opportunities in electricity transmission, I think this was a step in a good direction for Algonquin.  Furthermore, about half of Algonquin's stake in Calpeco will be financed with an equity investment in Algonquin from Elmira at C$3.25 per unit.  Since this is only slightly below the current price, and well above the price at which I recommended the stock, the transaction will be non-dilutive for both me and my readers, and a reasonable exchange for more recent investors.

Hydrogenics

In July, a reader worried that the deal with Hydrogenics was a bad idea because Hydrogenics is a fuel cell company, an alternative energy sector neither of us is enthusiastic about.  In fact, this is a short term deal, and shareholders need not be concerned with ending up owning a fuel cell company when they thought they owned a renewable energy power producer.  Despite the legal complexity, this deal is not a tie-up with Hydrogenics, but rather a way for Algonquin to acquire corporate status, and Hydrogenics' tax loss assets at the same time.  Because Algonquin is profitable, and Hydrogenics is not, these tax loss assets are valuable to Algonquin, but not Hydrogenics, allowing both companies to benefit. Algonquin will gain the benefit of Hydrogenics previous losses in exchange for a cash payment, which will allow the cash-poor, unprofitable company to continue operations. The transaction has been approved by Algonquin unitholders and Hydrogenics shareholders, and awaits regulatory approvals.

Results

The Trust's first half revenue was down compared to 2008, which management attributes to lower natural gas prices.  Gas prices affect the trust's revenues through lower contract prices for the heat from their thermal generation units.  I find this to be a good sign, since I expect that low current natural gas prices will rebound because they do not provide sufficient incentive for natural gas companies to drill and replace the gas supply from depleting wells. Although I expect that low natural gas prices will depress revenues in the short term, Algonquin's operating cash flow and earnings should continue to be easily sufficient to fund distributions to unit holders with plenty left over to fund Algonquin's growth plans.

At current prices of C$3.32 for APF-UN.TO and US$3.07 for AGQNF.PK, with a yield of 7.2%, I consider Algonquin to be reasonably valued, and continue to hold my positions.  However, because I currently expect a market decline, I would only suggest buying Algonquin today if you also hedge your position against general market moves.

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

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

Posted by Tom Konrad at 12:42 PM | Permalink | Comments (5) | TrackBacks (0)

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Posted by Charles Morand at 09:49 PM | Permalink | Comments (3)

Michael Giberson

Market-oriented policy analysts have not been shy about cataloguing the problems surrounding windpower development. But in the enthusiasm to oppose the government interventions accompanying wind generation, market-based analysts sometimes have strayed beyond principled defense of markets and unwittingly offered support to anti-market NIMBYism and other meddlesome sentiments. Policy analysts examining wind power issues should consider more carefully which issues ought to be pursued through the policy process.

Two Images

Wind power has two images. In one view, wind power is glamorous, hi-tech, future oriented and almost sexy. Advertisements for products from automobiles to watches to banking services casually feature tall, slowly spinning wind turbines in the background, hoping to suggest that the advertised product, too, is glamorous, hi-tech, and future oriented, and maybe a bit sexy.

A second view shows wind power in a much less favorable light: the product of misguided environmentalism twisted into government-funded corporate welfare. No hi-tech glamour in this view. Instead, destruction and waste becomes emblematic of a windpower industry, which has blighted farm and ranch lands with industrial towers and power lines, killed bats and birds, raised the cost of electricity, and squandered tax dollars.

The second view dominates among policy analysts with a libertarian or conservative policy bent. Market-oriented policy shops have produced several critiques of wind power: the Cato Institute, Heritage Foundation, Competitive Enterprise Institute, Reason magazine, the Heartland Institute. Each has issued policy papers or published editorials or articles about wind power. The details vary, but the overwhelming verdict is negative: wind is more costly than conventional power even with subsidies, it wastes land, the turbines are ugly, the power output is unreliable and requires fossil-fuel backup generation, it produces the most power when it is least needed, the spinning blades are dangerous to both wildlife and human health, and construction damages the local environment.

In addition, wind power development often requires substantial investment in electric transmission lines, which consumes more land and adds to the expense. The Texas Public Policy Foundation has produced a fairly comprehensive critique of wind power development that touches on all of these points and a few more (see links below).

Business versus Policy Issues

The first view contributes to a few policy problems — the hi-tech glamour of wind power gains it unearned public support and therefore special political favor. As one wind energy association analyst has said, windpower “polls extremely well” and has support of both Republicans and Democrats.

But the second, negative view also contributes to policy problems when the analysis goes beyond issues of appropriate public policy and gets involved in a seemingly indiscriminate piling on of negatives. Renewable power policy in the United States has involved the government in heavy-handed subsidies, which is wasting taxpayer monies, distorting investment into electric generation and raising consumer costs. But these points represent about the limit of the market-based objections to windpower development. Most of the technology and resource-use concerns listed above are, for the most part, nobody’s business but the business owners. When analysts encourage negative attention to decisions that naturally fall within a business’s scope of actions, they end up encouraging further unconstrained expansion of public policy.

Let’s sort through that catalogue of complaints about windpower one at a time:

Wind power is more costly than conventional power generation. This claim is not always true, but probably true in many cases and for most of the time. But so what? It may cost more to make a Ferrari than it costs to make a Subaru, but so long as the consumer is free to choose which price it wishes to pay, no real policy issue emerges. Sure, many states mandate that consumers purchase a certain amount of renewable power, but the objection here is to the government picking winners in the marketplace. The mandate would be just as objectionable in principle if renewables were cheaper than conventional generation, so let’s leave cost out of it.

Wind power development often requires substantial investment in electric transmission lines. Wind power development can require investment in electric transmission lines to get the power from the wind farm to the frequently-distant major power consuming regions. (Of course this is not too different for other forms of power generation, only in those cases the fuel frequently moves by pipeline or railroad before being converted to power.) Transmission remains a government-regulated business, even in regions and states with restructured markets, which makes it a public policy concern.

For years the rules governing transmission investment were intimately tied to the needs of the monopoly electric utility. As independent power generation became important to the industry, the rules governing transmission investment had to change too. Accommodations for renewable power are of a similar nature. If policies in fact unduly favor renewable generators, then market-based policy analysts may have a complaint. But development of the transmission grid can be useful in reducing the generator market power that is a legacy of years of government-protected monopolies. It is at least possible that most of the value of transmission investment to support renewable power will come from the encouragement of competition and the resulting more efficient operation of the grid. Consumers should favor such transmission development.

Windpower development is land-intensive. This claim is true in some respects, but greatly exaggerated. It is certainly the case that windpower projects blanket thousands and thousands of acres, but such production is consistent with many other uses of the land – excepting a rather small footprint for the turbine itself and associated facilities. And, again, so what? Agriculture also uses a lot of land, but that is no reason to oppose farming. Landowners are generally considered capable of deciding how much, if any, land they wish to devote to various opportunities. Public policy involvement in these private decisions should be limited, not encouraged.

Wind power output is unreliable. Three parties should be concerned with the variability of windpower output: the company selling the wind power, the company buying the wind power, and the transmission network operator providing responsible for reliable operation of the power grid.

Other power market participants using the grid have a secondary interest, but this interest should be limited to ensuring each power transaction pays an appropriate share of the costs of operating a reliable transmission grid. There are important and difficult issues here, but for the most part they are technical grid operation and market design issues only passingly related to public policy. The various regional power markets are working out the issues, and progress will probably be faster if Congress doesn’t get too interested. Market-oriented policy analysts ought not to encourage politicians to think wind power variability is a public policy issue that politicians need to address.

Wind power requires fossil-fuel backup generation.  In a point related to the variability of wind, it is sometimes claimed that each new megawatt of wind power capacity requires the support of a new megawatt of fossil-fuel generation.  There is, maybe, a grain of truth here, but as stated the point is greatly exaggerated.  First, to an extent every generation unit supplying the grid has to be supported by backup generation in the case that the unit under produces or fails altogether.  Reliable grid operation requires the presence of units kept in reserve.  But not every single unit supplying the market is matched by a unit kept in reserve – since independently operated generators are unlikely to fail at the same time, the system just needs a few units in reserve at any one time.  For this reason, most regional transmission grids have already had sufficient reserve capacity available to accommodate the level of wind power that has been added. 

Wind power presents some new challenges – unexpected output variations across wind farms in the same area will be correlated rather than independent.  But this is a technical issue to be handled by the parties involved, and the main technical issue is assigning wind power developers an appropriate share of the costs of the necessary reserves.

Wind power produces the most power when the power is least needed. On average this claim is true for most existing installed wind power capacity. For example, in West Texas, where the boom in windpower investment is most pronounced, wind speed and wind power output is higher during Spring and Fall than it is in Summer, but the demand for electricity is highest during the Summer. In addition, windpower output tends to be higher overnight, while demand tends to be highest on late summer afternoons. (On the other hand, coastal and off-shore wind power developments tend to produce more power during the day and less power at night.)

An issue related to these last two items concerns references to wind power’s capacity factor. A generator’s capacity factor is calculated by dividing the unit’s power output over a period of time by the amount of power that would have been generated by the unit operating at maximum output. It is frequently noted that wind power generators will have capacity factors that range between 20 and 40 percent, while coal, natural gas, and nuclear power plants tend to have capacity factors that range from 70 up to 95 percent. But capacity factors have substantially different meanings for wind power and the other forms of generation. And once again, the policy significance is limited. If the “capacity factor” of a Subaru plant is higher (or lower) than that of a Ferrari plant, then … so what?

Wind turbines are dangerous to both wildlife and human health. Obviously coming into contact with fast-spinning blades can be dangerous – to humans as well as to birds and bats. Turbines sometimes fail in dramatic and hazardous fashion, as easily findable YouTube videos will show. But producing and burning coal is probably more hazardous to humans, birds and bats as well, and even natural gas is not without risks to animals. Any balanced analysis would at least seek to put the risks of wind power in appropriate context.

It also seems somewhat disingenuous when a think tank usually given to complaining that the endangered species act or similar policies interfere with private property rights starts holding up injured birds in the attempt to discourage private rights to develop property, simply because government subsidies are involved.

Windpower construction damages the local environment. If wind power development is damaging your property, first try negotiation with the developer and if that doesn’t work, then existing property law provides various opportunities for you to pursue a remedy. To the extent that wind power development is damaging other people’s property, they should pursue their rights. It usually is not a public policy concern.

Wind power turbines are ugly. Of course, no policy analysis calls turbines ugly as a serious policy argument; the name-calling just tries to detract a bit from wind power’s glamorous image. But making the claim in the context of a policy argument tends to align the analyst with a NIMBY crowd. If the development of someone’s property is going to spoil a historic view or other community value, the market-based approach would be for members of the community to negotiate purchase of an easement.

My main point is that much of the litany of negative factors surrounding wind power is of limited relevance to a policy analysis grounded in a political philosophy of limited government. Yes, the government intervention into the economy in support of favored kinds of power production is objectionable. But it is just the intervention that is the problem, not the way that the businesses and property of other persons are being developed.

Of course it isn’t just wind power that benefits from intervention, other resources and technologies also see various government supports. It turns out that tallying up subsidies for different resources gets surprisingly complicated, but it is clear that renewable power is the recipient of substantial government support at the moment, particularly on a per-MWh generated basis. Defenders of wind power would also point out that it produces no direct air emissions when producing power, and therefore should be encouraged relative to fossil-fueled generators that do emit pollution. The claim has some validity, but as I have suggested elsewhere, the current set of subsidies for wind is a very inefficient way of pursing those policy goals.

A Suggestion to the Free-Market Community

Now that I have made my main point, let me suggest a principled way to violate it and bring some of these factors back into policy analysis. As any market-oriented person who engages in policy debates has realized, not everyone shares their viewpoint on the role of markets and the value of limited government. In such cases an appeal to principles will not be persuasive. Winning policy arguments appeal to more pragmatic considerations. Cost-benefit analysis is the standard approach.

A serious cost-benefit analysis of public policies supporting wind power would have reason to examine the costs of windpower and the value of its output. For such an analysis, some, but not all, of the negative factors surrounding wind become relevant. Even here a market-based analysts should exercise care to keep issues that should be primarily matters of private choice out of the policy discussion, lest politicians and other less-discriminating analysts become encouraged to further intervene in the market.

For the most part, these market-oriented policy papers and essays are not pursuing a balanced assessment of costs and benefits, just trying to make a case against windpower interventions. I support making a principled case against intervention; I urge policy analysts to refrain from arguments which miss the mark and thus may inadvertently give support to interventionists.

Michael Giberson is an instructor and research associate at the Center for Energy Commerce at Texas Tech University's Rawls College of Business, blogs on energy economics (including wind power) and other topics at Knowledge Problem.  This article was first published on Master Resource.

Appendix: Market Think Tank Critiques of Windpower

Most of these are fairly short commentaries; Drew Thornley’s study for the Texas Public Policy Foundation is probably the most thorough).

Cato Institute: Jerry Taylor, “Picken’s Plan to Rig the Market,” 2008; Robert L. Bradley, Jr., “Eco-dilemmas of Renewable Energy,” 1997.

Competitive Enterprise Institute: Steven J. Milloy, “The Wind Cries ‘Bailout’,” 2008; Neil Hrab, Baptists, Bootleggers and Wind Power, 2004.

Heartland Institute: Cheryl K. Chumley, “Questions Plague Efforts to Grow Wind Power Use,” 2008.

Heritage Foundation: Ernest Istook, “Hot air about wind power,” 2008.

Reason magazine: Ron Bailey, “Wind Breaks,” 2002.

Texas Public Policy Foundation: Drew Thornley, “Texas Wind Energy: Past, Present, and Future,” 2008.

Posted by Guest Contributor at 03:34 PM | Permalink | Comments (1)

John Petersen

Last week I had the pleasure of participating as a panelist in Infocast’s Storage Week and attending four days of presentations by industry executives, national thought leaders and policymakers. While most of the presentations were too detailed and specific for a blog about energy storage stocks, there were a few high-level discussions that may be interesting to readers and while I'll never qualify as a journalist I can at least share some of the thoughts I jotted down.

Storage for Integration of Renewables

Two of the most important presentations came from Dr. Imre Gyuk, the DOE's Program Manager for Energy Storage Research, who explained that the unbuffered grid is vulnerable to collapse, noted that power outages cost American business an estimated $79 billion per year in lost productivity, and described grid-based energy storage as "a disruptive technology that will induce a paradigm shift in the utility industry." He further explained that storage has become a national priority as an integral subset of the smart grid program because of the multiple benefit streams it offers utilities in the form of frequency regulation, peak shaving, energy management, and transmission and distribution system upgrade deferral.

In his presentation, Dr. Gyuk specifically asked participants to support S. 1091, the Wyden Bill, which will provide a 20% investment tax credit for grid connected storage facilities that have at least 2 MW of capacity and can deliver 500 kWh for a period of 4 hours; makes utility-owned storage facilities eligible for clean renewable energy bonds; and provides a 30% investment tax credit for residential energy storage equipment. When the new subsidies are coupled with existing provisions that provide investment tax credits for storage system manufacturing facilities; ultra-rapid depreciation on eligible projects; and a short-term program that will offer cash subsidies to renewable energy storage projects in lieu of tax credits, the potential impact is massive.

In his discussion of the challenges associated with integrating intermittent renewables into the power grid, Dr. Gyuk explained that the peak-efficiency hours for both wind and solar do not mesh well with periods of peak demand for electric power. In the case of wind, the peak efficiency is usually at night when customer demand is lowest. In the case of solar, peak efficiency is usually around noon. Since peak demand typically occurs at about 4 P.M., Dr. Gyuk explained that short-term storage to shift power availability from off-peak to peak hours significantly increases both the usefulness of intermittent power sources to utilities and the economic returns to owners of those generating assets.

Community Energy Storage

Another important presentation came from Ali Nourai, AEP's manager of distributed energy resources who provided an overview of AEP's new Community Energy Storage (CES) program. In discussing the CES program, Dr. Nourai explained that the concept is "technology neutral" and emphasized that system reliability and "commodity priced batteries" would be critical drivers. He also noted that if PHEVs and EVs follow their expected development path, the batteries used in CES installations would likely be the same batteries used for automotive applications because widespread adoption in the auto industry would drive battery prices down to a level where they would likely be attractive to utilities. The key factors that Dr. Nourai stressed as critical for the CES program were:

• Improved safety and security;
• Increased customer reliability and value;
• Optimized realization of multiple value streams;
  
• Simplified integration of distributed power generation;
• Simplified budgeting for smaller neighborhood projects; and
• Simplified purchasing decisions by lower-level personnel.
  

Since the CES proposal contemplates installing batteries in a standard sized transformer box and assumes that Li-ion batteries will become a dominant technology for PHEVs and EVs, it clearly gives a short-term advantage to Li-ion battery developers who can make products that will fit in a limited volume. I remain skeptical about whether Li-ion battery technology will ever be robust enough or cheap enough for widespread adoption in the automotive industry and I wouldn't be surprised to see the volume constraints relaxed over time to facilitate the substitution of flow batteries and advanced lead-acid batteries. Seriously, does anyone really care whether the ugly green box hiding behind the shrubs is 3' by 3' instead of 4' by 4'? For the time being, the CES program favors Li-ion technology by imposing size constraints that have nothing to do with performance. It will be interesting to see how the program evolves as the cost and performance profiles for various battery technologies become clearer.

Energy Storage Heretic

On the third day I had an opportunity to play devil's advocate during a presentation by Mark Peters, the Deputy Associate Laboratory Director for the Li-ion battery development program at Argonne National Laboratories. During the question and answer session, I explained that for several months I've been suggesting that the inflection point for Li-ion batteries seems to be when you put a plug on a car because until you get to an all-electric drive train, the weight and volume differences don't justify the additional cost. Mr. Peter's response came as a pleasant surprise to me because he basically said "While there are members of my staff who would probably disagree with you, I tend to personally believe that your assessment is reasonable and the sweet spot for Li-ion batteries arrives when you add a plug."

By the afternoon of the fourth day, I had lapsed into full heretic mode for a panel discussion on the future of vehicle to grid technology. I think it came as a bit of a shock when I said "I don't believe V2G will happen because I don't believe PHEVs and EVs will happen in anything that even remotely resembles current plans." I then laid out the simple case against PHEVs and EVs as follows:

• The principal goal of the smart grid is the minimization of waste in the electric power industry;
• The most wasteful activity I personally engage in is using gasoline to power 4,000 pounds of car and 300 pounds of passengers at highway speed;
• The only activity I can imagine that would be more wasteful is using batteries to power 4,000 pounds of car and 300 pounds of passengers at highway speed;
• While most of the conference participants can afford the $40,000 cost of an eco-bling PHEV or EV, that option is not available to over 90% of the car buying public who need to worry about things like budgets and car payments;
  
• There are 6 billion people who live in crushing poverty and for the first time in history most of them understand that there is more to life than subsistence farming;
• As the 6 billion become consumers, our biggest challenges will be finding relevant scale solutions to shortages of water, food, energy and virtually every commodity you can imagine;
• Last year 23 million electric bikes and scooters were sold in China and those E2Ws used the same battery capacity that one million American style PHEVs would have required;
  
• From the perspective of a foreign government planner, providing mobility for a million wasteful Americans is not as important as providing mobility for 23 million locals who have more reasonable demands and aspirations; and
• From the perspective of raw economics, a purchaser who needs a small battery pack can afford to pay a higher price per watt-hour than a purchaser who needs a large battery pack, which will leave PHEVs, EVs and grid-connected applications at the bottom of the food chain rather than at the top.

Posted by John Petersen at 03:43 AM | Permalink | Comments (0)

Posted by Charles Morand at 09:45 PM | Permalink | Comments (1)

• Near-term growth could be helped by fiscal incentives, most notably the 30% Investment Tax Credit (ITC). Unlike a Production Tax Credit (PTC), an ITC does not require the existence of a tax liability and should lessen the industry's reliance on tax equity investors - there are far fewer of those kicking around these days 
• The possible enactment of a Federal renewable portfolio standard would provide a substantial long-term boost for the industry, and momentum is building in this direction
• New interstate transmission lines aimed at unlocking high-potential wind resources are being built or at the very least discussed 
• Investments in manufacturing capacity by OEMs remain on track, indicating that the industry sees the crisis as only temporary
• Regulated utilities - with the ability to finance wind projects on-balance sheet - are making a growing commitment to wind (recently exemplified by Berkshire Hathaway's MidAmerican Energy)

• Although credit conditions are normalizing, no one yet knows for certain what the future will look like, but many people agree that the financing environment will almost certainly remain challenging for a long time. Should inflation kick in as a result of fiscal and monetary incentives, interest rates could shoot right up in response, which would prove disastrous for any sector using large amounts of leverage
• The Federal RPS portion of the Waxman-Markey bill remains controversial and the bill will most certainly continue to undergo changes on its way to becoming law. Unless and until this happens - the bill becoming law with a Federal-level RPS in it - I am inclined to discount this entirely as a potential factor in future growth
• Transmission has certainly been on the agenda to a greater extent than at any other time in the past few decades, but we are still far - very far, in fact - from the investment levels required to truly unlock wind's potential in America. Governance systems around grid investments remain complex, with key areas of decision-making split between various actors whose incentives are not always aligned. I would venture to say that many people still see this as a major barrier to wind development, not as an enabler
• The latest run in wind stock has been very impressive, with the ETFs outperforming the S&P 500 by 25-30%. Last fall, their relative decline was equally formidable. As pointed out earlier this week by Tom, the magnitude of gains we've experienced over the past three months should probably be be viewed with some caution. I'm not sure whether we're headed for an imminent decline and, if so, how pronounced it will be (I'm a lousy market timer). But if we are, you can certainly expect wind stocks to fall further than the market as a whole. Any risk-averse investor should probably stay away at this point, or consider taking some profit   

Posted by Charles Morand at 10:24 AM | Permalink | Comments (0)

Last week, I added a little to my position in AAER (AAERF.PK). I first took a long position in AAER, the Canadian-based MW-size wind turbine maker, over two years ago. I've since pared down it significantly, both because I wanted to take some profit after a meteoric rise in share price in Q4 2007 and later because of the company's seeming inability to get orders for more than a couple of turbines at a time.

Although there was, before the credit crisis hit, a severe shortage of wind turbines and wind turbine components, barriers to entry have remained high: (1) average order size has been growing and scale is becoming more critical; and (2) quality considerations are top-of-mind for funders as defective machines can throw off project economics. Both factors play against small emerging turbine makers with no quality records to show for. Getting a first large order has thus been the key milestone investors in AAER have been waiting for.

Finally, last October, as global markets were in the eye of the storm, AAER reached an agreement with a mid-size Canadian independent power producer, Northland Power, for 61 1.65 MW turbines for a total order size of 100.65 MW. This contract is valued at approximately C$142 million (~$152 million or $~1.5 million/MW) by the company and is structured as a cost-plus agreement, meaning that AAER is guaranteed to recoup its costs and earn a profit on the deal. However, the agreement was only that - an agreement - with a formal contract to be signed when both parties met a number of conditions. After being pushed back twice, this moment came on May 9 when the turbine supply agreement was finalized and signed...sorta. The contract is subject to a "notice to proceed" by the developer contingent "on final permitting, approvals and financing [being] obtained by both parties."

This could mean that Northland is having difficulty securing financing on acceptable terms. It could also mean that Northland anticipates permitting delays - a previous project not too far from this one was delayed by two years because of permitting hold-ups - and doesn't want to commit before it's certain it can get the regulatory green light. It could also mean nothing - according to the contract Northland signed with Hydro-Quebec, the utility buying the power, the developer is not required to show proof that it has secured financing until June 2010, so Northland might want to wait for credit markets to ease out a bit. However, with a contractual deadline obligating Northland to start producing power by December 2010 (failing which the developer must pay a penalty of C$55 per MW per day up to a max of C$2.01 million), the order will have to be initiated soon if the turbines are to be delivered on time.  

In the clearest indication yet that the market's risk appetite is far from back, the stock finished the week down over 15%. While investors are not yet pricing a worst-case scenario, it is fair to say that they feel overall very skittish about the apparent blanket option for the buyer to delay the turbine order as long as it pleases.

Last Friday (May 15), a glimmer of hope appeared after markets closed: AAER increased the size of an upcoming best effort unit offering - one unit is made up of one common share and one common share purchase warrant - from a minimum of C$2 million and a max of C$5 million, to a min of C$3 million and a max of C$7.5 million. Although small in absolute terms, this is an appreciable relative increase in the size of the offering of 50% at both tails. The company's bankers, it seems, are seeing increased appetite for the stock.

I'm liking the contract and added a little to my position. My thesis behind this is two-fold: (1) if the notice to proceed is given within a reasonable time frame - and I believe that it could be - the share price could experience a nice pop, following which I would take a little profit; and (2) although this order falls well short of the plant's theoretical capacity of 400 turbines per year (AAER has only 6 other turbines currently scheduled for delivery in 2009), it might just be enough to keep the firm alive through the end of the worst part of the credit freeze and until US renewable power policies kick-start the sector. Management has taken many of the right steps over the past two years and, with a large order in hand, the firm would be well positioned to fill the order book.     

A Risky Bet

This is a risky play that essentially amounts to a bet on the Northland contract going through. If it doesn't and AAER fails to secure another large order in the next few months, I would be very worried and would pull my money. This is why:

Liquidity: 2009 promises to be a punishing year liquidity-wise, with $14.9 million in contractual obligations and $9.5 million in payables and debt payments due. Meanwhile, AAER has a cash ratio of only 0.19 with C$2.6 million in cash and equivalents. This will be partly counterbalanced by cash coming through from a 2009 order book of around 9.65 MW (something in the neighborhood of $15 million), the money raised through the current unit offering and an unused line of credit worth $1 million. The liquidity crunch exists because AAER is in the process of tooling up its factory, purchasing inventory and paying off licensing fees to the companies from which it is licensing its turbine technologies.

Limited financing options: The credit crisis has made equity financing incredibly expensive for small alt energy companies - they are often forced to raise equity at a fraction of the price investors were willing to pay a year-and-half or two years ago. AAER is a prime example: it raised equity in November 2007 at $1.15 per share but, a year later in December 2008, had to do the same at $0.15. Investors typically don't like dilution, and AAER won't be able to optimize its capital structure by raising significant debt until it shows it can fill the order book. Eventually, too much dilution leads investors to bail, creating yet more pressure on the stock price and raising the cost of equity capital further. As at December 31, 2008, AAER had 122.4 million shares outstanding, a 48% jump on 2007.  

The credit crisis: There is no doubt that the credit crisis has seriously shaken the renewable power sector. Perhaps ironically, the more mature technologies such as wind are amongst the hardest hit because of their relative capital intensity - the disappearance of tax equity investors coupled with the dearth of reasonably-priced debt has led to a marked slowdown in US wind installations. Many of the turbine majors have laid off employees in order to cut costs and reduce capacity. It will probably be a few more months before definite numbers to come out on the state of the industry so far in 2009, but if anecdotes one hears at conferences or reads in the paper are any indication, it ain't gonna be pretty! Needless to say, this is isn't exactly the best time to try to turn a start-up into an established firm in an already-crowded industry struggling to cut capacity. Luckily, this situation will be short-lived.

DISCLOSURE: Charles Morand is long AAER.

Posted by Charles Morand at 10:31 PM | Permalink | Comments (2)

Wind advocates like to say "The wind's always blowing somewhere" to counter concerns about the variability of wind power.  This is true, and it means that wind can always be relied on to produce some power, but that does not mean that wind can always meet demand.  In the United States' Great Plains wind belt, wind is typically anticorrelated with demand, meaning that, unless we can shift demand to times when the wind is strong, either through time of use rates or demand planning, overall energy production from wind will not be able to exceed 25-35% of overall demand without completely overwhelming the system when demand is low and the wind is strong.

However, even getting to 25% will be tricky without careful planning and a more robust transmission grid which will be capable of bringing wind power from where wind happens to be blowing (which could be hundreds of miles away in any direction) to where it is needed, or by investing in more expensive grid-based storage.

Potential for Low Variability

Lena Hansen and Bryan Palminter at the Rocky Mountain Institute, and Jonah Levine at CU Boulder have been doing some excellent work to show that portfolio theory can inform how to optimally combine a diversified portfolio of wind and solar sites to dramatically reduce the overall variability of a combined wind-solar portfolio. 

Source of Images: Spatial and Temporal Interactions of Solar and Wind Resources in the Next Generation Utility

This demonstration goes a long way towards alleviating concerns about any unreliability concerns for wind or solar, but answering that one question leads to another: Are we actually getting anything like an optimal wind/solar portfolio?

Overly Concentrated Portfolio

The answer to that question is unfortunately, "no."  Current incentives for wind, such as the production tax credit (PTC) and state Renewable Electricity Standards (RES) both reward energy produced, not the true economic value of energy produced.  The PTC is functionally a payment of 2.1 cents for each kWh of wind energy produced, while RES's require that a certain percentage of energy produced come from renewable sources.  An added complication is that many state RES include added incentives to produce renewable energy in-state, which reduces geographical diversity further.

This emphasis on total energy produced leads wind developers to "optimize capacity factor," according to Jim Himelic, and Associate Analyst at Xcel Energy (NYSE:XEL), the US's largest utility seller of wind energy.  Mr. Himelic spoke about Xcel's Wind Integration project to tackle the problem I recently called the "Dumb Grid:" the fact that grid operators do not use much weather forecasting information when trying to integrate wind onto the system.  This is not only from a lack of incentives and tools allowing utilities to integrate weather data, but also simply from a lack of good data.  Most wind farm operators currently have no incentive to provide even turbine-by-turbine production information to grid operators, data which would be valuable for forecasting of short term wind fluctuations.

According to Himelic, because most Colorado wind capacity is clustered in the Northeast of the state, and the above incentives along with constrained transmission means that new additions to wind capacity will also likely be in the Northeast, meaning that, at least in the short term, geographic diversity is likely to decrease rather than increase over time.  This both increases the overall variability of the wind resource, and will also increase the frequency and size of large wind ramp events, when power from wind turbines rises or falls extremely quickly over a very short period.  The worst such ramp events from a grid operator's perspective often come when wind speeds rise so far as to require the turbines to shut down to avoid damage.  This can cause a large number of turbines to go off-line at once, leading to a quick drop in overall power production.

Concentrating a majority of wind farms in a small area means that such wind over-speed events are likely to affect many farms at once, exacerbating the problem for grid operators.

A Gust of Hope

It's ironic that government incentives for renewable energy are adding truth to wind's only partially deserved reputation for unreliability.  Fortunately, recent changes in national policy may help to alleviate some of the pressure to cluster wind farms in small areas.  

First, wind developers now have the option to take a 30% Investment Tax Credit (ITC), comparable to the one available for solar, rather than PTC.  This has the advantage that wind developers receive a portion of their investment costs back, independent of total production, which will reduce some of the disincentive to build wind farms at relatively low capacity factor sites.  Similarly, a national RES would be unlikely to encourage local production of renewable energy, which might improve wind diversity.

Tom Konrad, Ph.D.

DISCLOSURE: None.

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

Posted by Tom Konrad at 03:46 PM | Permalink | Comments (7) | TrackBacks (0)

Two months ago, Tom told us how he'd dipped a toe into the black stuff (i.e. bought the OIL etf) on grounds that current supply destruction related to the depressed price of crude oil would eventually lead to the same kind of supply-demand crunch that led oil to spike during the 2004 to mid-2008 period.

If you need evidence that the current price of crude is wreaking havoc in the world of oil & gas exploration, look no further than Alberta and its oil sands. The oil sands contain the second largest oil reserves in the world after Saudi Arabia, but more importantly will account for the lion's share of incremental supply as conventional oil production continues to decline. The province's economy, which had been growing at a breakneck pace for the past five years, has come to a grinding halt: employment insurance claims grew by twice the Canadian average over the past year; personal bankruptcies jumped by 61%; and home foreclosures are on the rise. This is the result of significant project cancellations that will no-doubt limit Alberta's ability to ramp-up output once prices climb back again.

It is thus no surprise that Cambridge Energy Research Associates and others are warning about the economic hazards of curtailing investments into conventional and alternative energy.  

Alt Energy & Fossil Energy

Oil being the most followed of the energy commodities, it is no surprise that it is receiving most of the media attention. Arguably, natural gas and coal prices should matter more to alt energy investors than oil prices: according to REN21, of the $71 billion invested in renewable energy in 2007, 47% went into wind and 30% into solar PV. Both technologies are used for power generation (investments into transportation alternatives are comparatively small) and, in the US, coal and natural gas are the dominant fuels in power production. The relentless focus of the popular press and other pundits on the the economic case for alternative energy being closely tied to the price of crude oil is thus mostly misplaced.

Case in point, last November, a reader wrote me with a correlation analysis conducted over a 5-year period (or, where there wasn't five years' worth of data, since inception). The correlation coefficients between the returns on crude oil and those on alt energy securities were as follows: GEX, 0.19; PBW, 0.14; TAN, 0.18; and the index underlying FAN, 0.19. These are, by most measures, pretty low correlation coefficients. Given the reader's reputation, I trusted the numbers. 

Nevertheless, in alt energy investing as in life, perception is often reality. Given the many signs pointing toward a rapid escalation in crude prices - demand can and will rebound far quicker than supply - I decided to re-explore the relationship between fossil and alt energies. If a strong positive correlation can be found between alt energy investments and crude oil, natural gas and coal investments, there may not be a need to dip a toe into the black (or colorless) stuff at all - one can focus on alt energy alone and still enjoy the ride up.

In order to verify this, I ran a basic correlation analysis with the daily returns on the KOL (coal), OIL (crude) and UNG (nat gas) ETFs/ETN on the one end, and the daily returns on the alt energy ETFs on the other. I got the return data from Yahoo Finance using the Adjusted Close prices that include dividends and splits. Given the results above from our reader's analysis, I only went back six months to see if the (lack of a) relationship still held.   

OIL and UNG track the prices of futures contracts in the underlying commodities, so they are pretty decent securities to use to estimate the returns on crude and nat gas investments. KOL, on the other hand, tracks a basket of coal company stocks. It's the closest thing I could find but it's not ideal as stock returns don't necessarily track commodity returns. For instance, large mining firms will often sell a high proportion of their output through fixed-price contracts, preventing them from benefiting from sudden surges in spot prices. 

The boxes delineate general alt energy ETFs (ICLN to GEX), the solar ETFs (TAN, KWT) and the wind ETFs (FAN, PWND). There aren't any notable differences between the ETF categories, with the most significant differences being between the fossil fuel ETFs/ETN and the alt energy ETFs.   

The relationship between alt energy stocks and coal stocks appears relatively strong. However, in the absence of return data on coal, it's hard to tell whether investing in alt energy stocks (or coal stocks for that matter) is an optimal way of playing increasing coal prices. Given the structure of the coal market, with significantly less involvement by purely financial actors than in oil or natural gas markets, this is a hard one to play for retail investors, although data appears to suggest there is a play.

On February 26, 2008, a drop in wind generation by about 1400 MW over ten minutes, coupled with an increase in demand of 4412 MW due to colder weather, and lower-than scheduled production from other power suppliers, led ERCOT, the Texas grid operator to cut 1100 MW of power to interruptible customers for about 90 minutes.  

Misconceptions

All these facts come from a Reuters article misleadingly titled "Loss of wind causes Texas power grid emergency."  I was dismayed a few weeks ago when this misleading reporting led the generally insightful Master Resource Report to conclude "This is a clear example of why solutions to storage and transmission are going to become increasingly critical as sources such as wind and solar become increasing parts of the generation mix.  This doesn't invalidate renewable power; it just means that the country has plenty of work to do and that there are plenty of investment opportunities besides just wind turbines and solar cells." [link to pdf]

It may be surprising to readers that I find anything objectionable in a call for more storage or transmission, although I'm a stronger proponent of transmission, which I consider more cost effective, even if there are far fewer barriers to adding storage.  

However, the lesson of the 2008 Texas emergency is that while we need more transmission, and, eventually, storage, there are other, cheaper and easier steps we can take to integrate wind and solar to considerably higher levels of penetration..

Not A "Wind" Emergency

The first thing to note about the incident is that the increase in electric demand was more than three times as large as the decrease in supply from wind.  Presumably, ERCOT had been dealing with such fluctuations in demand since long before wind came onto the system.  Part of the problem was that other power suppliers (presumably natural gas and coal, usually considered "reliable") were not delivering what they had promised.  Hence, the drop in wind production was probably only 20% of the overall problem, not 100%, as the headline led readers to believe.

Hero: The Smart Grid 

The next conclusion we can draw is that Demand Response (DR), in the form of interruptible service to large customers, prevented power outages.  Demand response an early form of the Smart Grid which is already working today.  It allows the grid operator to cut power consumption by other users who have previously agreed to such cuts in return for lower electricity rates or cash payments.  According to a 2005 study of DR programs from the American Council for an Energy Efficient Economy, the median cost of DR programs studied was $29 per kWh, and the average cost was $86 which compares quite favorably to the $500 or more per kW cost of a peaking gas turbine.   Demand Response was the hero of February 6, 2008, even if wind was not the villain.

Before we look for investments in energy storage or even transmission, we should be looking to even more cost effective resources for the integration of variable energy sources, such as Demand Response and other variations of the Smart Grid.  Both EnerNOC (ENOC) and Comverge (COMV) provide demand response services to utilities, and this is also one use for Smart Grid technology from such companies as Echelon (ELON), RuggedCom (RUGGF.PK), Telvent (TLVT), and Itron (ITRI).

Villain: The Dumb Grid

During the discussion at a January 21 seminar sponsored by the National Renewable Energy Laboratory and the National Oceanic and Atmospheric Administration, featuring speakers from wind forecasting companies 3Tier, WindLogics, and AWS Truewind, the speakers mentioned that the weather forecasters had been telling the system operator of the incoming cold front and likely drop in wind production, but that the system operators chose to make no preparations before the fact.  Had they done so, they could have ramped up standby generation before the cold front hit, and would not have needed to call on the interruptible power resources.

Given that much of the heating in Texas is electric, system operators must have known that a cold front would raise demand.  Why would system operators choose not to heed forecasters' warnings?  There may be many reasons, but in the end, they all probably come back to incentives.  Preparing for a predicted increase in demand would have been the intelligent response, but regulated utilities have very little incentive to use their resources intelligently.  After all, a regulated utility makes most of its profits based on an authorized return on capital based on the investments it can justify to the regulator as necessary to keep the system up and running.  If the utility is, for whatever reason, unable to use those resources effectively, it becomes easier to argue that more resources are needed, which will lead to more profit for utility shareholders, and a less stressful job for system operators..

In other words, regulated utilities have an incentive to use as little brainpower (for which they do not earn a return on capital) and as much capital investment as possible.   They have an incentive to be dumb.  Given such incentives, is it any surprise that they ignore warnings, and then blame the problem on the variability of wind?

Tom Konrad, Ph.D.

DISCLOSURE: Tom Konrad owns ENOC, COMV, ELON, RUGGF, and ITRI
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 08:44 AM | Permalink | Comments (7) | TrackBacks (1)

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:

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

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)

Last week, Tom brought you a piece on the Algonquin Power Income Fund (AGQNF.PK), in which he opined that shift in investor attention away from capital gains toward yield might eventually provide a catalyst for the prices of yield-focused securities such as income trusts to rise. So-called utility trusts, or income trusts where the underlying corporation is engaged in utility activities such as power generation, are a common feature of the Canadian income trust sector (the mother of all income trust sectors). A sub-set of utility trusts is the clean power utility trust, where the power generation assets consist of technologies such as wind, small hydro, biomass and waste-to-energy (WtE). Though new tax rules have effectively made it impossible for new income trusts to be brought to market (barring certain exceptions such as REITs), existing clean power utility trusts (existing as of Oct. 31, 2006) get to operate under the old tax regime until 2011.

The clean power utility trust model is similar to the clean power Independent Power Producer (IPP, see definition) model, whereby firms are pure-play clean power generators (i.e. they own only generation assets) that sell their electricity to utilities, with the exception that the tax treatment awarded to income trusts allows them to pay higher yields by avoiding double taxation.

While changes in legislation mean that this investment vehicle is dying a slow death, Tom was correct to point out that in times where the prospects for strong capital gains are uncertain and interest rates low, income trusts provide a good way for investors to access high yields. What's more, clean power utility trusts, this most unique of Canadian investment sub-sector, allow investors (including US investors) to play North American clean power in a way that does not entail a risky bet on a technology play but is rather much more akin to a utility investment.

Clean Power Utility Trusts             

*As at close on Friday Jan. 9, 2008

One of the major risks facing income trusts is distribution cuts, something that generally happens when the fundamentals of the underlying business are severely diminished or distributions were set too high to begin with (in order to attract investors). As can be noted from the table, the yields on some of these trusts (i.e. Boralex Power Income Fund and Macquarie Power & Infrastructure Income Fund) appear to indicate that investors are anticipating distribution cuts and are demanding a risk premium. Yet preliminary screens on both funds don't uncover much evidence that distribution cuts are in the cards (caveat: these were very preliminary screens).  

While growth will be challenging as long as credit conditions remain tight (individual projects typically use over 50% debt), the underlying business model and existing assets of these funds remain largely immune from a slowing economy - they are utilities with a clean twist. Barring another major round of indiscriminate selling in equity markets, investments in one or more of the clean power utility trusts is a good way of generating returns in the form of cash yields (something that's worth a lot more than the promise of future capital gains in this economic environment) from a comparatively low-risk sector.

Some of the things to look for as red flags in assessing these trusts are: liquidity position (cash on hand; quick ratio) and ability to borrow for emergency purposes (undrawn line of credit); leverage level (debt-to-capital ratio) and the need to roll over debt in the next 12 months; any signs that operating conditions have deteriorated (e.g. for wood biomass, indications that pulp/saw mill closures related to the bad economy are decreasing fuel supply).

DISCLOSURE: Charles Morand does not have a position in any of the securities 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 10:00 PM | Permalink | Comments (0)

As I've discussed previously, things haven't been easy of late for alt energy stocks, especially those of the pure-play kind. A few days ago, I was asked which, if any, alt energy stocks I could recommend in this environment. My answer was: none. While people continue to go on television claiming that alt energy's problem has to do with falling oil prices, in my view the real risk at the moment has do with financing - financing for the companies producing the technologies and financing for their customers. The two business models are simultaneously under attack: for technology firms, the model whereby a company burns through loads of cash in the hopes of eventually commercializing  a homerun application is dead, and for power producers and households installing solar panels and wind turbines current credit costs don't permit the necessary high degrees of leverage. As I've argued before, a temporary (i.e. 12 to 18 months) drop in oil prices will not phase policy-makers, and most of the demand right now is policy-driven.

So, for now, I would stay away from most pure-play alt energy stocks, at least until capital markets settle down and credit markets really normalize. However, as we've pointed out on many occasions, there are a wealth of companies out there with diversified revenue streams and appreciable market capitalizations that are moving into alt energy and cleantech. The dramatic drop in equity markets over the past few months has made the dividend yield on some those firms look quite attractive. For long-term investors, the advantage of purchasing a stock with a high dividend yield is that, provided the company can continue paying the dividend, you lock in an attractive yield on your security and you get to benefit from capital appreciation once markets recover.              

The table below lists a few diversified stocks with exposure to alt energy that currently have an attractive dividend yield (>4%). The next step would be to look into the ability of the firm to maintain this yield throughout the bad economy. 

Besides Otter Tail, the names in this table are not typically labelled "green energy" or "alternative energy" stocks. Most of the pure-plays pay no dividend. As stated above, a necessary next step would be to look into these firms to see if they will be able to maintain this dividend.

DISCLOSURE: Charles Morand does not have a position in any of the securities discussed here.

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 08:37 PM | Permalink | Comments (3)

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 Charles Morand at 11:17 PM | Permalink | Comments (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)

In the most recent two installments of Energy Tech Stocks' interview with me cover my views on transmission stocks, and biofuel stocks.  Readers of AltEnergyStocks know that I am a big fan of electricity transmission, a theme I keep coming back to.  You also know that I have a very ambivalent relationship with both ethanol and biodiesel.  So I liked Bill's transmission article, but I just wasn't able to convey to him the subtleties of how I feel about biofuels.  But he got one thing right: the owners of biofuel feedstock are likely going to be the biggest winners.

Relevant articles on Biofuels

Competition in Ethanol

An Insider's View of the Ethanol Industry

Let Them Eat Grass

Blue Sun Biodiesel

Biodiesel's Competition

My Biodiesel Jeep

The Answer is Trading in the Wind

While you're on the Energy Tech Stocks site, read a little about trading of wind power futures (here and here.nbsp; While I personally have no interest in speculating in wind futures, I predict this will be a great boon to wind farm owners and climate scientists everywhere.  I also predict hedge funds which will use strategies based on emerging inverse correlations between wind power futures and natural gas futures, probably sooner than anyone might guess. 

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 02:17 AM | Permalink | Comments (0) | TrackBacks (0)

Bribing and Pressuring Fissile Regimes

On July 25th, France offered to build a nuclear reactor for Libya to power a water desalinization plant.  Russia is delaying the delivery of  nuclear fuel for Iran's nearly completed Bushehr to help pressure them to comply with UN Security council demands for less secrecy.  South Korea, Japan, China, Russia, and the United States promised to provide 950 thousand tons of oil or equivalent aid to North Korea in return for permanently disabling all its nuclear facilities.

I'm not going to argue about whether using energy aid is the best way to influence this country or that; the fact is that no matter what you or I think about it, the carrot will always be part of international diplomacy, as well the stick.  I want to talk about what form that carrot takes.

This map shows the amount of solar energy in hours, received each day on an optimally tilted surface during the worst month of the year.
Image Source: Sunwize.  

Both Iran and Libya are well suited for concentrating solar power (CSP), and the declared purpose of the reactor for Libya is desalinization, an excellent application for CSP.  Iran has a wind resource as good as the American Midwest (although CSP may be a better choice due to sandstorms.)  While North Korea has only moderate insolation, US non-governmental organizations were already working to help North Koreans with wind power in 1999.  North Korea has a high quality wind resource all along its Western coastline in Korea Bay, which is shallow and well suited to offshore wind, and also nearest the capital, Pyongyang.

Intermittent Electricity would be an Improvement

The strongest objection to wind power (and to a much lesser extent solar) is that these are intermittent resources.  Yet all these countries already have problems with persistent power outages.  Iran already has problems meeting demand during peak summer hours, and CSP is better suited for meeting peak summer loads than nuclear power, which is a baseload resource, which operates at its worst on hot summer days due to its cooling requirements.  

Power utility time of use for California CSP Plants.  Source: San Diego Renewable Energy Study Group, 2005 [.pdf, page 15.]

In Libya and North Korea, the electricity situation is even worse.  Libya's utility vows to reduce power rationing, and provide more hours of electricity, while in North Korea the entire nation, with the exception of Pyongyang, is switched off at night.  Providing North Korea with intermittent wind power rather than fuel oil for dispatchable power plants might lessen Kim Il Sung's incentive to give his capital such favorable treatment compared to the countryside, and do more to help the populace, rather than giving the regime another lever for control.

Technologies for Peaceful Applications

Iran and Libya claim that they want nuclear power only for peaceful applications.  Concentrating solar power is better suited to enhance their energy security than nuclear because it does not rely on imported uranium.  If that is what they want, CSP seems just as well suited for their purposes, and would give them greater energy security since it does not rely on imported fuel.  With North Korea, supplying wind turbines would be even simpler politically, because the existing agreement already allows for equivalent energy aid.  If we in the West are worried about the additional security renewable energy might give to these unpredictable regimes, shouldn't we be even more worried about providing them with nuclear material?

This same line of thought applies to President Bush's possibly Nuclear Non-Proliferation Treaty-busting deal with India.  Regions of Southern and Western India also have excellent solar resources (see map).  India may already have the bomb, but that is no excuse for eviscerating one of the few (and already weak) safeguards the world has against nuclear proliferation.  It might be argued that India does not need our help to take advantage of their renewable energy resources, but, if so, why do they need our help with their civilian nuclear industry?

Posted by Tom Konrad at 03:26 PM | Permalink | Comments (3) | TrackBacks (0)

What is a good indicator of whether something is "hot"? When the top weekly in the world runs at least one article about it in every edition it publishes. That is what has been happening with The Economist and alternative energy over the past few months.

This week's piece was dedicated to the economics of wind power. Citing studies conducted in the Netherlands and Denmark, two wind power markets that are comparatively more developed than most North American markets (barring maybe Texas), the piece argues that, once a significant part of its initial costs have been paid off, wind power can reduce average power prices significantly because the marginal cost of producing it is close to 0 (the fuel is free).

This is consistent with a report released in January by Emerging Energy Research that found that, under a scenario where carbon emissions are priced at €30 ($41) per metric tonne, "the cost of energy production from land-based wind turbines would be well below the cost of natural gas and coal plants at today's levels" in Europe. Contracts for one metric ton of carbon for phase 2 of the EU ETS (Europe's emissions trading program) are currently trading at around €21. I need not remind you that cap-and-trade for greenhouse gases may be here soon.

As our regular readers know, I have been a wind enthusiast for some time now, and I continue to believe that wind has some of the strongest fundamentals of all forms of renewable generation. In the context of rising fuel costs and the imminent pricing of carbon emissions in the US, the ability of wind to create savings for customers may one day prove to be the strongest argument in its favor.

Investment Ideas

Of course there are the issues of grid stability and transmission bottlenecks which could slow growth in the wind sector. However, as we have pointed out in the past, we believe that both of these apparent limitations may actually provide good investment opportunities. On the topic of frequency regulation, two stocks in particular are worth watching: Beacon Power (NASDAQ:BCON) and VRB Power Systems (TSE:VRB.V or VRBPF.PK). We have written in the past about opportunities in transmission and inverters.

The other major problem facing the wind industry is chronic shortages of wind turbines. Here again, however, this means that turbine manufacturers should do very well in the next few years. Some of the top stocks in this space are:Vestas (VWSYF.PK), Gamesa (GCTAF.PK), GE (NYSE:GE) and Suzlon (SZEYF.PK). The Pink Sheets listings are ADRs - all of these firms have proper listings in their home countries.

DISCLOSURE: The author is long Beacon Power.

Posted by Charles Morand at 11:29 PM | Permalink | Comments (0)

A recent study by Emerging Energy Research confirmed what we have been saying about wind power for some time - namely that growth prospects look very strong for the North American market.

The study, entitled "US Wind Power Markets and Strategies, 2007-2015", is not available free of charge but you can access a summary here (PDF document).

The US: The World's Top Dog

Here are some of the key takeaways from the summary:

a) The US wind power market is expected to grow from 11,000 MW in 2006 to around 49,000 MW by 2015 (for those for whom MW doesn't mean much, this essentially equates to very solid growth)

b) Over $65 billion is expected to be invested in new US wind capacity over the 2007-2015 period

c) By 2015, the US will have a 19% share of global installed wind capacity, making it the single largest wind market in the world

The study notes that there will be (and currently are) wide disparities in regional wind activity. Texas, California, Minnesota, New York, Colorado, and Washington will together account for around 53% of market growth between 200t and 2015.

Consolidation, Consolidation

EER also reports a consolidation trend in the industry, as Independent Power Producers (IPPs) seek to solidify their positions in the market. The study notes that a group of 10 to 15 IPPs is currently emerging from the pack, including strong international alternative energy players such as Iberdrola (IBDRF.PK) and EDP (ELCPF.PK).

We have written in the past about problems with shortages in wind turbine components. EER discusses the intensification of vendor competition in the US wind market. The report notes:"Turbine manufacturing investment in the US has grown markedly in the past two years, with aggressive new entrants now vying with US market veterans GE and Vestas for big name contracts."

Implications for Investors

So what does this all boil down to for the public market investor? It's simple: wind is a good business to be invested in or at least thinking about. The fundamentals look strong, in part because governments are not going to stop supporting it anytime soon, and the industry is fast reaching the kind of scale that will allow wind to be competitive with other forms of electricity generation (especially so as climate change regulations are introduced and CO2 emissions are priced). One more thing: the technology is tried and tested.

There are investment opportunities at three main levels: (a) IPPs, which are a relatively safe play on wind as utilities tend to be stable investments; (b) wind turbine vendors, whose order books are full and showing no signs of emptying out; and (c) feedstock providers, such as providers of carbon fiber. Browse through our Wind archives for potential company names.

There is, however, one big caveat: watch out for transmission bottlenecks. Problems with grid stability were cited as the reason to put a moratorium on all wind development in the Canadian province of Alberta, and underinvestment in transmission capacity has been a problem across North America.

DISCLOSURE: The author does not have any positions in any of the companies discussed above.

Posted by Charles Morand at 05:33 PM | Permalink | Comments (0)

In the face of a declining overall energy market today, three of our favorite alternative energy stocks posted strong gains on high volume.

The Oil Services HOLDRs ETF (OIH) was down 2% and the PowerShares WilderHill Clean Energy ETF (PBW) was down 1.7%. Indeed, the vast majority of the energy stocks that we track were in the red. But bucking the trend were two energy stocks that we have profiled in the recent past and a third company that we will begin covering today.

First on the list is our favorite wind energy play, Welwind Energy International (WWEI). We recommended Welwind during October of 2006, when it was trading around $0.07. It closed today at $0.18, up 26% on 4X average trading volume. That is more than a 900% gain in the six months since we first initiated coverage on Welwind.

Next on the list of breakout stocks today is Nova Biosource Fuels (NVBF). Nova just announced a move from over-the counter to the AMEX, which will be effective on Monday, May 14. Nova recently held its official groundbreaking ceremony at the site of its planned biodiesel refinery in Seneca, Illinois. The plant is expected to have a 60-million-gallon per year biodiesel production capacity from locally generated, low-cost feedstocks, including rendered animal fats and oils and recycled vegetable and animal- based greases. Nova’s stock price increased by 4.5% today on 12X normal trading volume.

Our final stock is getting its first mention on Gold Stock Bull today. Despite being the darling of the ethanol investment community and attracting funding from none other than Bill Gates, we have been hesitant to recommend Pacific Ethanol (PEIX). We watched the stock quadruple during 2006 from $10 to nearly $45, but couldn’t see any fundamental justification for the rise and held off. PEIX has since retreated to around $15 in an overall downturn amongst ethanol producers.

So what is driving our optimism with Pacific Ethanol? A shift from hype to substance. The Sacramento, Calif.-based company swung to a first-quarter profit, earning $1.9 million, or 5 cents per share. During the same quarter last year, Pacific Ethanol lost $612,000, or 2 cents per share. This first-quarter profit was generated from revenue that more than doubled to $99.2 million from $38.2 million. Pacific Ethanol sold 37.5 million gallons of ethanol, almost twice as many as it did a year ago, and ethanol prices were up more than 20 percent.

Pacific Ethanol’s share price responded by climbing 9.1% on 6X normal trading volume. Despite fears by some investors of an oversupply in ethanol during the back half of 2007, we believe PEIX will continue pushing higher. We have a price target of $22 for 2007, which is a 47% increase from the current price. The chart below shows clear support at $15 and we believe a bounce off this price floor is imminent.

Pacific Ethanol currently has one plant operational, one plant about to open and three other plants under construction. The operational plant is located in Madera, California and has a capacity of 35 million gallons per year. It is the largest ethanol plant on the west coast.

Their second plant is being constructed in Boardman, Oregon and will also have a capacity of 35 million gallons per day. Construction is scheduled to be completed in the next few months.

Pacific Ethanol also has begun construction on three 50 MGY name plate capacity production plants that will open mid 2008. Magic Valley, Idaho will serve growing markets in the Intermountain West, while Pacific Ethanol’s Stockton, California and Imperial Valley, California plants will help meet the growing demand for ethanol in California.

The energy bill passed by Congress in 2005 requires an increase in ethanol use by refiners to 7.5 billion gallons by the year 2012. With Democrats now controlling both houses and looking likely to take over the presidency, we can only expect additional government incentive for alternative energies such as ethanol.

A significant portion of Ethanol demand is coming from the fact that states across the country have banned MTBE (Methyl Tertiary Butyl Ether), a fuel additive formerly required to increase octane levels of gasoline. MTBE has found its way into drinking water and many believe is cancer-causing. Ethanol is the only other commercially viable additive that will bring gasoline into compliance with state and federal clean air regulations. Consumption and production of ethanol has continued rising at a record pace and should be considered as part of any investment portfolio.

Good luck and happy investing!

Jason Hamlin is Founder of Gold Stock Bull, a site that has been tracking the secular bull market in gold and silver since its inception, back in early 2002, as well as the emerging bull market in energy since it took off in early 2004.

Posted by Guest Contributor at 11:22 PM | Permalink | Comments (0)

The polysilicon shortage in the solar industry is, by now, a well-known fact, and most investors are aware of the scale and probable duration of that shortage, as well as of what companies are positioned to benefit from a tight polysilicon market.

A similar situation is currently unfolding in the wind industry. We have discussed the very bright prospects for the wind sector here before. In the US, the American Wind Energy Association forecasts that installed capacity could grow from 11,603 MW today to around 100,000 MW by 2020. In Canada, Emerging Energy Research predicts that installed wind capacity will expand from around 1,500 MW today to around 14,000 MW by 2015.

We have also noted how the seeming lack of attention wind receives from retail investors, despite the fact that wind is a proven technology nearly competitive with conventional grid power, likely stems from the fact that there just aren't a great deal of 'exciting', headlines-grabbing wind stories in North America. Wind just keeps on growing quietly (albeit very rapidly), and North American investors are paying that growth next to no attention. The same definitely cannot be said of solar, with its plethora of exotic Chinese plays and its engrossing contest for technological supremacy. At the end of the day, though, wind is a proven and well-understood business with a good track record...which cannot always be said of solar.

The New Kid On The Shortage Block?

One of the key factors limiting growth in wind right now is a shortage in the various components needed to make wind turbines, from gearboxes all the way down to bearings. Someone alerted me yesterday to an interesting article in last week's Economist discussing feedstock shortage problems in the solar and wind industries. While the solar polysilicon story is well-known, the shortfall in wind turbine components supply will probably come as news to many folks. The article notes:

"Wind turbines are giant machines that require lots of parts. Several firms are building new factories: Vestas has just announced its first American plant, which will make blades in Colorado. But new factories will take several years to get up to speed. In the meantime, buyers are putting down deposits to reserve their turbines. GE Energy, the largest turbine installer in America, is already booked up until the end of next year."

A Stock That Could Benefit

This is somewhat timely given that in the latest Week In Cleantech we recommended a post by Notable Calls discussing exactly that topic, and providing a stock pick.

The pick is Zoltek [NASDAQ:ZOLT], a carbon fiber manufacturer said by RBC Capital Markets to be, because of the projected growth in wind, in a "commodity cycle position" similar to that MEMC Electronic Materials [NYSE:WFR] was in two years ago.

Shortages, Shortages...

Feedstock shortages related to alternative energy are currently responsible for some of the biggest gains generated in this bull market, both through direct commodity exposure and through exposure to companies involved in providing the feedstock. Just think of uranium, corn and sugar, to name a few.

This is merely an extension of that phenomenon - the growth in alternative energy has been so rapid over the past two years that players in various positions along supply chains just haven't had time to ramp up production enough to meet demand.

While this is bad news for downstream players, it is worth keeping an eye on up- and mid-stream companies who typically hold an appreciable degree of pricing power in tight markets.

The polysilicon, uranium and corn stories are well-known - might it be time to start paying more attention to wind?

DISCLOSURE: I do not hold a position in any of the stocks discussed above but I do have exposure to wind

Posted by Charles Morand at 11:23 PM | Permalink | Comments (0) | 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)

I took 2 long positions yesterday (1 in my normal trading account and the other in my retirement account) in an emerging Canadian integrator of megawatt-sized wind energy conversion systems (i.e turbines) called AAER Inc [TSE:AAE]. Besides turbine assembly, the company also provides a range of services to clients in the wind industry, ranging from assistance in project planning and financing to post-installation maintenance.

Now it must be said from the outset that is a very speculative play on North American wind and not suitable for all investors. I entered one of my positions at C$0.38 and the other at C$0.39.

What initially poked my interest in this stock was a Jan. 17 press release stating that a small wind turbine manufacturer had just signed a 10-year lease agreement to take over a former car factory in the Canadian province of Quebec. I looked into this further and found out that, a few months earlier (Nov. 22, 2006), AAER Inc. had signed a C$35 million contract to deliver and maintain, for a period of 6 years, 17 1.5 MW wind turbines to Katabatic Power Corp., a privately-held wind farm developer based in British Columbia. Katabatic is going to use the turbines for its Mt. Hays project, and has an option for a further 17 turbines in 2008.

The Company

AAER Inc. has only existed in its current form since Nov. 7, 2006. Before that date, it was known as Bolcar Energie, a publicly-listed capital pool company that had been established with the sole purpose of making an acquisition in the turbine manufacturing space. Although Bolcar filed its preliminary prospectus as far back as July 2003, AAER did not go public until May '06, following a qualifying transaction with Bolcar. On Nov. 7, after a reverse takeover, Bolcar was terminated and the company became officially known as AAER Inc.

AAER's most recent financial disclosure, available on SEDAR, sheds very little light on what the firm currently looks. Filed under the Bolcar name, the company reported a total loss of C$2,532,406 on revenues of C$7,491 for the 6-month period ended Sept. 30, 2006. For the previous fiscal year, ended on March 31, 2006, Bolcar reported a loss of C$1,665,136 on no revenue.

I didn't pay too much attention to Bolcar's numbers here as the firm had not begun operating when it last filed. Unlike certain sectors like fuel cells, wind is a proven business and the name of the game is not to burn through cash for years hoping for a blockbuster technology sometime in the future - new players in this sector should be able to generate sales and produce operating earnings rapidly, as the competition from well-established firms is stiff. So far, I like what I'm seeing from AAER.

What I liked

Here are the key elements that sold me on AAER:

A) Their board of directors features an impressive roster of well-connected individuals that could greatly help strategic partners (i.e. wind farm operators) land good contracts. Most notably, Ted Moses, one of the most influential First Nations people in Canada, could be key in securing the support of Aboriginal communities in several regions. Aboriginal communities will play a large part in the development of Canada's wind industry because of the land they now control, especially in the northern parts of many provinces.

B) Canada is slated to become one of the top markets globally for wind energy between now and 2015, with installed capacity forecasted to grow tenfold from its current 1,500 MW to around 14,000 MW. Within Canada, Quebec is expected (PDF document, go to p.6 for the executive summary in English) to be one of most aggressive jurisdictions with regards to developing wind energy, with installed capacity forecasted to grow from around 215 MW today to 4,000 MW by 2015. AAER is very well-positioned to benefit from the growth of the wind industry in Quebec, and has already demonstrated that it has the rest of Canada on its radar. AAER states that it's business target is North America as a whole. This brings me to...

C) I really like the fact that AAER is doing business with Katabatic. The Mt. Hays project really is the tip of the iceberg - the real meat lies with a project called Banks Island. As reported on Katabatic's website, "Fortis Bank rated the North Coast of British Columbia as the number one wind resource in the world. Banks Island was independently assessed by Helimax (as part of a 2002 study on BC Wind prospects) to have 2,780 MW available." Katabatic has found a financier of renown, Deutsche Bank, to help bankroll its Banks Island project. Banks Island would be developed with a view to exporting green power to the largest power market in North America, California. I have not come across any information indicating that AAER might get a piece of that action. However, its MW-scale turbines, adaptable for the tough conditions encountered in northern BC, would be a great fit for such a project...not to mention the fact that the 2 entities already have a business relationship.

D) The company just announced a private placement of 3,284,856 shares at C$0.35 per unit, as well as the issuance of 314,200 warrants entitling the holder to 1 common share and 1 common share purchase warrant at a price of C$0.60 for a period of 2 years. A little over a month ago, AAER entered into a share-for-debt agreement under the terms of which it issued 97,417 common shares at a price of C$0.3375 per share "in settlement of outstanding indebtedness aggregating C$32,878.09." I like the fact that these transactions took place at close to the price that I paid for my positions, and that there are investors out there willing to bet that the stock will trade over C$0.60 within 2 years (although we're admittedly talking about not very many shares).

A Word of Caution...

Now needless to repeat that this is a highly speculative investment that entails a number of risks. What's out in the public domain so far looks very good to me, but that doesn't say much since there really isn't much publicly-available information on AAER Inc. Nevertheless, as I stated before, I am quite bullish on wind in North America, and this could do quite well for me if I'm right. I'll report back on this trade in a few months.

Until then, happy alt energy investing!

DISCLOSURE: Charles Morand is long AAER.

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 10:24 PM | Permalink | Comments (2)

Renewable energy is still very much in its infancy, which means that companies in the space are either profitless or high-multiple startups, or divisions of much larger companies (GE Wind (NYSE:GE), or utilities such as FPL Group (NYSE:FPL) and Xcel (NYSE:XEL) which get much of their power from conventional generation.) This presents a dilemma for investors who understand the compelling drivers for the sector, but whose risk tolerance or financial needs indicate an income-based investing strategy.

Canadian Income Trusts in Renewable Energy

A few Canadian Income Trusts have historically gone some way towards filling this niche. These include the Boralex Power income trust (BPT-UN.TO / BLXJF.PK), Algonquin Power (APF-UN.TO/AGQNF.PK), and the Clean Power Income Fund (CLE-UN.TO/CEANF.PK).

The Boralex Power Income Fund owns an electricity generating asset mix of approximately 45% hydroelectric (by 2005 revenues), 32% wood residue (biomass) with some cogeneration, and 23% natural gas fired cogeneration. It is managed and 23% owned by its parent utility, Boralex (BLX.TO/BRLXF.PK).

Algonquin Power Trust owns a mix of hydroelectric generation (25% of sales), cogeneration (42% of sales), Alternative fuels (9% of sales), and infrastructure (24% - mostly waste disposal and treatment. Percentages based on 2005 data.) Alternative fuels (mostly landfill gas, municipal solid waste, and some wind) comprise the fastest growing segment of the portfolio.

Finally, the Clean Power Income Fund, which trumpets itself as "the first income fund to be certified under Canada’s Environmental Choice^MProgram," owns a mix of electricity generation assets consisting of landfill gas (37% based on 2005 cash flow), biomass (27%), hydropower (26%), and wind (10%). They are completing the Erie Shores 99MW wind project which will increase the wind portion of the portfolio.

Disappearing Tax Advantages

While none of these have the stability of a bond fund, they have gone some way towards bridging the gap between volatile startups and predictable income, allowing a broader spectrum of investors to participate in renewable energy. However, they were all organized to take advantage of a provision of Canada's tax code which conferred significant tax advantages, similar to the advantages enjoyed by REITs and Master Limited Partnerships in the US. Those tax advantages were scheduled to be phased out over the next four years to the surprise of the financial markets in November, and while some are still fighting the tax law changes, the trust management of these three trusts have, by their actions acknowledged the reality of the changes.

Within the last week, The Clean Power Income Fund board has agreed to be acquired by Algonquin Power, subject to the approval of its unitholders, while The Boralex Power Income Fund has announced that it is up for sale, possibly to be acquired by its parent, Boralex, which currently owns 23% of the fund and acts as its manager.

Risks and Opportunities

For the traditional income investor, primarily interested in stability, all this activity and the volatility is bad news, but it presents opportunities for the risk tolerant investor interested in purchasing solid, income producing assets, something of a rarity in retail renewable energy investing. It's impossible to say what good price entry levels are for any of these funds, but they are all considerably cheaper than they were before the tax changes were announced in November.

Prospective investors should also understand the tax implications (which depend not only on the changing laws, but on the nationality and tax status of the account used) before investing.

Tom Konrad, Ph.D.is an independent investment adviser registered in the state of Colorado who helps people reach their investment goals while protecting the environment.

DISCLOSURE: Tom Konrad and some of his clients hold positions in The Clean Power Income Trust and the Algonquin Power Trust.

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 11:41 AM | Permalink | Comments (2)

Without a doubt, ethanol and solar are the 2 alt energy categories that have attracted the most investor attention in North America in the past few years, and that is because they are the 2 categories that feature the most US-listed stocks. However, despite its comparatively lower profile as an asset class, investors should not forget about wind power!

On January 18th, Emerging Energy Research published a short study on the growth of wind power in China. For 2006, China installed 1,040 MW of new wind capacity, making it the 5th country in the world in terms of new wind capacity. Now some may say that that's nothing to write home about, especially compared to the 2,454 MW of new wind capacity installed in the US in '06. However, one of the things noted by the Emerging Energy Research study is that China went from about 100 MW in 2003 to 2,300 MW in 2006, and that the government now has a target of having 30,000 MW installed by 2020.

The following week, on January 23rd, the American Wind Energy Association released its growth figures for '06. The industry added 27% more wind capacity to its fleet in 2006 as compared to 2005, and is expected to add an extra 27% in '07. Wind power in the US grew by an annual average of 29% between 2000 and 2005. The industry's goal (PDF document) is to expand from 11,603 MW today to 100,000 MW by 2020.

However way you look at these numbers, they spell nothing but solid growth for the firms underpinning this industry. But, as noted at the outset of this post, wind power has not, outside of a few large institutional investors, attracted much attention from North American investors in the recent past, and this despite the fact that the landscapes of some of America's most populous states are littered with wind farms.

The other thing to note is that wind power is much closer than its solar counterpart to being competitive with conventional generation technologies without government support, as demonstrated by another recent Emerging Energy Research study. Under a scenario where carbon emissions would be regulated in the US with an emissions trading system, wind would likely prove competitive on its own.

Now the problem remains: there is a dearth of viable 'pure-play' wind stocks on US markets. But that doesn't mean, in my view, that investors should shy away from an industry with such impressive growth prospects. Those of you who are able to purchase European stocks have a broader spectrum of options, but most of the heavy-hitters are accessible to US investors...although not alway in an optimal form (see below). Here are a few ways to play this:

Utilities

FPL [NYSE:FPL] - with over 3,600 MW of installed wind capacity in 15 states, subsidiary FPL Energy is the US leader in wind power.

Iberdrola [MCE:IBE or OTC:IBDRF] - European leader in wind energy with aggressive plans for international expansion, including in the US and China.

Acciona [MCE:ANA or OTC:ACXIF] - not technically a utility but ranks 3rd in the world for installed wind capacity.

Turbines & Parts

Vestas [CO:WVS or OTC:VWSYF] - over a 3rd of the world's market share for wind turbines.

Gamesa [MCE:GAM or OTC:GCTAF] - about 18% of the world's market share for wind turbines, and involved in wind farm development with exposure to China and the US.

General Electric - [NYSE:GE] - about a 10% market share but revenue from this segment comparatively very small.

American Superconductors - [NASDAQ:AMSC] - maker of wire and power electronic converters with applications in wind generation; has exposure to China.

Now I don't claim to know each and every company out there with exposure to wind, and I am sure there are other interesting ways to play this space. For instance, the Pink Sheets and OTC Board feature a few smaller, high-risk companies with exposure to wind. As always, we welcome input from our readers.

DISCLOSURE: I do not have a position in any of the stocks listed above, and I am not affiliated with any of the organizations discussed in this article.

Posted by Charles Morand at 11:00 PM | Permalink | Comments (5)

One of the stories recently featured on one of my favorite sites, Reddit, was a link to some amazing pictures of offshore wind farms.

Seeing these pictures of wind turbines really made clear to me the reality of offshore wind power, and the size and scope required to harness the power of wind over the ocean.

Summarizing some points from the article:

Distributed Energy Systems Corp (DESC) has been awarded a contract for $1.14 million to install, commission and service three additional NorthWind 100 wind turbines for the Alaska Village Electric Cooperative (AVEC) in the rural village of Chevak, Alaska. The contract continues AVEC's commitment to the development of its rural wind program in Alaska, bringing the total number of turbines AVEC has purchased from Northern Power to 13.

The three new turbines, combined with an additional NorthWind 100 purchased by AVEC in October 2005, are expected to be installed in Chevak by the autumn of 2006. Together, the four turbines will produce approximately 905,332 kWh of electricity annually, replacing about 30% of the energy normally generated by diesel fuel. At current fuel prices, the turbines are expected to provide AVEC significant annual fuel cost savings. [ more ]

Posted by Mark Anderson at 07:45 PM | Permalink | Comments (0)

Western Wind Energy (WNDEF.OB) announced that the United States Federal Energy Regulatory Commission ("FERC") has issued a definitive decision in Western Wind's favor, allowing Western Wind to access a key transmission line. The decision enables Western Wind to start work on its 120 MW power sales agreement with Southern California Edison. This agreement enables Western Wind to generate over US $30 million per year in annual power sales. [ more ]

Posted by Mark Anderson at 07:50 AM | Permalink | Comments (0)

Scottish Power plc (SPI) was granted final planning approval to construct Europe's largest on-shore windfarm, the 322MW Whitelee project south of Glasgow. The 140 turbine project would provide enough green energy to power 200,000 homes. [ more ]

Scottish Power is currently the largest provider of wind generated electricity in the United Kingdom.

Posted by Mark Anderson at 08:14 AM | Permalink | Comments (0)

Western Wind Energy (WNDEF.OB) announce that it has executed a formal turbine supply agreement with Mitsubishi Power Systems. Mitsubishi Power Systems will supply Western Wind Energy with an initial 15 one-megawatt MHIA 1000A wind turbine generators, for Western Wind Energy's 15-megawatt steel park wind project in Arizona for delivery of October of this year.

The turbine supply agreement further calls for the supply of up to an additional 900 megawatts of wind turbine generators for future projects. A delegation from Western Wind Energy will be traveling to Japan next month to inspect the new 2.4-megawatt Mitsubishi wind turbine generator that Western Wind hopes to showcase in North America. [ more ]

Posted by Mark Anderson at 09:13 AM | Permalink | Comments (0)

The global wind energy industry is expected to enjoy continued strong growth in coming years with total installed capacity seen more than tripling from current levels by 2014, an industry survey showed on Tuesday. Over the next eight years, international installed capacity is expected to increase to about 210,000 megawatts from today's installed total of about 59,000 megawatts, a study by the German Wind Energy Institute (DEWI) showed. [ more ]

Posted by Mark Anderson at 12:45 PM | Permalink | Comments (0)

American Superconductor Corp. (AMSC) announced it has received a follow-on order for its proprietary PowerModule(TM)-based wind turbine generator control systems for 150 wind turbines from Windtec Systemtechnik GmbH (Windtec), a supplier of large wind turbine components and system technology, based in Klagenfurt, Austria. The PowerModule-based control systems will be utilized in the electrical equipment of wind turbine generators -- each rated at 1.5 megawatts -- which Windtec plans to ship to China in calendar 2006. AMSC expects to ship the PowerModule PM1000 power converters, which manage and stabilize electricity produced by wind turbine generators, to Windtec by the end of calendar year 2006. [ more ]

Posted by Mark Anderson at 08:11 AM | Permalink | Comments (0)

German utility E.On AG launched a 29.1 billion euro ($34.72 billion) all-cash bid for ENDESA (ELE) on Tuesday, topping a previous offer from Gas Natural by more than 30 percent and threatening to disrupt carefully laid plans for Spanish power-market consolidation.

Endesa said in a statement that the E.On offer was "clearly" the better of the two, but added that it still did not adequately reflect Endesa's true value. [ more ]

Shares of Endesa were up 15% in yesterday's trading.

Posted by Mark Anderson at 08:06 AM | Permalink | Comments (0)

Maxwell Technologies (MXWL) announced that Enercon GmbH has placed a 1.5 million-unit purchase order for ultracapacitors for wind turbine blade pitch systems. Enercon currently uses BOOSTCAP® ultracapacitors for backup energy storage and power delivery in wind turbines models ranging in output from 300 kW to 6 MW.

Ulrich Neundlinger, Enercon's managing director of switching units, said that the company is expanding its use of ultracapacitors for blade pitch system backup power after initial deployments confirmed their significant advantages over traditional battery solutions. [ more ]

Posted by Mark Anderson at 09:32 AM | Permalink | Comments (0)

"America is addicted to oil, which is often imported from unstable parts of the world"

Thanks to Mr. Bush's state of the union address last night, we should see some nice gains across the board in the Alternative Energy sector.

Some of the big winners may be the Ethanol companies like Archer Daniels Midland (ADM) and Pacific Ethanol, Inc. (PEIX).

The EnergyStockBlog.com has a nice write up on the potential for ADM. [ more ]

GreenCarCongress.com has a nice summary of the important parts of the speech.

In his State of the Union 2006 address, President Bush announced the Advanced Energy Initiative�?a 22% increase in clean-energy research at the Department of Energy (DOE).

The Initiative is intended to focus on providing breakthroughs in two areas: power for homes and businesses; and transportation. [ more ]

Update: Well the market is now open and shares of ADM and PEIX are trading down. But shares of Fuel Cells and Solar companies are up.

Posted by Mark Anderson at 09:12 AM | Permalink | Comments (0)

Hydrogenics Corp (HYGS) announced that they have been awarded a contract for over EUR 500,000 to deliver a hydrogen station to Gas Natural SDG, a Spanish-based energy services multinational with approximately ten million customers in Spain, Latin America, Italy and France (www.gasnatural.com).

Gas Natural will use a Hydrogenics' HySTAT(TM)-A Hydrogen Station at the Sotavento Galicia wind farm to produce up to 60 Nm3/hr of hydrogen. The hydrogen will be used to fuel an internal combustion engine generator, which in turn will supply electricity to the electric grid. [ more ]

Posted by Mark Anderson at 11:21 AM | Permalink | Comments (0)

Hydrogenics Corp (HYGS) announced that the company was awarded a contract by Basin Electric Power Cooperative, to supply an electrolyzer-based hydrogen refuelling station for installation in Minot, N.D. In addition to the core electrolyzer module, Hydrogenics is supplying compression, storage and dispenser equipment as part of the contract. The station is one of the first United States-based hydrogen fueling stations to use electricity from a wind power resource to produce hydrogen from water, in this case using electricity generated by wind resources either owned or contracted by Basin Electric. The hydrogen produced will be used to refuel hydrogen-powered vehicles, demonstrating a linkage between wind power and vehicle refueling. [ more ]

Posted by Mark Anderson at 07:38 AM | Permalink | Comments (0)

FPL Group Inc (FPL) is currently in the advanced stages of negotiations to acquire Constellation Energy Group (CEG). An FPL-Constellation merger would create a giant East Coast-based utility with a market capitalization, based on Tuesday's closing stock prices, of $26.97 billion - $16.93 billion for FPL and $10.04 billion for Constellation.

Constellation Energy Group is based out of Baltimore Maryland and is the holding company for Baltimore Gas and Electric. They also have an extensive presence in the wholesale power supply and generation business. The Power Generation Division currently uses 4.6% alternative sources for power generation.

FPL has a strong commitment to alternative energy generation and is one of the largest utilities in the US utilizing extensive wind farms. CEG has a large footprint in Nuclear power generation and the combination of these two companies would make a top-tier producer of power generation for the East coast markets and a potential of 30,000 megawatts of power generation. CEG also gives FPL the ability to enter the wholesale supply side of the power generation business.

Typically you would see shares of the acquiring company down and shares of the acquired company up with this type of announcement. The market is liking this potential merger and CEG is up over 7% and FPL is also trading up 0.6% this morning.

Posted by Mark Anderson at 10:01 AM | Permalink | Comments (0)

ENDESA (ELE) reported a 52 percent increase in third-quarter profit Wednesday and said it will distribute almost 2.12 billion euros ($2.48 million) in dividends for the year. The company said it will pay out nearly 2 euros ($2.34) a share in dividends for 2005. [ more ]

The increased dividend is an attempt to ward off a hostile takeover attempt by Gas Natural. The stock way paying an almost 4% dividend yield and this move takes the divendend up near 12% with the special payout.

Today I purchased the second third of my planned holdings for ELE in the mutual fund.

Posted by Mark Anderson at 01:20 PM | Permalink | Comments (0)

Xantrex Technology Inc. (XTX.TO) received an order for wind converters valued at $12M from Clipper Windpower Technology Inc. of Carpinteria, CA for delivery in 2006. This order exceeds the framework agreement announced on September 15, 2005 for approximately $10 million over two years. These Xantrex converters will be used in Clipper's new 2.5 megawatt Liberty wind turbine. [ more ]

I spent sometime talking with the people at the Xantrex booth at the recent solar conference and they have a firm commitment to the Alternative energy marketplace. They have also started a concentrated effort to release new products into the marketplace and they are proving it with a steady stream of new press releases. I have been using one of their power inverters for some time in my car to power various electronic devices and the products are high quality and work well.

My main problem with the company is its difficult to purchase shares of the company in the US since they only trade in Toronto. People that I have spoken with at the company state they currently have no plans to move to a US exchange. Xantrex is a company I want to own for a long term hold. The stock is very attractive under the $6 (CDN) level and has some near term support at $5 (CDN). I make all my stock transactions online and a purchase of a foreign stock requires that I would have to call in the purchase order which usually doesn't give you the flexibility to toy with your buy limit orders. This also means the transaction costs are going to be much higher for me. But I do believe owning this company in the future may be worth the inconvenience and extra costs.

Posted by Mark Anderson at 08:55 AM | Permalink | Comments (0)

Distributed Energy Systems Corp (DESC) has been awarded a contract to install and commission three additional NorthWind 100® wind turbines for Anchorage-based Alaska Village Electric Cooperative (AVEC). The contract brings the total number of turbines AVEC has purchased from Northern Power to 10, representing what is believed to be the largest investment in wind turbines made in Alaska in a single year.

The Northern Power Products division will also supply and install wind turbine Supervisory Control And Data Acquisition (SCADA) systems for the villages of Toksook Bay and Kasigluk. These systems will leverage Northern Power's SmartView® software, which will allow AVEC to monitor and control the wind turbines in both villages, as well as monitor the overall power generation system assets. The combined value for the turbine sale, the SCADA systems and other value-add services is $1.8 million. [ more ]

DESC is up over 1.5% in pre-market trading this morning. The stock has been moving nicely and it seems to have bounced off the 50 day moving average which confirms that it is still in a nice uptrend.

I'm still wary to commit new money to the stock market right now. If the general market was acting better, I would probably be a buyer of the stock at this point.

Posted by Mark Anderson at 08:54 AM | Permalink | Comments (0)

Scottish Power plc (SPI) is an electrical generation and distribution company primarily focused in the UK. They have two subsidiaries that are based in the US, PacificCorp and PPM Energy. They are currently in the process of trying to sell PacificCorp to Berkshire Hathaway.

PPM Energy is a company with extensive wind energy development and generation. Scottish Power also has extensive wind farms in Scotland and Europe. They are also developing off-shore wind power of the Welsh coast.

This stock has been moving strong recently and it looks like it is building a base at the $40 level. I purchased a 1/3 stake of this stock for the mutual fund at a price of $27.00. I will purchase additional thirds on any pull backs to lower my cost basis. This stock also pays a 4% dividend.

ENDESA (ELE) generates and distributes energy in Spain, Italy, France, and Portugal, and Latin America. They have extensive wind farms in Spain. They are currently trying to fight a hostile bid by one of its competitors Gas Energy. The stock currently pays a 3.5% dividend. Endesa has forumulated a plan to increase the dividend payouts to 7 Billion Euros over the next 5 years to combat the hostile bid. They will accomplish this by disposing of non-strategic assets to generate the future dividend payouts. Full details about their plans can be found on the Endesa website [ pdf ].

The stock has been moving strong over the last month and I have been waiting for a pull back to enter the stock. That pull back has never materialized and I wanted to step into this position before it gets away from me. I'm purchasing a 1/3 stake in the mutual fund at $40.91. I will purchase remaining thirds on any pullbacks from here.

With these purchases I'm now at a 50% invested position in the mutual fund. My plans are to still try to maintain a conservative stock entry strategy as I get closer to 100% invested in the mutual fund. I'm already at an 80% invested amount in my personal portfolio. I will be selling some of my stake in PBW to gain cash as I find new names I want to own in my personal portfolio.

Posted by Mark Anderson at 09:50 AM | Permalink | Comments (0)

Distributed Energy Systems Corp (DESC) has been profiled on Forbes.com.

Kenneth Reid, editor of Spear's Security Industry Analyst, recommends buying shares of Distributed Energy Systems. The Wallingford, Conn.-based company creates and delivers a variety of products for the alternative and decentralized energy markets.
. . .
The story of Distributed Energy and other alternative-energy players is a long-term one, say bulls like Reid. With the surge in oil prices this year, the story is resonating with investors. Distributed Energy shares are up 333% in the past year, trading around $8 after hitting a 52-week (intraday) high of $8.09 on Sept. 27. [ more ]

Forbes also has a short DESC video that gives some additional information about this stock.

My take on DESC is that it is a great company to own. I have owned it in the past and sold it with a nice profit in early August. I purposely tried to liquidate the majority of my positions in August in anticipation of blogging about all my portfolio purchases. Many of the names I owned are back on my watchlist and I have been looking for a good re-entry point for a long term hold on this stock. It is currently sitting at a 52 week high and it showing signs that it getting over bought. The Forbes profile hit the net early this morning, and DESC is currently trading above $8 pre-market. Right now I will continue to watch the stock and it is one my short list for purchase. I just want to wait a couple of days to see how the stock price action behaves.

Posted by Mark Anderson at 09:02 AM | Permalink | Comments (0)

The Alameda County Board of Supervisors approved renewal permits held by wind power companies like FPL Group Inc (FPL), and other wind generators to produce electricity at the 584-megawatt Altamont Pass wind farm, one of the world's largest wind energy centers. [ more ]

One key stipulation for the renewal is that the wind power companies need to replace over 5,000 windmills over the next 13 years with 500 more efficient turbines with high blades that spin above the birds' flight paths. This may seem like a win for the wind farm utilities, but it comes with a price. They expect this overhaul to cost them over $500 million over the next 13 years.

The true winners of this news are the companies that provide the new turbines and blades (i.e. GE Energy and Vestas) .

Posted by Mark Anderson at 03:05 PM | Permalink | Comments (0)

FPL Group Inc (FPL) places order from Siemens to build wind turbines for FPL. They expect to install the new turbines in 2006. [ more ]

Posted by Mark Anderson at 04:18 PM | Permalink | Comments (0)

Hydrogenics Corp (HYGS) is a developer of fuel cell technology and hydrogen generation. They are also working with wind farm technology in the generation of hydrogen. Back in January of this year they successfully completed the purchase of Stuart Energy which compliments their product portfolio.

Shares of the stock have been under pressure for the last couple of months due to missed expectations on Q1 revenue results. There is also some major concern about an increase in product backlog.

In August, HYGS issued their most recent quarterly earnings and are attempting to reassure the shareholders that they are making great strides in incorporating the Stuart Energy division and also working on fulfilling the backlog of orders.

"We believe that the increase in revenues, combined with synergies derived from the Stuart Energy acquisition, will accelerate our path to profitability," continues Rivard. "All in all, we believe we are delivering on the commitment we made at the beginning of the year to achieve renewed financial performance for our shareholders by applying discipline and sound business fundamentals." [ more ]

I have successfully owned this name in the past with some nice gains in one of my trading portfolios. Right now I feel it is poised to move to the upside for a long term uptrend and I purchased shares in both my personal portfolio and my Marketocracy mutual fund portfolio at an average price of $4.00. The stock is currently sitting right against some resistance at the $4.00 and I think it has the momentum to take it out to the upside. The stock has some nice support at the $3.50 level and I would be willing to average back down if it comes back down to this price level.

There are also some other Marketocracy gurus adding this stock to thier portfolios as well, which may (or may not) be a good sign. [ more ]

For those of you that are adventurous, the HYGS MAR 2006 5 Calls look good here if you can get a fill in the $0.50-$0.60 range. There is very little open interest for options on this stock and getting a fill at a decent price may be difficult.

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 Mark Anderson at 12:10 PM | Permalink | Comments (0)

ENDESA (ELE) will have 21.5 MW of new wind capacity in the region of Castilla y Leon once its cogeneration and renewable energy subsidiary (ENDESA Cogeneracion y Renovables: ECYR) completes the construction of the Valpardo wind farm in the town of Navalperal de Pinares (Avila), located in the central part of the Malagon mountain range. The farm is scheduled to start up at the end of this year. [ more ]

Posted by Mark Anderson at 11:15 AM | Permalink | Comments (0)

The Carballeira wind farm, constructed by ENDESA (ELE) subsidiary, Endesa Cogeneracion y Renovables (ECYR), has been connected to the grid. This completes the construction of the group's largest wind farm complex, which also includes the Bustelo and Faladoira plants, located in the area of As Pontes (A Coruna) and Xermade (Lugo). The wind farm complex has total installed capacity of 161 MW and is connected to the grid through via the Tesouro substation in As Pontes.

The Carballeira wind farm, the last to be completed, has installed capacity of 24.42 MW, with 37 660kW wind turbines expected to produce 65,580 MW of energy a year. This would supply the consumption needs of 13,780 households and reduce crude imports by 100,125 barrels. [ more ]

Posted by Mark Anderson at 11:58 AM | Permalink | Comments (0)

Universal Communication Systems Inc (UCSY) announced that the company has developed a new, exclusive energy application utilizing "wind power" technology for energy co-generation for use with AirWater machines. [ more ]

Posted by Mark Anderson at 09:08 AM | Permalink | Comments (0)

California's push to add more renewable electricity to the state's power grid is pressuring wind power developers to reduce the number of birds killed each year at one of the biggest wind farms in the United States.
Wind companies like FPL Group Inc (FPL) , wildlife groups and the U.S. Fish and Wildlife Service are trying to agree on ways to lower the risk for birds flying into big spinning turbine blades at the 584-megawatt Altamont Pass wind center in rolling hills about 50 miles east of San Francisco. [ more ]

Posted by Mark Anderson at 09:03 AM | Permalink | Comments (0)

ENDESA (ELE) has signed an agreement with Sacyr Vallehermoso for the acquisition of 100% of the share capital of Portuguese company Finerge Gestao de Proyectos Energeticos, S.A. (FINERGE), umbrella company of a holding which operates wind farms and co-generation plants in Portugal. The deal hinges on the pertinent authorisation from the Portuguese anti-trust authorities.

The company, which has 43 subsidiaries, owns projects already in operation whose installed capacity is 60 MW and projects under construction or in the pipeline with a capacity of 260 MW. [ more ]

Posted by Mark Anderson at 08:43 AM | Permalink | Comments (0)

FPL Group Inc (FPL) announced that it has begun commercial operation at its 106.5-megawatt (MW) Weatherford Wind Energy Center, located near Weatherford, Oklahoma, and plans to expand the project by 40.5 MW. This brings the total capacity of the Weatherford Wind Energy Center to 147 megawatts. Construction on the expansion will begin in the near future and is expected to be completed by year end. [ more ]

Posted by Mark Anderson at 07:42 PM | Permalink | Comments (0)

FPL Group Inc (FPL) The U.S. wind energy industry will add as much as 2,500 megawatts of new production capacity in 2005, more than previously expected, the American Wind Energy Association said on Tuesday.

A megawatt of wind capacity can provide roughly the amount of electricity needed by 250 to 300 households, so the new forecast translates into the equivalent of power for some 700,000 homes, the group said. [ more ]

Posted by Mark Anderson at 08:21 AM | Permalink | Comments (0)

Magnetek Inc. (MAG) announced a reorganization of the Company's operating structure to accelerate growth in alternative energy markets. "Alternative energy products currently account for less than 5% of our quarter-billion-dollar annual revenue," said Magnetek chief executive Andrew Galef. "But that revenue has the potential to increase exponentially over the next few years, based on double-digit growth rates in alternative energy markets and proprietary power conversion products that we are now introducing for solar and wind power markets." [ more ]

Posted by Mark Anderson at 08:23 AM | Permalink | Comments (0)

Hydrogenics Corp (HYGS) announced that Hydrogenics and Prince Edward Island Energy Corporation will lead a consortium of industry and government partners to develop Canada's first wind-hydrogen village demonstration - the Prince Edward Island (PEI) Wind-Hydrogen Village Project. This multi-faceted initiative will demonstrate, in real-life and in real-time, how wind energy and hydrogen technologies can work together to offer clean and sustainable energy solutions across a wide range of applications. [ more ]

Posted by Mark Anderson at 08:18 AM | Permalink | Comments (0)

FPL Group Inc (FPL) announced it will build, own and operate a new wind farm in Texas, the Horse Hollow Wind Energy Center, to be located in Taylor County, Texas.

The 220.5-megawatt Horse Hollow Wind Energy Center will be comprised of 147 1.5-megawatt wind turbines spread over a 22,500 acre site approximately 15 miles southwest of Abilene. Initial site work on the project is underway with full-scale construction expected to begin in the next few weeks and be completed no later than December 2005. [ more ]

Posted by Mark Anderson at 11:14 PM | Permalink | Comments (0)

Renewable energy like wind and solar power and hydrogen fuel cells could blossom into a $100 billion a year global market in less than a decade as technology costs fall, according to a study.

The combined market for "green" sources of energy has already grown 68 percent since 2002 to more than $16 billion last year, according to Clean Edge, a research and publishing firm based in California. [ more ]

You can view and download the complete Clean-Energy Trends report at the following link. [ more ]

Posted by Mark Anderson at 04:04 PM | Permalink | Comments (0)

ENDESA (ELE) has received authorisation to build and start up new wind farms and mini hydro plants this year, requiring an investment of Euro 286 million. The start-up of these projects, part of ENDESA's Strategic Plan, will add 277 MW to ENDESA's generation capacity, 252 MW in wind (for a Euro 250 million) and 25 MW in mini hydro capacity (for an investment of around Euro 60 million).

Facilities already under construction and expected to come on stream in 2005 include the wind farms at Pena Ventosa and Chan do Tenon in Galicia, Las Hoyuelas in Castilla La Mancha and P.E. Saso Plan in Aragon, representing an investment of Euro 144 million and overall capacity of 146 MW. [ more ]

Posted by Mark Anderson at 10:21 AM | Permalink | Comments (0)

Western Wind Energy (WND.V) is pleased to announce the execution of a formal power purchase agreement with the Southern California Edison Company ("Edison") for the procurement by Edison, from the Company, of up to 120 megawatts of wind powered electrical generation. The agreement is for a period of 20 years.

The location of the wind energy facilities will be the famous Tehachapi Pass Wind Park. Tehachapi Pass is the site to over 4,600 wind turbine generators delivering over 1.4 trillion watt hours of energy from 670 megawatts of name-plate capacity. [ more ]

Posted by Mark Anderson at 09:34 AM | Permalink | Comments (0)

FPL Group Inc (FPL) announced today that it has been recognized on the first, annual list of Global 100 Most Sustainable Corporations in the World. FPL Group, Inc. is one of only 100 companies chosen from 2000 of the world's largest corporations whose sustainability performance falls within the top five percent of their business sector. The company is part of a select group of only 20 U.S.-based companies included in this special recognition. FPL Group was selected based on its ability to manage the triple bottom line - society, environment and economy. [ more ]

Posted by Mark Anderson at 08:39 AM | Permalink | Comments (0)

FPL Group Inc (FPL) wind farms continue to help meet the growing need for pollution-free electricity while providing new economic opportunities for local communities and states across the United States. In 2004, FPL Energy's 43 wind farms produced more than 6.6 million megawatt hours of electricity for local utilities, municipalities, power marketers and rural electric cooperatives across the country, or enough power to serve more than 500,000 average homes. FPL Energy estimates that it would have taken the equivalent of 3.8 million tons of coal, or 32,579 train cars of coal, 10.5 million barrels of oil or more than 45.1 billion cubic feet of natural gas, or enough to fill the Louisiana Superdome 360,844 times, to generate the same amount of electricity as its wind farms. [ more ]

Posted by Mark Anderson at 11:23 AM | Permalink | Comments (0)

FPL Group Inc (FPL) wind farms continue to help meet the growing need for pollution-free electricity in Pennsylvania while providing new economic opportunities for local communities and the state.

FPL Energy's five Pennsylvania wind farms, with a capacity of 129 megawatts, are capable of generating electricity for nearly 37,000 homes. In 2004, the wind farms offset generation emissions totaling about 192,000 tons of carbon dioxide; nearly 1,400 tons of sulfur dioxide and more than 300 tons of nitrogen oxide. [ more ]

Posted by Mark Anderson at 12:05 PM | Permalink | Comments (0)

Distributed Energy Systems Corp (DESC) announced preliminary estimated full-year 2004 revenues of approximately $21 million, and preliminary estimated fourth quarter revenues of approximately $10 million. The Company also announced that its backlog of signed project and product commitments at year-end is approximately $25 million. This figure represents signed contracts covering energy projects for commercial and industrial clients, as well as in-house manufactured systems, including hydrogen generators and wind turbines. [ more ]

Posted by Mark Anderson at 11:58 AM | Permalink | Comments (0)

ENDESA (ELE) will have another 78.4 MW of new wind power capacity in Andalusia once subsidiary Endesa Cogeneracion y Renovables (ECYR) completes its new wind complex in Tarifa, Cadiz province, comprising the five wind farms of La Manga, Rio Almodovar, El Ruedo, El Gallego and Cortijo de Iruelas.

The complex is wholly contained in the town of Tarifa, and has 98 wind turbines: 42 Made AE-56 and the other 56 Made AE-59, both designs being 60 metres tall with unit generating capacity of 800 kV. The complex required an investment of Euro 75 million. [ more ]

Posted by Mark Anderson at 04:07 PM | Permalink | Comments (0)

USAToday.com has an article discussing the perils of wind energy and the ecological effects to local bird wildlife. [ more ]

After years of study but little progress reducing bird kills, environmentalists have sued to force turbine owners to take tough corrective measures. The companies, at risk of federal prosecution, say they see the need to protect birds.

The biggest concern is the Altamont pass near San Francisco.

Altamont Pass bird kills have been known for years, but turbine owners and federal regulators ignored them except to urge more research, says Miller of the Center for Biological Diversity. But a California Energy Commission study in August found bird fatalities much higher than had been thought and laid out steps to limit them.

This is just more fuel to the fire to get the Altamont pass upgraded. The newer technology and taller structures have decreased bird fatality. These future upgrades will reflect positively to the Wind generation stocks.

Posted by Mark Anderson at 02:32 PM | Permalink | Comments (0)

BusinessWeek has written an article about the investment opportunities available int he Alternative Energy marketplace.

Renewable energy is booming. The use of solar power has been growing by more than 30% a year and, except for a hiccup in 2004 -- when Congress delayed renewing a tax credit -- so has wind power. Ethanol is heading for record production levels. And there's no end in sight, given high oil and gas prices, an increasing number of government mandates and incentives, and the first real steps toward tackling global warming. Clean Edge Inc., a research and strategy consultant, predicts that the total clean-energy market will grow to $92 billion by 2013, about seven times its current size of $13 billion. "The investment community is starting to see real opportunities," says Ron Pernick, co-founder of Clean Edge. [ more ]

This article mentions many of the stocks followed on this website.

Posted by Mark Anderson at 08:33 AM | Permalink | Comments (0)

Northern Power Systems, a subsidiary of Distributed Energy Systems Corp (DESC) has been awarded an approximately $800,000 contract for eight hybrid TelePower(TM) remote power systems. The 48VDC systems will supply power for a critical U.S. military application in Alaska.

Each of the eight Northern TelePower systems will generate power through a combination of renewable sources consisting of a photovoltaic (PV) array with a single wind turbine and a pair of Thermo Electric generators to be used when the renewable sources are not adequate. The systems are designed to reliably operate year round in the harsh Alaskan environment, particularly during the extremely cold winter months. [ more ]

Posted by Mark Anderson at 08:25 AM | Permalink | Comments (0)

FPL Group Inc (FPL) scored the highest ranking in the U.S. and second globally in a World Wildlife Fund (WWF) report that analyzed 72 of the world's leading power companies reviewing current use of available technologies to reduce C02 emissions, as well as clear commitments made for future improvements. The new report said FPL is a bright spot in the U.S. rankings. The WWF says FPL Group scored high due to leadership in developing wind energy and a commitment to dramatically improving power plant efficiency. [ more ]

Posted by Mark Anderson at 09:51 AM | Permalink | Comments (0)

ENDESA (ELE) has started up the Estoncala, Jupiter and Saturno wind farms, located in the north of the province of Soria, in the Sierras of Alba and Montes Claros, near the villages of Santa Cruz de Yanguas, Villar del Rio, Vizmanos, Las Aldehuelas and Arevalo de la Sierra.

The three wind farms have a combined installed capacity of 47.2 MW and are equipped with 59 GAMESA AE-56 wind turbines, made in Spain and with a unit capacity of 800 kW each. [ more ]

Posted by Mark Anderson at 02:23 PM | Permalink | Comments (0)

As mentioned in a previous entry, the Pennsylvania legislature passed SB1030, the Alternative Energy Bill, on November 20, 2004 which will require a total of 18% of Pennsylvania's electricity to be generated by alternative energy sources by 2020.

The standard requires 8% of Pennsylvania's electricity to be generated by so-called "Tier I" renewable sources of energy by 2020. Tier I resources include solar, wind, geothermal and biomass. The standard also requires 10% of the state's electricity to come from a second category of resources that include waste coal, integrated combined coal gasification technology, municipal solid waste, large-scale hydro, demand-side management and distributed generation systems. [ more ]

Posted by Mark Anderson at 09:59 AM | Permalink | Comments (0)

Right on the heels of Colorado passing Amendment 37, Pennsylvania is waiting for State House approval on the passage of their own legislation mandating clean energy production. [ more ]

This new bill states that by 2020, utilities would be required to provide 18 percent of the electricity used in Pennsylvania from alternative sources, like wind, solar and waste coal. Wind should be the big winner for this region.

Posted by Mark Anderson at 02:04 PM | Permalink | Comments (0)

Spanish Energy producer ENDESA (ELE) will have 75.9 MW of additional wind power in Galicia, now that its subsidiary, ECYR, (ENDESA Cogeneracion y Renovables) has completed construction of the Fonsagrada-Punago wind power complex in the Province of Lugo.

ENDESA currently has operative installed wind energy capacity totalling 999 MW, with an additional 163 MW under construction, giving it a national market share of 16.6 %. Year to date, the Company has brought 4 wind parks into operation, representing 77 MW, while it has commenced construction on 7 new farms, which will add 163 MW to current installed capacity. [ more ]

This company's chart is beautiful and it has been added to my watch list. I would be a buyer of this stock below $19. It has been trading in an upward channel for many years. While this is not my typical AltE stock, they are making a strong move into that space.

Posted by Mark Anderson at 01:29 PM | Permalink | Comments (0)

Colorado voters have approved an amendment requiring utilities to get part of their electricity from the sun, wind or plant and animal waste.

The amendment requires the state's seven largest utilities to get a portion of their retail electricity sales from renewables, beginning with 3 percent in 2007 and climbing to 10 percent by 2015. Four percent of the renewables should be solar sources. [ more ]

Posted by Mark Anderson at 08:30 AM | Permalink | Comments (0)

FPL Group Inc (FPL) announced it will build, own and operate a new wind farm in Texas, the Callahan Divide Wind Energy Center, to be located in Taylor County, Texas.

The 114-megawatt Callahan Divide Wind Energy Center will be comprised of 76 1.5-megawatt wind turbines spread over a 6,000 acre site approximately 12 miles southwest of Abilene. Construction is expected to begin in the next few weeks and be completed no later than the first quarter 2005. [ more ]

Posted by Mark Anderson at 08:47 AM | Permalink | Comments (0)

British Telecom has announced a three-year plan to get all of its energy needs from renewable sources - the biggest such project in the world. The electricity used, worth hundreds of millions of pounds, could power a city the size of Nottingham. Renewable sources of energy include wind, wave and solar power, rather than using fossil fuels like oil or coal. [ more ]

Posted by Mark Anderson at 09:27 AM | Permalink | Comments (0)

Northern Power Systems, Inc., a subsidiary of Distributed Energy Systems Corp (DESC) has been awarded a $1.9 million contract from Anchorage-based Alaska Village Electric Cooperative (AVEC) for seven of Northern's NorthWind® 100 wind turbines.

The advanced-design 100 kW wind turbines will generate renewable electric power for 3 remote communities, in western Alaska, served by AVEC. As part of the contract award, Northern will provide on-site installation and commissioning services of the turbines in the harsh Alaskan environment. It is the first stage in a broader effort through which AVEC will be integrating wind into more of the 51 isolated Alaskan communities to which it currently provides electric power. [ more ]

Posted by Mark Anderson at 08:57 AM | Permalink | Comments (0)

The Production Tax Credit (PTC) -- a critical factor in stimulating the growth of the US wind industry -- is very likely to be expanded to include geothermal energy as part of the JOBS tax package (H.R. 4520, the "American Jobs Creation Act of 2004") just approved by a Congressional Conference Committee. [ more ]

Posted by Mark Anderson at 09:08 AM | Permalink | Comments (0)

In order to take full advantage of the recent Congressional extension of the federal Production Tax Credit (PTC) for wind generation, Xcel Energy yesterday filed a request with the Colorado Public Utilities Commission to further expedite a company bidding process for new wind power in the state.

On Aug. 11, 2004, the Colorado Public Utilities Commission gave Xcel Energy (XEL) permission to issue a "Request of Proposal" for up to 500 megawatts of renewable energy -- expected to primarily be wind -- under the company's overall resource planning process. The bidding process for this wind power began the following week and was to continue through Nov. 23, 2004. [ more ]

Posted by Mark Anderson at 09:17 AM | Permalink | Comments (0)

TheStreet.com has a good write up about the new potential growth opportunities that are available in the Alternative Energy marketplace.

"With oil recently passing the $50 mark -- and expected to stay high -- some investors feel freshly tempted by alternative energy stocks. They view fuel cells and sunshine and windmills as ultimate replacements for diminishing supplies of fossil fuels. Thus, they tend to look past the alternative fuel industry's current losses and focus on future possibilities instead." [ more ]

The following companies are mentioned in this article:
Ballard Power (BLDP)
FPL Group Inc (FPL)
Fuelcell Energy Inc (FCEL)
Plug Power Inc (PLUG)

Posted by Mark Anderson at 06:39 PM | Permalink | Comments (0)

U.S. power companies such as FPL Group Inc (FPL) that develop windmill farms will probably install a record number of turbines next year after Congress renewed the tax credit needed to make the plants cost effective.

Over a thousand new windmills, typically twenty stories high with three 40-foot blades, will crop up in fields in Oklahoma, ranches in Colorado and off the coast of Massachusetts. U.S. wind power will increase by more than the 1,687 megawatts built in 2003, said Christine Real de Azua, a spokeswoman for the American Wind Energy Association, a trade group in Washington. [ more ]

Posted by Mark Anderson at 09:16 AM | Permalink | Comments (0)

First National Power Corporation (FNPR) in keeping with its commitment to becoming a leader in alternative energy sources is pleased to announce that on August 18, 2004, they conditionally agreed to work with an integral department of a large Northern Ontario city, with the intent being to collaborate on identifying alternative energy solutions. It is the intent that FNPR will joint venture with the City and possibly a local forestry concern on these projects. First National Power will act as a full partner, providing the funding, while the other partners will be the vendor of the equipment, the operator of the facility and the City, who are adding both the land for the deal and the connection to the grid through their wholly owned public utility commission. The deal being discussed with the local company in the forestry business will be similar in design, except that the local company will be the customer for the energy produced. [ more ]

Posted by Mark Anderson at 08:30 AM | Permalink | Comments (0)

New York will dramatically boost its reliance on renewable energy sources like wind and water over the next nine years under a policy approved by state regulators Wednesday.

Clean energy advocates and state officials said the action by the state Public Service Commission places New York among the leaders nationwide in the development of renewable energy. It comes 20 months after Gov. George Pataki first called for a statewide standard that would encourage the production of environmentally friendly energy. [ more ]

Posted by Mark Anderson at 08:54 AM | Permalink | Comments (0)

Puget Sound Energy (PSD) recently signed a letter of intent with Houston-based Zilkha Renewable Energy to obtain 100-percent ownership of Zilkha's proposed 220-megawatt (MW) Wild Horse Wind Power Project located in the eastern part of Washington state's Kittitas County. It is the next step in an ongoing process to acquire renewable energy as part of a strategic plan to secure low-cost, long-term diverse resources for its growing customer base. [ more ]

Posted by Mark Anderson at 08:50 AM | Permalink | Comments (0)

Credit rater Standard & Poor said Tuesday wind energy could be a viable alternative to oil amid higher petroleum prices.

"Wind power remains often more expensive than traditional energy sources ... although it is becoming increasingly price competitive," said S&P credit analyst Jan Willem Plantagie. [ more ]

Posted by Mark Anderson at 08:49 AM | Permalink | Comments (0)

Just one year after launching its wind power program, nearly 9,000 OG&E Electric Services (OGE) customers have subscribed. About one-third of the subscribers have 100 percent of their electricity generated by wind, making OG&E's program one of the leaders in the United States. [ more ]

Posted by Mark Anderson at 09:04 PM | Permalink | Comments (0)

Nearly 36,000 jobs could be created in Texas if an increase in the national renewable energy standard were adopted, according to a new study released by the Union of Concerned Scientists.

A national standard would require that 20 percent of the country's electricity come from clean, renewable sources like wind, biomass and solar. [ more ]

Posted by Mark Anderson at 07:00 PM | Permalink | Comments (0)

"Experts generally agree that our current reliance on fossil fuels is unsustainable. Already oil is near $50 per barrel, and the great millions of Chinese and Indians destined to take to the road in the next decades have not yet gotten behind the wheel."

This week Newsweek has written several special reports about alternative energy in all its forms. All of these reports can be found at the following link. [ more ]

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Colorado House Speaker Lola Spradley, R-Beulah. and U.S. Rep. Mark Udall, D-Eldorado Springs, co-chairs of Amendment 37—the Renewable Energy Initiative—kicked-off their statewide campaign Thursday with stops throughout Colorado.

Amendment 37 would require 10 percent of Colorado's electricity be generated from renewable energy by 2015. The program is scaled beginning with a 3 percent requirement by 2007, 6 percent by 2011, and 10 percent by 2015. [ more ]

Posted by Mark Anderson at 05:48 AM | Permalink | Comments (0)

Hawaiian Electric Industries Inc (HE) has begun a one-year study to verify the wind energy potential on the ridges above the company's Kahe Power Plant. The study began in April of this year to monitor wind speed, direction and turbulence so the utility can confirm the area's potential to generate electricity with wind. Recently completed high-resolution wind resource maps indicate that the ridges above Kahe have one of Oahu's strongest wind resources. [ more ]

Posted by Mark Anderson at 05:34 AM | Permalink | Comme