Some of you may remember an article I wrote last March about a small Canadian wind turbine maker called AAER Inc (AAERF.PK or AAE.V). In fact, I got a few emails from readers informing me that they'd bought the stock following my article and that they were happy with its performance. The following chart traces the stock's performance between the date of the article (March 7, 2007) and last Friday (May 2, 2008):

Since I wrote this article many things have changed with AAER. The Katabatic contract, which is what attracted my attention initially, is no longer in effect. AAER has nonetheless forged ahead and entered into a number of supply agreements to get its hands on turbine components, not the least of which is with American Superconductor (NASDAQ:AMSC), a stock many wind investors have on their radars (or in their portfolio). SkyPower, a Canadian wind heavyweight and affiliate of Lehman Brothers, bought about 20% of AAER's equity in the fall of '07. In fact, it is formally Lehman Brothers Inc. that owns the stake. Then, only a few weeks ago, the company announced another round of equity financing through a bought deal at C$1.20/shr, for a total of C$7.5m (US$7.82m). Finally, the company managed to sell a few of its turbines in Canada, the US and France.

Overall, AAER looks it is getting the right things done. However, the stock's latest run was tied to one event in particular.

The Hydro-Quebec Bid

AAER's partnership with SkyPower as well as another partnership with TransCanada Energy Ltd appeared to position AAER very well for the much-awaited Hydro-Quebec request for proposal (RFP) for wind power. This RFP, calling for the installation of 2,000 MW of wind power in the Canadian province of Quebec, represents the single largest block of wind power contracts to be awarded anywhere in North America to date. Under these contracts, Hydro-Quebec, the state-controlled power utility, buys the electricity under a 20-year agreement from private sector projects at a rate of C$0.087/kWh. Consortia of developers and turbine makers were invited to bid projects into RFP.The call attracted a fair deal of attention with 66 bids totaling 7722.2 MW - significantly more than the 2,000 needed.

Through its partnerships with SkyPower and TransCanada, both of which submitted bids into the RFP, AAER believed it had a serious shot at jumpstarting its business. AAER is headquartered in the province of Quebec, and local assembly of the turbines as well as local economic development considerations more generally were key criteria in judging the bids (along with factors such as costs, reliability of turbines, ability to manage community relations, etc). Moreover, both partners have strong reputations in the Canadian wind market and SkyPower is already active in Quebec. In both cases, the consortia appeared very well positioned to be selected and AAER (and many of its shareholders) saw this as: a) an opportunity to fill the order book in the near-term and b) a chance to establish its reputation in the North American marketplace for the long run by getting a few hundred MWs of turbines going in the real world. If this was successful, it could bolster AAER's assault on a North American marketplace in dire need of turbines and that is currently being underserved by the incumbents.

The winners were announced on Monday (May 5) at 11:15 am and the AAER consortia were not a part of them. The stock immediately collapsed, so much so that Canadian market regulators suspended trading and expunged a bunch of trades because the news conference was in French only and the info was not disseminated to American and English Canadian investors at the same time as to French Canadian ones. When trading reopened on Tuesday morning, the share price immediately tumbled and found resistance for most of the day at around $0.60.

In the end, two turbine makers were selected to provide all of the 2,000 MW: Enercon and REPower (RPWSF.PK)

What's Next?

As pointed out in the article linked to initially, I entered my positions in AAER at C$0.39 and C$0.38. In early January, I got the majority of the dollar value of my initial investment out at C$1.15. On the morning of the announcement, I wrestled with getting another chunk of my position out at C$1.80, but ultimately decided not to budge - this was a gamble and I lost it. However, at around $0.39 with the information that was available in March 2007, this looked to me more like a high-risk value play than like a gamble.

Reading through an AAER investor discussion board Tuesday afternoon, I came across the usual mix of anger and amazement. One fellow claimed he and his family had lost $70,000 (not sure whether it has been realized or not). Others, who had pulled the trigger right on time after the announcement and had still been able to get out with a fat profit, saw their trades expunged by the regulator and were later forced to accept significantly lower bids.

This episode speaks to the risks of investing based on a story alone. The AAER story sounded too good to pass to many people, and few folks bothered to figure out what the firm was worth without those Hydro-Quebec contracts. Beyond just a story, generally upward movements in this stock in recent weeks were driven by a single high-probability event, and this is where gambling instincts take over rational analysis.

For me, the main lesson from something like this is that it reinforced the importance of risk management. Risk is inherent to investing, and it is important to take at least some steps toward managing it. In this case, I applied the simplest possible form of risk management: I pulled my initial money out. The only cost of doing so, unlike using derivatives, is the opportunity cost of potential future capital gains - so it's in effect free. This was mentally difficult to do in this case, as it often is, and I am actually guilty of not pulling any money out the first time the stock peaked in October and November 2007. Like many other people, when I did a rough mental computation of what I believed to be the probability of AAER getting at least one of the contracts, I felt I would be surrendering a lot of upside by pulling out too early.

Many pure play alt energy stocks are either unprofitable or are profitable but trade at very high multiples. Like AAER, many of them also receive rich valuations based on nothing more than a good story. There is therefore a good chance that pure-play alt energy stocks will add at least some risk to a portfolio. If calls and puts aren't for you, a good idea is to set targets at which to exit part of a position to protect gain. The more something looks like a gamble rather than an investment, the more disciplined one needs to be about this and the lower the threshold should be.

As for AAER, I'm hanging in there for now. I like some of the progress that's been made to date, and I think their strategy of targeting community-based projects under 50MW, which are the projects that are having the toughest time getting any attention at all from the turbine majors, could pay off. There is no doubt that this firm's prospects look a lot less bright than they did a few days ago, and the C$7.5 m financing discussed above could be in jeopardy (or at least may be renegotiated). With the momentum crowd now gone, I don't expect this stock to shoot up again for an appreciable period of time. If you're still holding AAER and are not sure what to do, the question you have to ask yourself is: do I really want to own this business or was I just gambling? In the latter case, better get out.

DISCLOSURE: The author is long AAER

Posted by Charles Morand at 07:58 PM | Permalink | Comments (0)

Taking a study break, I happened to see an article in the Denver Post bringing together two of my favorite clean energy themes: Efficient transport, and wind power. Rail transport has become essential to delivering windpower across the country.

The full article is here: Rolling With the Wind.

Posted by Tom Konrad at 04:53 PM | Permalink | Comments (0)

by Tom Konrad

When I asked, Alternative Energy Stocks readers overwhelmingly wanted me to take another look at Composite Technology Corp. (OTC BB:CPTC.OB)  I've discussed CPTC several times over the last year, and consider it my most speculative pick in electricity transmission and distribution.  True to the nature of a speculative stock with no current earnings which is still trying to establish markets for its products, the stock price has been all over the map.

The reader interest is doubtless due to the recent sharp decline since mid January.  I personally sold a portion of my and client positions when the stock was in the $1.75-$2.00 range, and repurchased it for some accounts around $1.30 (including my own.)  These accounts are currently showing a loss of around 30-35%, not counting the gains taken last year.

I actually have not been watching the recent decline, but seeing the stock at $0.82 today makes me wonder: should I buy more?  Should I take a tax loss for those accounts that could use one?  Has something happened to make the stock look worse, or is the current decline just the effect of falling markets on what has always been a very speculative stock?

Those Pesky Banks

Two weeks ago, I was talking to a friend who acts as a CFO for small wind developers.  Unprompted, he mentioned that banks would not finance CPTC's DeWind turbines because of their lack of track record, which is a gigantic barrier to incorporating them in a US windfarm.  My friend made the same comment about  AAER Inc [TSE:AAE], a company which AltEnergyStocks Editor Charles Morand bought last year (He still owns it, and says he bought if for other reasons, but is not overly concerned about turbine financing.)  In general, I have not been paying nearly as much attention to CPTC's wind division, because I'm more interested in the transmission play, and I had assumed that, given the long backlog for turbine orders from major manufacturers, DeWind would find places to sell as many turbines as Westinghouse can manufacture for them.  This financing difficulty is not news to investors who have been following DeWind, but it raised the question of how many turbines they will be able to sell until they build more of a track record in such places as the Czech Republic.

However, since this is not news, it can't account for the stock's decline.  CPTC does seem to be making accepted progress towards getting these turbines tested and certified, which should do something to ameliorate banks' reluctance to finance DeWind turbines.  They are currently waiting on two reports from the National Renewable Energy Laboratory and the Department of Energy, as well as negotiating with insurance companies which would insure the turbines to allow bank financing.   

Uncertainty among investors as to the results of the DOE and NREL certifications are likely to be the cause of some of the decline.  This sort of uncertainty can feed on itself in down markets like the one we are currently experiencing, but that leads to buying opportunities for brave investors.

Latest Earnings Release

The Feb 11 December quarter earnings release certainly provides no explanation for the recent decline (although the decline began a full month before the release, so it would require the leak of insider information if it had.)  With revenues having doubled from the 2006 December quarter, and up 40% from the previous quarter, the expectation would be that the stock would also be up.  Both the DeWind and ACCC Cable divisions seem to be making headway towards broader market acceptance.

In contrast, operating cash flow for that quarter was almost $14 million in spending, mostly due to a large increase in inventory.  With cash on the books of only $11.5 million, their balance sheet looks weak, so failure to convert those inventories to cash could lead to a liquidity crunch in the coming quarters.  This might lead to a dilutive stock offering, which would probably be bad for current shareholders, unless it were in order to finance an increase in orders.

The company currently does not anticipate needing new cash until June, but seems determined to avoid further dilution if at all possible, mostly by relying on customer payments to fund inventory growth.  This adds both uncertainty, but also means that any gains are likely to be much more profound.

Conclusion

I like what I see.  The company has made considerable progress over the last year, and the stock is staying at the same price.  As the ACCC conductor begins to make a significant contribution to the bottom line, and its turbine certification continues as expected, the company seems likely to maintain current revenue growth rates.  At some point, barring too many unforeseen hiccups, investor greed sparked by rapid revenue growth should overcome uncertainty.

UPDATE: Shortly after publication, two readers pointed out that I'd missed the most likely cause of the sell off: selling by Millenium Partners, to pay an SEC fine.  All the more reason to buy, if the reason for selling has nothing to do with the company.  One of these readers gave the following detailed reasoning:

One issue that I noticed you did not cover is the selling by Merriman (Englander) of Twelve million shares to cover a 148 million fine by the SEC.  This can explain the dropoff in share price.  The market maker that handled the sale of the shares is ARCA, I believe.  If you notice, when ARCA appears to be off the ask, the stock has a tendency to go up.

Good enough for me.  I just bought some more.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CPTC.  Charles Morand owns AAE.

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 11:11 PM | Permalink | Comments (6) | TrackBacks (0)

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

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

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

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

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

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

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

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

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

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

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

#1 First Solar (Nasdaq:FSLR) $267

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted by Tom Konrad at 09:33 PM | Permalink | Comments (12) | TrackBacks (0)

When I first got wind (no pun intended) of Finavera Renewables (TSX:FVR or FNVRF.PK), I did not make too much of it because my view was that commercial exploitation of wave power - which is the banner under which Finavera has decided to promote itself to the investor community - was a few years away at best. Then, upon hearing that the company had managed to get a prototype in the water (PDF document), I decided to do a bit more digging.

After all, if the technology worked, the economics of the business model would closely resemble those of my uncontested favorite at the moment: wind power. Wave power also had the advantage of being more predictable than wind. With a proven technology, the firm could get itself into power purchase agreements, lever up to take advantage of the relatively lower cost of debt, and go on finding new sites to exploit while its existing operations generated steady cash flows. At some point in the perhaps not-so-distant future, the company could become an acquisition target, and yet more upside could accrue to equity holders. What's not to like for an investor who is in early?

Almost immediately I came across something that truly poked my interest: rights to develop wind assets in Germany, Ireland and the Canadian provinces of Alberta and British Columbia. Granted, there was no big secret here. This information was there all along for anyone who bothered to look. Finavera posted on its website research notes by two Canadian boutique brokerages that cover the stock: Haywood Securities and Dundee Securities (both PDF documents). Both notes confirmed my intuition at the time (this was in late October '07), namely that the bulk of near-term value rested with the wind projects, not wave energy. Although valuations differed, both reports had a much higher target than the C$0.40 the stock was trading at, and my own experience with renewables-focused Canadian independent power producers (IPPs) told me that they were likely right. I pulled the trigger and went long at C$0.40.

Shortly after, things turned ugly. First, Finavera's device sunk to the bottom of the ocean before tests were completed, compounding fears by environmentalists and fishermen that this idea may spell nothing but disaster for marine life. Second, when Q3 results (PDF document) came out, it became clear that things were a lot worse (PDF document) than just a sunken piece of steel and a few worried anglers: the company had a working capital deficit of C$4.1 million, it had to write down C$6 million in goodwill related to the very technology that had just sunk and on which it was banking its future, and it was abandoning its German wind farm plans, which would have generated much-needed cash in the near term. What's more, rough conditions in capital markets caused by the credit crunch prevented Finavera from moving forward with a critical round of financing.

The stock got killed, flirting with the C$0.10 mark. Ouch...but I hung on. Within a week, Finavera announced that it had secured about C$2 million in financing (down from C$23 million it was initially hoping to raise) and had restructured its board. New board members had weaker cleantech credentials but stronger acumen in financial and business matters. Not exactly great news but I decided to hang on until late December, when I was scheduled to get back from a trip to India - this would give me time to think things through, and it's not like I'd bet the house on this one anyways.

It was while sitting at a small internet cafe after visiting a tea plantation in Kerala that I got the good news: Finavera was at the center of the biggest ocean power news story I could recall. Shortly after, more good news came out related to the firm's wave power activities. Maybe there was value in wave after all. And this brings us to...

The reason why we selected Finavera as our #2 speculative pick for 2008. I still feel that viewed through the lens of a conventional valuation approach, wind is where most of the value lays. There is no doubt, however, that the succession of positive wave-related news has created something of a buzz, as evidenced by the stock rebounding to close at C$0.335 ($0.3371 in the US) on Monday on heavy volumes. Tom and I both agree that the PG&E deal could continue to generate significant investor interest in both wave energy and in Finavera in particular, and that the stock could see some strong upside as a result. I increased my position on Monday and my adjusted cost base now stands at $0.37. More good news on the wave front could spell good things for this stock in 2008.

There are, of course, a number of important caveats:

(A) Unless anything has changed, the company must still fill a working capital gap of around $C2 million. With 174 million shares outstanding, which is very large relative to sector comps (i.e. small earning-less IPPs), the risk of dilution looms large. On the positive side, the recent recovery in share price is good news from the point of view of seeking financing.

(B) Without the German wind farms, no company operation will generate revenue or earnings until 2009 at the earliest, which is assuming that Finavera can secure all the funding it needs to set up its Alberta wind farms. But liquidity is not the only thing in short supply at the moment; the market for wind turbines is currently incredibly tight and small wind farm operators are reportedly having a heck of a time getting their hands on turbines and turbine parts. Personally, I would feel reassured if I saw company management focus on executing on wind first, and worrying about wave once cash is coming through.

(C) Finavera wrote down all of the goodwill associated with its 2006 purchase of AquaEnergy (PDF document), which is how it initially got its wave technology. In fact, according to the company's Q3 2007 filings (PDF document), goodwill associated with the IP for the wave technology (called AquaBuOY) accounted for 97% of the value of all assets acquired in that transaction. While this write-down is more of an accounting formality than an indication that the technology is completely useless, as some may have thought, this still means that there were serious flaws and that Finavera's engineers must go back to the drawing board. In other words, this is not wind and the technology is far from ready for commercialization. Power purchase agreement or not, if Finavera wants to be a force to be reckoned with in ocean power it will have to have something to show for on the technology side before too long. Not to mention that if it doesn't soon the market will probably forget all about what just happened with PG&E and move on.

DISCLOSURE: Charles Morand has a long position in TSX:FVR.

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 09:47 AM | Permalink | Comments (1)

Investing in Renewable Energy Stocks seldom fails to be exciting, although it can lead to crushing losses as well as mouthwatering gains (Think Ethanol stocks and Thin Film Solar in 2007.)  With this in mind, I usually emphasize that the majority of most investors portfolios should be targeted towards larger, profitable companies, especially those focused on Energy Efficiency rather than the more sexy Renewable Energy technologies.  This is the philosophy behind Alternative Energy Stocks' Blue Chip Portfolio: companies which aren't sexy, but which still are well positioned to take advantage of rising oil prices and increasing efforts to reduce and regulation of Greenhouse Gas Emissions.

That said, a small exposure to even extremely volatile stocks can, if kept small, improve the risk-return profile of a portfolios, so long as those stocks are not overly correlated to the portfolio as a whole. 

Other people just like to gamble.   Given the vertiginous returns we have seen in the alternative energy sector recently (First Solar, NYSE:FSLR is up by a factor of ten in 2007,) it's a safe bet that this Alternative Energy has drawn more than our share of gamblers.

This article is for the gamblers (and a little bit for the cautious diversifiers.)  If you're a gambler, these are the gambles I would be taking.  If you're a cautious diversifier, you can consider using a few of these bets as a way to diversify your portfolio of bonds and energy efficiency companies, just keep it small (no more than a few percent your portfolio.)

In either case, be prepared to have any of these bets go wildly wrong, or succeed well beyond your expectations.  

Some Educated Hunches

Many people who see themselves as cautious diversifiers like to set aside a small part of their portfolio as "play money," which they can use without their normal portfolio discipline, to invest in something that makes them feel good.  I feel this is the wrong approach.  Emotional investing is a sure-fire way to stack the odds against yourself.  Even in risky assets, there are good bets and bad ones.

Especially when it comes to highly risky and emotive companies, I'm a great believer in Behavioral Finance, the theory that investors make the same mistakes over and over again because of the way our emotions are wired.  Roughly, this means that we all tend to invest in the same stocks at the same time because it feels good to do so (which means we buy precisely when the price is irrationally high) and sell the same stocks precisely when they're screaming bargains.

My favorite gambles therefore are stocks I think have the potential to be tomorrows feel-good fad, that is currently being ignored.  I call this gambling because it has very little or nothing to do with the underlying fundamentals, an a lot more to do with wild emotional swings of the retail investor.  While it is gambling, it has more in common with card-counting, than with slot machines.

Ten Gambles for 2008

I personally am more a cautious diversifier than a gambler, but I do have some gambler in me.  All the speculations below are ones I am taking with my own money, and some of them are also positions in client portfolios.  I don't see this as play money, but at the same time, I know that any of these gambles cold turn against us unexpectedly, and I keep the positions accordingly small.  In reverse order of my guess at their riskiness, here is the first installment detailing ten bets I'm currently making, and which I expect to pay off as a whole in 2008 (although individual stocks will undoubtedly be losers.)

#10 and #9: Cree, Inc. (NasdaqGS:CREE) $23.50, and Lighting Science Group (LSGP.OB) $0.32.

I've been invested in both of these for a long time, and last wrote about these LED stocks in June.  I sold half the holdings of many of my managed accounts  soon after that article when CREE was around $27-$30, about double the price at which I'd bought them.  Smaller positions in Lighting Science Group have followed a similar pattern, mostly due to buyout speculation in LED stocks, with only modest gains over the last year as speculation has died down.

Yet the fundamental reasons to be bullish about LEDs are stronger than ever.  This Christmas season was the Season of LEDs in more ways than one.  In my personal experience, I went to Target on December 15 to get another string to add to the ones I'd bought last spring, and found that they were totally sold out (although conventional lights were well in stock.)  I left empty handed, but I expect that Philips (NYSE:PHG - another holding), will report LED sales well above expectations this quarter.

Also, while solar stocks may suffer with tax incentives removed from the recently signed Energy Bill, the bill did contain a "Ban the Bulb" provision, phasing out incandescent lights by 2014.  Lighting Science saw a 20% jump the day it was signed, but it's still way down from its highs last summer, and Cree didn't budge.  It's true that most incandescent bulbs will probably be replaced with CFLs, but LEDs work better in several sorts of applications: they are dimmable, work better at low temperatures (such as in freezers), and are more tolerant of vibration.  Thus, the new law provides a practically guaranteed, large market.

I'll be surprised if both these stocks don't see significant run-ups sometime in 2008, and Lighting Science could easily see one soon after the New Year, due to the publicity they'll be getting in Time Square on New Year's Eve.  Most likely, we'll have to wait a little longer than that, but even without a run-up or buyout, I see these two as good long-term bets.

For hard-core speculators, one LED penny stock that you might look at is Cyberlux (CYBL.OB.)  Cyberlux was brought to my attention by a reader the last time I wrote about LEDs.  I looked into it again last week, but decided not to invest because of the large overhang of convertible debt.  In my analysis, it will be virtually impossible for long-term shareholders to profit because of the expected dilution due to the convertibles.  That does not mean that short term traders might not make a killing (or lose their shirts.)  For more on Cyberlux, go to this message board (run by the reader who brought the stock to my attention.)  There's a lot of information there, although I don't know if its accurate.

#8 Maxwell Technologies (NasdaqGM: MXWL) $8.10

Maxwell is a developer of ultracapacitors, which are currently used in wind turbines, utility power quality applications, and other industrial applications.  Wind should continue to see strong growth throughout the world, which should continue to help turbine component suppliers.

They also have the potential to be an important component for energy storage in Hybrid Electric and Electric vehicles.  Maxwell has recently announced a partnership with China's Tianjin Lishen Battery to manufacture hybrid powerpacks, which will combine the speed, long cycle life, and low temperature performance of ultracapacitors with the large energy storage capacity of lithium-ion batteries.  Readers and anyone who has seen one of my presentations already knows that I see energy storage as the best way to take advantage of the adoption of hybrid, plug-in-hybrid and electric vehicles.

The downside here is that Maxwell is currently in a large patent-infringement suit with private ultracapacitor company NessCap.  I find patent-infringement suits to be very unpredictable.  Maxwell filed the initial complaint in October 2006, and NessCap countersued in December.  A large negative earnings surprise last June and subsequent analyst downgrades further depressed the stock, possibly aggravated by tax-loss selling.  I see a good chance of a quick rebound in 2008, especially if the courts start ruling in favor of Maxwell, or the two companies reach a settlement. While negative ruling would hurt, they would be unlikely to destroy the company.

Maxwell's top-line revenue has been flat for over a year, so a large part of the recent price drop has likely been due to investor fatigue.  Nevertheless, insiders have been buying the stock on the open market, which I find reassuring with regard to internal confidence at the company.  Any significant uptick in sales volumes would likely bring with it a strong increase in the stock price.

Picks 4-7 are here, and Picks #1-3 are available here.

I decided to split this article into parts because the stocks I'm picking seem to be rising even as I write... I was clearly not the only person who has been thinking along these lines over Christmas...

Here's what has already happened to picks #8,9, and 10 on December 26, as I was writing:.

Cree jumps on American Technology Research Comments (up 10.7%); Lighting Science up 25%; Maxwell Technologies up 6%.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CREE, LSGP, PHG, MXWL, and a short position in FSLR.

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

Posted by Tom Konrad at 12:56 AM | Permalink | Comments (3) | TrackBacks (0)

Most alternative energy investors are aware of North American wind power's very bright growth prospects. In past articles, we discussed encouraging projections for the US and Canadian (PDF document) wind markets between now and 2015. While onshore European capacity is fast being exhausted, North America is only beginning its foray into wind and some major capex can be expected in this space over the coming years.

Besides solid expected growth, another phenomenon is currently impacting the wind industry; consolidation. This is a global movement that is affecting all of the power gen sector, and that has no-doubt been aided by easy credit in the past few years. Examples of recent deals in the North American wind industry include EDP's July, 2007 acquisition of Horizon Wind for $2.7 billion, and Suez' July, 2007 acquisition of Ventus Energy (PDF document) for C$124 million.

Playing Growth & Consolidation

Two of the most interesting ways to play growth and consolidation in the North American wind sector lay on the Canadian side of the border. They are two Independent Power Producers (IPPs) with attractive pipelines of projects, good forward-looking revenue visibility because of their exposures to Power Purchase Agreements (PPAs) with credit-worthy customers, and attractive take-over targets due to their size and the location of their generation assets. These two companies are: Boralex [TSX:BLX or BRLXF.PK] and Canadian Hydro Developers [TSX:KHD or CHDVF.PK].

Boralex

Boralex currently runs a generation portfolio totaling around 350 MW, with 103 MW of wind. Over the next five years, however, Boralex is expected to add another 690 MW of wind to its portfolio. Besides having access to PPAs, Boralex is also active in the US Renewable Energy Credits (RECs) market - in 2005 and 2006, respectively, one of the company's facilities in the US recorded C$8.1 million and C$6.2 million in RECs revenue alone. With 2007E EV/EBITDA of around 12x and 2007E PE of around 21x, Boralex is trading roughly in line with its comps. The company is geographically well-diversified, with operations in Quebec (one of Canada's hottest wind markets), Ontario, the Northeastern US and France.

Canadian Hydro Developers

At upwards of 60x 2007E PE and around 24x 2007E EV/EBITDA, KHD does not come cheap, either as a stand-alone stock or relative to industry peers. However, the company has a very attractive pipeline of wind projects across Canada, and valuations are expected to converge with industry averages over the next three years. Canadian Hydro currently has around 265 MW of generating assets with around 154 MW of wind. The company has a further 384 MW of wind currently under construction and a total project pipeline of about 1,400 MW - one of the most interesting such pipelines of any mid-size North American IPP. While KHD is an expensive buy at the moment, a lot of that has to do with all of the growth the firm is projected to undergo between now and 2010, as well as with a high amount of revenue visibility associated with high exposure to PPAs.

Two Of a Kind...

Both firms belong to a very rare breed - publicly-listed alternative energy generation pure-plays. While there are a number of similar companies listed on the Toronto Stock Exchange, most of them are income trusts with limited growth pipelines or small players with next to no track records. Both companies are increasingly on the radar of public market investors due their projected growth and to the fact that they are potential acquisition targets. Fundamentally-speaking, both look very attractive in the medium term (3 to 5 years) due to their extensive exposure to various schemes by Canadian provincial governments to boost wind generation capacity. These two companies really are, for all intents and purposes, two of a kind.

DISCLOSURE: The author is long Canadian Hydro Developers.

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 Jason Hamlin at 11:22 PM | Permalink | Comments (0)

Last week, Charles told us to expect wind power industry suppliers to benefit from shortages in wind turbine components. Owens Corning (NYSE:OC) which I mentioned in my Blue Chip Alternative Energy Portfolio fits nicely into this category with their composites for turbine blades, as do the power converter stocks I mentioned two weeks ago.

As essential to wind power as any of these is improved power transmission. The National Wind Coordinating Collaborative states,

Electrical transmission facilities connecting windy areas and load centers are sometimes non-existent or minimal. Even in cases where a good wind resource has nearby transmission, that transmission often has limited capacity to transport additional energy. In fact, transmission facilities throughout much of the country are strained, and this problem is acute at specific points of congestion. The expansion of wind power is hampered by this situation, but the associated problem is not confined to wind. Instead, it is a general problem of concern to many in the electric power sector.

While the need for long distance transmission often holds up the construction of wind farms for logistical reasons (there is no incentive to erect wind turbines if you cannot get the power to market), it is unlikely to prevent investment in renewables for financial reasons. The ERCOT Competitive Renewable Energy Zones Study found that the necessary investment in transmission for the high resource zones they identified in Texas ranged from a low of 1.5% to about 12% of the cost of the generation, which will only change the overall economics of any project in marginal cases. Some of these transmission improvements will also be likely to improve system reliability, and so the full cost is unlikely to be considered totally attributable to the wind projects.

As a less expensive but unavoidable investment for new renewable energy projects, transmission improvements are well positioned to be profitable investments in our energy infrastructure as the US shifts to more sustainable electrical supplies.

The FERC opens up Transmission

Politicians and regulators are beginning recognize the necessity of new transmission. This started with the Energy Policy Act of 1992 (EPAct), which opened access to the transmission grid to allow power to be delivered from one generator to another utility.  The Federal Energy Regulatory Commission (FERC) Order 888 laid out laid out the terms under which this was implemented. Order 888 fell short of providing the necessary incentives for investment in transmission and access for renewables, and in December of 2000, the FERC issued order 2000 and 2000-A which require transmission-owning companies under FERC's jurisdiction to file either proposals to form Regional Transmission Organizations (RTOs) or progress reports on the development of RTO proposals. RTOs will have sole responsibility for operation and expansion of the transmission system, maintaining short-term reliability, establishing and managing tariffs, and responding to requests for service.

The credible threat of RTOs in competitive bidding for projects acts as an incentive for utilities to stop delaying necessary investment in transmission, and make such investments quickly at the lowest possible costs.  This should benefit investors in the companies best able to build transmission efficiently and quickly.

Action at the State Level

My own Governor, Bill Ritter recently signed Colorado Senate Bill 100, which requires electric utilities subject to rate regulation to identify high-potential wind-energy locations by undertaking biennial reviews to designate “Energy Resource Zones��? where transmission constraints hinder the delivery of electricity. Texas passed a similar law in 2005, and, as a result, there are several competing proposals for transmission to bring wind power from Texas' remote, windy areas to where it is needed, such as the proposed "Panhandle Loop".

Transmission is not only necessary for large scale wind installation, it also goes a long way (pun intended) towards dealing with wind power's most oft-cited drawback: the wind seldom blows when you need it. Typically, the wind blows at night, and the overall capacity factor for most wind turbines is around 30%. But long distance transmission allows wind from different areas to be combined, allowing benefits similar to the diversification that we investment advisors are always pushing for our client's portfolios. The more wind farms that are built over a wider geographical location, the more reliable wind energy is, and it is transmission that ties it all together.

In the Great Plains, wind typically blows at night in the winter... but winter peak load in California is typically in the evening: due to the time difference, midwest winter wind is on-peak; a more robust transmission system will bring the power from where and when it is cheap to where and when it is needed. Minnesota has also passed enabling legislation to study and develop plans for transmission network enhancement to support Renewable Energy Standards.

In the United States, the grid is characterized by decades of under-investment, with the established operators having insufficient incentives to invest, and as a consequence, having until recently rested on their laurels, treating their existing transmission assets as a sinecure. Therefore, I expect the best investments to be those transmission owners who have shown the ability to upgrade their networks quickly and effectively, with the rest likely to lose out to upstart RTOs which will increasingly be able to win projects from incumbent utilities. There will also be a political aspect to these potential returns: states still have fairly broad authority to implement FERC rules, and the actions of state legislators in utilities commissions will undoubtedly have significant impacts on the decisions and profitability of building new transmission.<