Wind Archives


February 06, 2017

Broadwind Catches a Breeze

by Debra Fiakas CFA

Two weeks ago wind tower builder Broadwind Energy (BWEN:  Nasdaq) announced $28 million in new orders.  Plans are to deliver all the towers within the year, giving a nice boost to the top-line for a company that recorded $170.3 million in sales over the last reported twelve months, well below the same period the year before.  In addition to wind towers, the company produces gearing mechanisms used in the oil, gas and mining industries.  Unfortunately, demand from these customers has been weak in recent periods.

The company has had some difficulty in establishing a profitable business model.  Losses for Broadwind have been epic in size and by the end of the last full fiscal year 2015, the retained deficit had ballooned to $308.8 million.  However, the last two reported quarters carried a glimmer of hope for the company as both ended solidly in the black.  The two analysts who have published estimates for Broadwind expect the company to reach $184.7 million or $196.7 million in total sales (an average of $190.7 million) in the current fiscal year.  They are also expecting a profit, at least in terms of cash earnings, of $0.12 per share.

Broadwind has survived its many years by generating positive operating cash flows even when reported earnings were negative.  In the twelve months ending September 2016, the company converted 14.8% of sales to operating cash flow.  Performance could get even better going forward.  The company has a cost reduction strategy in place that is still expected to realize new efficiency in continuing operations.
The decision to jettison the unprofitable Services segment is also an important step toward a healthy business model.  Most of the assets related to the Services segment have already been sold by the end of 2015, but $513,000 still needs to be mopped up.  What remains of the Services segment resulted in a net loss of $908,000 in the first nine months of 2016.  

Broadwind remains a small company with many challenges in its markets, but the company has made considerable progress toward becoming a growing and profitable business.  The oil and gas industry has come through a difficult period.  With a change in political thinking in Washington DC, the tight and squeaky shoe may now be on the foot of renewable energy. 

Wind energy has made great strides over the past couple of years.  By the end of September 2016, there was 75,700 megawatts of wind power generating capacity installed in the U.S.  Wind now represents 4.7% of the total electricity generating capacity in the U.S.

It is not likely that even the myopic views on the environment and climate issues held by the Trump administration can reduce the installed presence.  However, new projects could be in jeopardy if capital flows dry up as investors shy away from sectors that seem out of favor in the Oval Office.  Thus even though Broadwind just got a boost in new orders for wind towers, investors should temper expectations.

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

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

November 30, 2016

SBM Offshore Trades Offprice

by Debra Fiakas CFA

The November 8th post “Trident Winds Floats a Plan for Morro Bay” described plans for one of the first wind energy projects off the western shores of the U.S.   Trident has perfected new technologies for a floating platform that makes possible the location of wind turbines in areas where ocean depths prohibit conventional wind turbines towers anchored to the sea floor.  Investors interested in wind energy technology do not have to wait for Trident to prove out to get a stake in ‘floating offshore’ wind energy. 

Based in Europe, SBM Offshore (SBMO:  AEX) is a leader in the market for Floating Production Storage and Offloading platforms (FPSO).  The company is part of a consortium of electric utility and technical firms to win a contract from the French government to build and operate a pilot floating wind farm.  SBM Offshore will supply its proprietary floating system.  Three Siemens 8-megawatt turbines will be installed on the platforms.  The project is one of four being supported by French government programs, which have identified floating wind turbines as key to renewable energy production for France given the great ocean depths around the country.

Shares in SBM Offshore give an investor more than a stake in offshore wind.  Indeed, floating platform solutions are among the newest seaworthy products offered by the company.  SBM Offshore has a lengthy history in deep water infrastructure with swivel stacks, turret mooring systems, semi-submersibles, and well-head platforms.  The company has been in business continuously for over 150 years under various names and product lines.

The company reported $2.6 billion in total sales in 2015, providing $24 million in net income.  Sales and earnings were off in the year compared to the previous year as low crude oil prices hobbled order patterns by its oil and gas industry customers.  Backlog declined 13% in 2015.  Unfortunately, as the year 2016 has unfolded, things have not improved.  The company reported $936 million in sales and $38 million in net income in the first six months of 2016, marking an even deeper decline in fortunes for SBM.  Cultivation of new markets for SBM’s unique expertise in deep ocean conditions could be a salvation for the company weakened top-line.

The stock price has followed revenue down the mountain.  The stock, which trades in the Euro on the Amsterdam exchange, has declined by 54% from its historic high price of Euro 30.32 in July 2007.  The stock has been so weak, SBM leadership decided to use excess cash to repurchase shares with up to Euro 150 million.  As of mid-November 2016, repurchases valued at approximately Euro 108 million had been completed.  The repurchase program seems to have put a strong line of price support about 25% below the current stock price, suggesting there is a floor but its represents a significant downside risk for investors one the share repurchase has run its course.

Despite these near-term trading issues, SBM Offshore is an interesting company to watch.  Even the most modest turnaround in its established deep water solutions or progress with the new offshore wind business would be a plus for the stock.   When the recovery is imminent, the smart investor could do well buying the stock ‘offprice.’

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

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

August 02, 2016

Offshore Wind Blows Into The US: Seven Stocks To Catch The Breeze

Tom Konrad CFA

The Growth of Offshore Wind

Offshore wind has finally gotten a toe hold in the United States.  

The United States' first offshore wind farm, the 30 megawatt (MW) Block Island Wind Farm, is under construction.  A new project, the South Fork Wind Farm will be  three times the size of Block Island (90 MW), is set to be approved by the Long Island Power Authority.  This project will be located 30 miles East of Montauk, NY and Southeast of Block Island in a wind energy area designated by the federal Bureau of Ocean Energy Management (BOEM.)

BOEM also recently designated 81,130 acres of outer continental shelf off New York's Long Island and New Jersey as a new commercial wind energy area.  This area's proximity to some of the nations' most expensive and capacity constrained parts of the nations' electric grid make it an excellent site for relatively expensive but abundant offshore wind energy.

Both are projects of Deepwater Wind, the country's leading offshore wind developer.

Offshore Wind Stocks: Over The Horizon

Investors looking for a way to invest in offshore wind will be disappointed to note that Deepwater Wind is principally owned by the D.E. Shaw group, a privately held partnership.  The best investment opportunities in offshore wind stocks are, like offshore wind itself, often located beyond the horizon.

One place to look for stock market investments are the suppliers to wind farms.  Offshore wind turbine suppliers are a natural first choice.

GE (NYSE: GE) is supplying the turbines for Block Island Wind.  Again, this will be a little disappointing to stock market investors.  While GE is a publicly traded company, offshore wind turbines are not a significant part of its business.  The company's Renewable Energy segment accounts for less than 20% of total revenue, and offshore wind is a tiny fraction of that.

Offshore wind turbines tend to be larger and more rugged than their onshore counter parts.  The large size is due to the expense of foundations, making it important for an offshore farm to generate as much power as possible from each turbine.  A typical onshore wind farm uses turbines with peak power output of around 2 MW each.  Block Island is using just five 6 MW turbines.

These large sizes make it difficult for new entrants to challenge established manufacturers.  This means that offshore wind manufacturers a very elite bunch.  This is good for offshore wind investors because it means that industry incumbents (which are often public) are likely to remain leaders for far into the future.  But it is bad for investors looking for a pure-play exposure to offshore wind.  Offshore wind turbine manufactures simply do not exist without a large onshore wind business to support the investment in manufacturing and R&D.

Most wind turbine manufacturers serve both the onshore and offshore market, but the ones with the biggest names in offshore wind are European players Siemens AG (OTC:SIEGY) and Vestas (OTC: VWDRY). 

It's not particularly surprising that European manufacturers lead the offshore wind turbine market, since Europe has long been the leading offshore wind market.  Because offshore wind sites are almost by definition accessible by ship, I expect that the early dominance of European offshore wind manufacturers will prove to be more durable than the early dominance of European solar manufacturers proved to be in the early 2000s.


Another way offshore wind is different from its onshore cousin is the need for underwater electrical connection to shore.  Again, investors will not find pure-play offshore wind companies, but underwater cables need to be strong and durable enough to survive decades under salt water and the occasional encounter with a ship's anchor or other submarine hazard.

Submarine cables are expected to be the fastest growing segment for electrical cable manufacturers over the next five years.  US-Based General Cable (NYSE:BGC) and European Prysmian S.P.A. (OTC:PRYMF) both have large submarine cable businesses.

Owners and Developers

No article on offshore wind stocks would be complete without a mention of Danish energy giant Dong Energy A/S (Copenhagen:DENERG.)  Dong is a diversified energy developer and utility with a focus on sustainable energy.  The company has long pioneered new offshore wind technology, and is a leading European developer.


Much of the investment in offshore wind is under the surface of the water, in the foundations.  Constructing these giant, incredibly strong structures under windy seas is also a technical feat requiring specialized equipment.  Holland's Sif Group (Amsterdam: SIFG) is the leader in this market, where it gets approximately two-thirds of its revenue.  This makes Sif the closest thing to a pure-play offshore wind company available.  The balance of its revenue comes from foundations for oil and gas.


Offshore wind is a rapidly growing and exciting form of renewable energy, and the established industry leaders have wide moats protecting them from startup competition.  This combination means that current leaders are likely to continue to lead, but it also means that pure offshore wind exposure is difficult, if not impossible to find.  The only stock that is more offshore wind than anything else is Sif Group, and that company's exposure to oil and gas may be too much for some investors excited about renewable energy.

This article was first published on GreenTech Media on July 19th.

Disclosure: Tom Konrad manages and invests in The Green Global equity Income Portfolio, which owns BGC.

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.

July 07, 2016

Broadwind: Major Order, But Still Looking For The Right Size

by Debra Fiakas CFA

Last month wind tower manufacturer Broadwind Energy (BWEN:  Nasdaq) announced a major new tower order from a major U.S. wind turbine manufacturer. The customer was not named, but the likely suspects are not hard to round up.  General Electric (GE:  NYSE) is the largest U.S.-based wind turbine producer with about 9.1% of the total world market according to BTM Navigant, an industry research firm.  While substantially smaller in size, Northern Power Systems, PacWind and Xzeres are also important competitors in the wind energy industry.   Clearly General Electric as a customer has the greatest financial strength and therefore more credibility  -  two traits that have been in short supply at Broadwind of late.

The company’s current chief executive officer, Stephanie Kushner was recently promoted to the post from the position of chief financial officer, a position held since 2009.  No new CFO has been named.  Broadwind also recently announced the resignation of the controller and intentions to “consolidate corporate financial functions.”  The C-suite at Broadwind is not well populated these days, leading some shareholders to question leadership and direction.  The big new order helps calm critics.

Valued at a total of $137 million, the recent wind tower order calls for deliveries over a three-year period ending in 2019.  That means roughly $45 million in additional revenue per year  -  a major win for the company.  In the twelve months ending March 2016, Broadwind reported a total of $196.7 million in total sales.  Thus the new order represents a 23% increase in incremental annual sales.

Broadwind reported a net loss of $10.1 million in the twelve months ending March 2016.  However, EBITDA (earnings before interest, depreciation and amortization) was near breakeven at $111,000 and operations generated $13.1 million in cash flow.  Barring poorly negotiated margins on the new contract, Broadwind should be able to at least post positive EBITDA if not a net profit as the company works through the new contract.  There is only a single analyst with a published estimate for Broadwind.  Surprisingly, that analyst reacted to the new contract announcement with even deeper quarter losses than before in 2016, as well as a deeper loss in the year 2017.

The forecast reduction was not encouraging for shareholders, but most appear to have shrugged off the opinion of a single analyst.  The stock had already been on an up-trend since February 2016, riding the wave of renewed interest in U.S. equities.  The stock gapped higher on the new contract announcement in early June 2016, but has since given up the entire gain.   

As encouraging as new business appears, the fact that Broadwind has not found an operating configuration that produces profits is of far greater concern.  The company recently decided to divest of its services division, retaining the towers and weldments businesses.  Eliminating the unprofitable services division will be beneficial, but it will not fix the problems in the remaining business that is also unprofitable.  Five years ago the company initiated a restructuring plan to right-size its manufacturing base and reduce fixed costs.  Two production facilities were idled and 10% of the workforce was laid off.  The efforts have led to positive cash flows in continuing operations, but net profitability remains elusive.  Indeed, the gross profit margin shrank to 9.2% in the year 2015.  

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

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

February 11, 2016

Gamesa Blows Siemens a Valentine

by Debra Fiakas CFA

Spain’s wind turbine manufacturer, GAMESA Corporation (GTQ1: Berlin; GAM: Madrid; GCTAF: OTC/PK), has been under pressure lately to spread profits over a hefty debt load.  The November post entitled The Wind in Spain is Mostly in GAMESA, noted the expanding product line and building customer base.  Backlog at the end of September 2015 was 3,034 megawatts, representing a 43% increases over backlog a year ago.

Robust sales and higher profit margins have generated strong cash flows and GAMESA has been able to pay down debt.  During the first nine months of 2015 the company used Euros 238 in cash to reduce net debt to Euros 70 by the end of September 2015.  Still the debt burden had been an issue for GAMESA as principal payments on notes and bond are coming due.  However, in December 2015, GAMESA announced an extension of the expiration date to January 2021, for its Euro 750 million syndicated loan facility.

Thus last week, with the pressure off on the debt front, it was a bit of a surprise to see news that GAMESA has been discussing a possible merger with Siemens AG (SIEGY:  OTC/PK, SIE: DE).  Siemens has extensive interests in the renewable energy sector as well as electricity generation infrastructure.  Folding GAMESA’s wind power business into Siemens would create the largest wind turbine company in the world, surpassing Vestas Wind Systems (VWS: Copenhagen or VWDRY: OTC/PK), which is now in the number one spot with about 12% market share, and General Electric (GE), which now appears to be neck and neck with Siemen’s for the number two position, each with about 9% to 10% market share.  A clear market leadership position might give Siemen’s a competitive boost.

Siemens would have much to gain in the deal.  The German giant would get GAMESA’s diverse product line of wind turbines as well as access to GAMESA’s installed base of wind power generation projects.  The November 13th post noted GAMESA’s recent introduction of a new 2.5 megawatt turbine for low winds earlier in the year.  The first turbine in a 3.3 megawatt family was launched at the European Wind Energy Association event in Paris in late November.  The turbine like most of GAMESA’s product line is intended for locations on-shore.  This might be a favorable complement to Siemen’s roster of wind turbines that are mostly used at off-shore sites.

GAMESA’s installed base of wind turbines might be the more interesting to Siemens, which does a fair amount of business through service contracts with energy infrastructure owners.  Siemens, with its strong reputation for quality and reliability of service, might fare will in winning GAMESA customers to long-term maintenance contracts that would drive a tidy flow of recurring revenue and profits.

Of course, GAMESA has much to gain as well.  As a part of a much larger company, GAMESA would have easier access to lower cost capital.  Additionally, Siemen’s has so very many good friends in the energy industry.  In the wind turbine market, GAMESA competes within a large pack none of which have more than 5% of market share.  The GAMESA-Siemen’s tie-up could make an imposing presentation with a broad product line, unparalleled service capability and deep bench of wind power generation expertise   -  a compelling circumstance for GAMESA sales reps.     

The validity of the Siemen-GAMESA merger discussion is likely to be proven out in the next couple of weeks.  GAMESA shares have already reflected new interest in the stock.

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. AMRS is included in Crystal Equity Research’s Beach Boys Index of companies developing alternative energy using the power of the sun.

November 17, 2015

The Wind in Spain is Mostly in GAMESA

by Debra Fiakas CFA

In the second week of November 2015, GAMESA Corporation (GTQ1: Berlin, GAM: Madrid, or GCTAF: OTC), Spain’s wind turbine manufacturer, reported double the net profit in the nine months ending September 2015, on revenue that was 30% higher than the same period last year.  During the period GAMESA has received orders from customers in twenty-five different countries for wind turbines with generating capacity of 2,841 megawatts.   Backlog at the end of September 2015 was 3,034 megawatts, representing a 43% increases over backlog a year ago.  At a time when some companies are struggling amidst weak demand, GAMESA’s success stands out.

Part of GAMESA’s good fortune appears to be the result of an expanded product line.  The company introduced a new 2.5 megawatt turbine for low winds earlier in the year.  The first turbine in a 3.3 megawatt family is to be launched at the European Wind Energy Association event in Paris in late November.  The broader selection of size seems to have given GAMESA better reception in markets like Canada, South Africa and northern Europe, where onshore wind energy projects are underway.

GAMESA has a solid presence in the U.S. market with an installed base of 4,150 megawatts across the continent.  Sales the U.S. accounted for 15% of total sales in the first half of the year.  The company’s most recent sale in the U.S. was for a wind project in New York to will rely on thirty-seven of GAMESA’s 2.1 megawatt turbines to generate 78 megawatts of total power.  GAMESA also has a joint development agreement with renewable energy giant SunEdison (SUNE:  NYSE) to jointly develop wind projects totaling at least one gigawatt of power.

Strong sales and higher profit margins have generated strong cash flows.  GAMESA has been able to pay down debt.  During the year the company has used Euros 238 in cash to reduce net debt to Euros 70 by the end of September 2015.  Management’s focus on deleveraging the balance sheet has not left shareholders in the cold.

The company recently reinstated a dividend and pledged to pay out 25% of profits.   The company paid Euros 23 million to shareholders in the September quarter.  The current forward dividend yield of 0.6% may not be impressive, but it is encouraging that the company has been able to reinstate a dividend.

Taking a position in GAMESA by U.S. investors requires stepping out to the Madrid or one of the German exchanges.  Most U.S. brokers have layered on sufficient platform services to facilitate trading securities in listed on exchanges in outside the U.S.  A position in GAMESA gives shareholders a stake in a leading wind turbine manufacturer with sufficient strength to serve the world market.  The stock has moved higher in the year and is not the beaten down bargain it was a few months back.  However, the stock is still trading at 25 times trailing and 19 times forward earnings, representing potential upside of 38% even without valuation expansion.  

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

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

November 03, 2015

Pattern Energy Investors Enjoy The Breeze

by Debra Fiakas CFA

This week Pattern Energy Group’s (PEGI:  Nasdaq), the independent wind power generator, is scheduled to report sales and earnings for the quarter ending September 2015.  The company has cultivated a strong following among analysts for a company its size.  Nine estimate contributions have gone into a consensus estimate of $87.2 million in sales for the quarter, resulting in a net loss of a penny per share.  If achieved the sales hurdle would represent 22% growth over the same quarter last year.  A penny loss may not seem impressive, but it is substantially better than the $0.15 loss the company posted last year for the third quarter.  Indeed, the consensus estimate for the next quarter and next year suggests the company is poised to reach profitability for 2015 and then take off on a run into the next year to potentially reach 40% sales growth and tripling earnings.

Pattern Energy operates fourteen wind power facilities across the U.S., Canada, Chile and Puerto Rico.  Another two facilities are under construction.   With exotic names like Logan’s Gap Wind in Comanche County, Texas and Lost Creek Wind in DeKalb County, Missouri, the wind power sites have a total capacity to generate 2,282 megawatts.
Far away from the windy stretches where its wind turbines spin out electricity, Pattern Energy’s management team is installed in offices at San Francisco’s historic Embarcadero.  Most members hail from Babcock & Brown, the Australia-based investment and advisory firm that went bust during the financial crisis in 2009.   The post mortem for Babcock & Brown suggests it was poorly run, with little regard for prudent leverage or risk management practices.  Reportedly, the Wind Group at Babcock & Brown was central to the problems, paying out substantially more dividends than was earned as operating cash flow.  While normally prohibited, such excessive payments were made by setting up the Wind Group in an off-shore ownership structure.  The ruse allowed Babcock & Brown to portray the company as highly profitable so the company could borrow more from banks as well as pay out management fees and bonuses to senior executives.

According to its financial reports, Pattern Energy recorded $266.6 million in total energy sales in the twelve months ending June 2015, resulting in a net loss of $33.2 million.  However, operating cash flow in the period was positive $98.2 million and the company closed out June with $82.9 million in cash on the balance sheet.   Cash generation is all important, as power generation is a capital hungry business.  Capital investment has averaged over $290 million per year over the past three years.  Dividends are also a drain on cash.  The company is slated to pay out $1.45 per share in dividends over the next year, requiring at least $108 million in cash to cover checks to shareholders. 
To keep things going Pattern Energy has put on some leverage, bringing total long-term debt to $2.0 billion at the end of June 2015.  The company has also sold common stock, raising approximately $867 million over the last three and a half years.   

Investors have been squirming under the added risk associated with higher leverage as well as the specter of losses during the last year.  PEGI began trading downward in mid-July 2015 when the rest of the U.S. equity market took a nose dive.  With a beta of 1.04 we would expect a decline commensurate with the broader market.  However, PESI has not recovered with the rest of the market, leaving the stock price closer to its 52-week low price than it is to the high price. 

For investors who are content with management’s performance and trust financial strength of the company, the depressed stock price is appealing.  The current dividend yield is 6.8%, a yield that could deliver a pleasant breeze to investors’ portfolios.

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

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

June 05, 2015

Making the Most Energy from the Wind

Better technology is allowing some wind farm operators to get more out of their existing wind farms by completely repowering the farm - replacing old technology with new - or by conducting performance upgrades on their turbines.

Jennifer Runyon

There is an old piece of wisdom that states: "If it ain't broke, don't fix it." But some wind farm operators, especially in Germany and North America, are finding that advice difficult to heed. That's because technology improvements in turbines coupled with software analytics are revealing that signing up for a performance upgrade could allow them to squeeze even more wind energy - and money - out of existing wind farms.

Replacing Old Technology with New

According to the recently released Global Wind Report by the Global Wind Energy Council (GWEC), "Repowering has become a billion euro market." The report shows that in Germany 544 wind turbines with a combined capacity of 264 MW were taken offline in 2014 and replaced by new turbines with a capacity of 1000 MW.

The Vestas V100-1.8 MW turbines at Macho Springs Wind Farm in New Mexico, USA. Credit: Vestas.

While repowering "has not become a very substantial market yet anywhere besides Germany, the potential is huge," said Steve Sawyer, GWEC's president and CEO. "Especially in places like California, Denmark, Germany, even in India where a lot of the best wind sites are now occupied by, in some cases, comically ancient machines that look like they belong in a museum," he said. Sawyer predicts there will be much more action in the re-powering market in the coming years.

Performance Upgrades

It isn't only old technology that is being upgraded, however, sometimes turbines that have been in the field for just four or five years are candidates for an upgrade.

Navigant Consulting's Jesse Broehl is one of the authors of the recently released World Wind Energy Market Update 2015 published by BTM Navigant. He explained that wind performance upgrades are a recent development where major turbine vendors such as Vestas [VWDRY], Siemens[SIEGY], and GE[GE] (the number 1, 2 and 3 suppliers in 2014, respectively) among others "are looking for every opportunity that they can to diversify their revenue stream and increase their income beyond just turbine sales," he said. Broehl explained that performance upgrades are taking place on relatively young turbines. He pointed to a deal in which EPD purchased GE's PowerUp package for 402 turbines spread out over 5 different wind farms. "Maybe those [turbines] are 4 or 5 years old. Probably in that range, maybe even newer," he said.

Ken Siddall, Director of Service Technology Americas at Siemens said that his company offers its modifications and upgrades packages on turbines that are as little as two years old. He explained that upgrades span the entire power curve. "In low-wind situations, we've got a reactive power offering. In the ramp of the power curve, as the wind speeds are coming up, we offer a power-curve upgrade kit, at the top, at full winds, we can offer a power boost to customers with certain turbine models," he said. Siemens also keeps customers informed about available upgrades to its existing fleet of turbines. "Every year or so Siemens launches new turbines with new upgrades or enhancements for improved power performances and as much as we can we try to bring those back into the existing fleet that's already out there," he explained.

Development of the annual installed and cumulative capacity (MW) of land-based wind energy in Germany including repowering and dismantling as of December 2014. Source: Platts Power Vision 2015. Credit: GWEC's Global Wind Report.

Wille Mildebrath, Product Manager at Vestas likened power performance upgrades to customization on a car. "With traditional maintenance, [you would, for example] change the gear oil," he said, adding, "you could also do customization of the car and that's what we're doing with performance upgrades." Mildebrath said that Vestas works with customers to do anything it can to customize and optimize the turbines that are already installed in the field.

Vestas performance upgrades take place after the company, in partnership with the wind farm owner, has conducted "a site specific analysis of that turbine to make sure we understand which upgrade or upgrades would be best." Vestas offers a product suite called PowerPlus, which encompasses power upgrades, extended cutouts, and aerodynamic upgrades, said Mildebrath. "Power upgrades and extended cutouts are most effective on high wind sites, and aerodynamic upgrades have the most impact on low wind sites," he explained. To date, Vestas has sold PowerPlus upgrades for more than 1,300 wind turbines - less than a year after its public launch.

Data collection and analysis of turbines in the field is a big part of both Vestas' and Siemens' offerings. It's that data analysis that helps Siemens know when it is best for customers to entertain the idea of implementing these modernizations and upgrades. The company is constantly monitoring its entire fleet of turbines, according to Siddall "gathering terabytes of data from all of our turbines onshore and offshore."

Software plays a big role in upgrades. Improving the software that controls the turbine "is probably the largest part of these performance upgrade packages," said Navigant's Broel. He said that better algorithms are able to improve "how the turbine operates and how it reacts to the wind environment it is experiencing."

Attractive Costs

Since the money to perform an upgrade often comes from a wind farm owner's O&M budget, rather than the capital expenditure budget, OEMs have made doing them quite enticing. "Vestas PowerPlus is basically free for customers to install," said Mildebrath. The customer pays for the additional energy produced through a revenue share arrangement that is worked out before the upgrade is installed.

DinoTails can be installed directly on the rotor blades of existing wind turbines. Credit: Siemens.

The offshore Wind Farm Horns Rev in Denmark uses Siemens turbines. Credit: Siemens.

GE has a similar arrangement, said Andy Holt, general manager for global projects/services, GE Renewable Energy. "Our customers pay very little upfront costs to implement our PowerUp services platform," he explained adding that GE only profits if its customers do. Siddall said that Siemens has a profit split arrangement where the company shares in any increased revenue they might get from the upgrades.

How much more revenue are they going to get? That is dependent on a lot of factors of course, including wind conditions, which upgrade was specified, the site itself etc. However, Siddal, Holt and Mildebrath said that a 5 percent increase in annual energy production (AEP) is a good target. "Up to 5 percent AEP increase is not uncommon," said Mildebrath.

One Note of Caution?

With no upfront costs, performance upgrades seem to offer what everyone wants: the opportunity to gain more revenue from an existing asset. However Navigant's Broehl offers one word of caution. "Basically if you run your turbine harder then there might be a compromise on its end-of-life use," he said. "You might be taking away years on the back end in order to get that up-front increased performance." Broehl cautioned that a tax-equity investor who plans to exit the deal after a certain rate of return has been reached, say in 10 years, and a different organization that will own the wind farm once that investor has left, may have differing financial motivations. "It's a little bit like how you might prefer to buy a used car from the retirees down the street instead of from a college student," he said.

Nevertheless, most OEMs are committed to a long-term relationship with their customers. Siddall talked of the 10- and 15-year O&M contracts that Siemens makes with its customers. It seems that any risk of prematurely wearing out a turbine could be mitigated with the right kind of contract in place. "We take a long-term approach to this," Siddall said.

Jennifer Runyon is chief editor of and Renewable Energy World magazine, coordinating, writing and/or editing columns, features, news stories and blogs for the publications. She also serves as conference chair of Renewable Energy World Conference and Expo, North America. Formerly, she was the managing editor of Innovate Forum, an online publication that focused on innovation in manufacturing. Prior to that she was the managing editor at Desktop Engineering magazine. In 2008, she won an "Eddy Award" for her editing work on an article about solar trees in Vienna. In 2010, was awarded an American Business Media Neal Award for its eNewsletters, which were created under her direction. She holds a Master's Degree in English Education from Boston University and a BA in English from the University of Virginia.

This article was originally published on, and is republished with permission. 

April 20, 2015

Investing in German Wind Power

By Jeff Siegel

When it comes to understanding the EU, I'm not the brightest star in the sky.

And to be honest, after stumbling down a rabbit hole of proposals, directorates, and laws on the European Commission's website, I was even worse shape than before I started.

The European Commission is the EU's executive body that represents the interests of the EU as a whole. And just yesterday it made a decision that will result in a huge boost for wind energy in Germany.

Germany's 7 Gigawatts are Coming

So as many in the renewable energy game know, following the Fukushima disaster, Germany decided it wanted to put the kibosh on its fleet of nuclear power plants. In its place, the Germans would build out their wind energy capacity to make up most of the difference.

This is actually a pretty lofty goal, and of course it was heavily criticized by nuclear apologists and fossil fuel-powered knuckle-draggers. But you know, Germans tend to be a pretty industrious group of people, so I've never doubted their ability to get this done.

What I didn't realize, however, was that because the investment necessary for this wind energy development was so massive – about 30 billion euros – the European Commission would have to ensure that it didn't violate any state rules.

Yesterday we got word that the Commission has given Germany the go-ahead to proceed.

Here's a clip from the Commissions press release on the matter …

Brussels, 16 April 2015

The European Commission has found that German plans to support the building of 20 offshore wind farms are in line with EU state aid rules. Seventeen wind farms will be located in the North Sea and three in the Baltic Sea. The Commission concluded that the project would further EU energy and environmental objectives without unduly distorting competition in the Single Market.

In October 2014 Germany notified plans to support the construction and operation of several offshore wind farms. Aid would be granted to operators in the form of a premium paid on top of the market price for electricity.

The size of each wind farm ranges from 252 megawatt (MW) to 688 MW and, in total, the projects will make available up to 7 gigawatt (GW) of renewable energy generation capacity. The total investment costs amount to € 29.3 billion. All wind farms are planned to start producing electricity by the end of 2019 at the latest. In total, they are expected to generate 28 terawatt-hours (TWh) of renewable electricity per year amounting to almost 13% of Germany's 2020 scenario for renewable energy given in the National Renewable Energy Action Plan (NREAP).

The Commission assessed the projects under its Guidelines on State aid for environmental protection and energy that entered into force in July 2014 The Commission found that the projects contribute to reaching Germany's 2020 targets for renewable energy without unduly distorting competition in the single market. In particular, the Commission verified that the state aid is limited to what is necessary to realising the investment. The rates of return that investors would achieve thanks to the premium were limited to what is necessary to implement each project and in line with rates previously approved by the Commission for similar projects. The Commission also took into consideration that these projects will enable new electricity providers to enter the German generation market. This will have a positive effect on competition.

Now Siemens (OTCBB: SIEGY) is the king of the castle when it comes to offshore wind turbines in Germany. Sadly, in the U.S., it only trades on the pink sheets now. But hardcore renewable energy investors are rarely scared off by pink sheets. Particularly pink sheets with market caps of $94 billion, like Siemens.

Of course, with such a huge undertaking – about 7 gigawatts of wind power – this will only add further momentum to the wind industry in general. Certainly GE (NYSE: GE), Vestas (OTCBB: VWDRY), and ABB (NYSE: ABB) will enjoy some residual momentum. Rising tides to indeed lift all boats.

Of course, with the Dow down about 325 points right now, I suspect few investors are too giddy over this news. But looking at this development from a long-term perspective, yesterday's announcement from the European Commission was a pretty big deal, and we'll be wise to invest accordingly.

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

March 21, 2015

11 Wind Energy Stocks for 2015

By Jeff Siegel

Something doesn't add up here...

A recent Energy Department report has suggested that wind power will be cheaper than natural gas-generated power within 10 years. And that's without a federal tax incentive.

Sounds good. Certainly I love hearing about renewable energy competing with fossil fuels in the absence of subsidies.

Yet here's the weird thing...

While the DOE report states that wind can be the cheapest, cleanest power option in all 50 states by 2050, the Obama administration is pushing to not just renew the wind energy production tax credit but actually make it permanent.

That's the problem with those pesky subsidies: Once they appear, they're hard as hell to get rid of. Certainly that's been the case for the nuclear industry, fossil fuels, and farm subsidies.

I would hate for the same to happen to renewables.

A Shot of Steroids

Understand, I'm not anti-wind. In fact, I'm very much pro-wind, as wind power has proved to be a valuable component of our energy economy. In fact, in some states, wind is a major player.

The state of Kansas gets 19.4% of its electricity from wind. South Dakota gets 26%, and Iowa gets a whopping 27.4%. Also worth noting is that Texas now boasts enough wind generation to power more than 3 million homes.


Still, on a national level, wind only represents a little more than 4% of our overall power generation. So if the DOE believes it could be as high as 35% by 2050 — well, that's some serious growth potential.

Now, I'll be honest...

I tend to be skeptical of DOE reports in general. Not because I think something shady is going on (although there's certainly an argument to be made for that) but because the technological progress that has launched the renewable energy industry into mainstream status is rarely figured into the department's equations.

Which makes sense. Certainly you can't quantify something that doesn't yet exist.

However, if we look at how quickly solar and wind technology has advanced over the past 10 years and then look at how quickly it's going to advance over the next 10, I don't think a 35% share is out of the question — especially when you consider that coal will provide less and less along the way. Natural gas and renewables are certain to fill the void.

Now, while I'm not a fan of subsidies for any form of energy — this includes nuclear and fossil fuels — I do know that if the wind energy industry gets a bone thrown its way this year in the form of a long-term extension of the production tax credit, you can be sure the growth in wind will get a serious shot of steroids.

Of course, that being said, even if the wind energy industry is kept away from that big trough of tax dollars that feeds every other energy industry, it will continue to gain ground — albeit not as fast.

How to Play it

For investors, there are a few ways to play the wind energy market.

The most obvious is through wind turbine manufacturers. The main publicly traded players here are:

  • GE (NYSE: GE)
  • Siemens (OTCBB: SIEGY)
  • Gamesa (OTCBB: GCTAF)
  • Xinjiang Goldwind Science & Technology (OTCBB: XJNGF)
  • Nordex (OTCBB: NRDXF)
  • Suzlon (NSE: SUZLON)
  • Vestas (OTCBB: VWDRY)

You can also invest in wind farm developers, most of which come in the form of yieldcos and are rarely pure plays on wind, as many also include solar assets. Some of these include:

  • Hannon Armstrong Sustainable Infrastructure (NYSE: HASI)
  • TransAlta Renewables (TSX: RNW)
  • Pattern Energy Group (NASDAQ: PEGI)
  • Abengoa Yield (NASDAQ: ABY)
  • Brookfield Renewable Energy Partners (NYSE: BEP)

Say what you want about the integration of renewable energy, but there's no doubt that wind power is a cat that will never get back into its bag. It's a valuable source of power generation all across the globe, and its growth in the U.S. will continue — with or without government support.

To a new way of life and a new generation of wealth...


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

January 09, 2015

Sol-Wind: New Yieldco With A Tax Twist

By Tim Conneally

The pool of public solar yieldcos keeps growing.

Just before the Christmas holiday, Sol-Wind Renewable Power LP filed for a $100 million initial public offering with the Securities and Exchange Commission. This will be the eighth Yieldco to debut since 2013, and the stock will trade on the NYSE under the symbol SLWD.

But there's something different about this one.

Sol-Wind is a yieldco that utilizes a Master Limited Partnership (MLP) structure, so it will be taxed differently from the other Yieldcos.

Generally speaking, a Yieldco is similar to MLPs by nature, but the taxation rules are very different.

The offering from Sol-Wind merits a closer look.

What it is, Why it's different

Sol-Wind is a New York-based company that has only existed for a year. It has already booked $15 million in PPAs across the U.S., Puerto Rico, and Canada. It has a portfolio of 184.6 MW of generating capacity which is made up of 131 discrete solar assets and 16 wind assets.

According to the IPO prospectus, Sol-Wind intends to put the proceeds of the IPO toward acquiring more assets. The document states:

“We are focused on acquiring assets from middle-market developers, which is an area where we see particularly compelling opportunities. We define "middle-market developers" as those developers who typically, in the case of solar assets, develop projects of between 100 kW and 5 MW in nameplate capacity and, in the case of wind assets, between 1 MW and 10 MW in nameplate capacity.”

It seems pretty straightforward, but Sol-Wind is attempting to structure itself in such a way so that it can receive the tax benefit of an MLP instead of a typical yieldco.

A regulation known as I.R.C. § 7704 allows certain publicly-traded master limited partnerships to be taxed as partnerships instead of corporations, and Sol-Wind has the ability to meet that exemption.

It's a tricky arrangement that's often used by private equity and hedge funds to avoid taxation. A blocker corporation is set up to absorb the 35% corporate tax that would otherwise be applied to the partnership's assets. However, the corporation makes nothing, and any income made by the MLP is taxed only at shareholder level.

Why is this structure necessary?

“By statute, MLPs have only been available to investors in energy portfolios for oil, natural gas, coal extraction, and pipeline projects. These projects get access to capital at a lower cost and are more liquid than traditional financing approaches to energy projects, making them highly effective at attracting private investment,” Senator Chris Coons (D-DE) says on his website. “Investors in renewable energy projects, however, have been explicitly prevented from forming MLPs, starving a growing portion of America's domestic energy sector of the capital it needs to build and grow.”

Currently under federal law, qualified sources of income for tax-free partnerships include: interest, dividends, rents, capital asset sales, real estate, and natural resources (including oil/gas/petroleum, coal, timber, etc).

Several bills known as the MLP Parity Act (MLPPA) were submitted to congress in 2012 and 2013, seeking to amend the tax code for publicly traded partnerships to treat all income from renewable and alternative fuels as “qualifying income”.

Unfortunately, senate bills and house resolutions known as the MLP Parity act all died in committee.

Tim Conneally is an analyst at Energy and Capital, where this article was first published.

October 14, 2014

China Plans Aggressive Renewables Deployment But Falling Incentives

Doug Young

Lofty targets contained in a new report show that China intends to push ahead with ambitious plans to build up its renewable energy sector. But perhaps the most interesting thing about this new report is word that Beijing finally intends to sharply reduce the inflated state-set fees now paid for solar and wind-produced power, in one of the sharpest indicators that it expects the industry to stop depending on government support and become commercially viable on its own. Such state support through a wide array of measures, which also include export credits and low-interest loans, have become a huge sticking point that has led to a series of trade wars between China and the west.

All that said, let’s jump right in and look at the latest aggressive targets now being finalized by Beijing under its upcoming 5 year plan for the sector between 2016 and 2020. China makes such 5 year plans for all major sectors, a relic of a Soviet-era practice for centrally planned economies. Under revised figures for its current 5-year plan, Beijing announced late last year it was aiming for national solar power-generating capacity of 35 gigawatts by the end of 2015, a very ambitious target for a country that had virtually no such capacity just 3 years earlier. (previous post)

Anyone who thought that figure looked ambitious will probably think the newest plan looks even more aggressive, aiming to build up solar generating capacity to 100 gigawatts by 2020. (English article) The country has even more ambitious plans for the wind power industry, with a target of 200 gigawatts of capacity by 2020.

At the same time, officials who are leaking details of the upcoming plan are also making it clear that state support will be phased out over the next 6 years for makers of solar panels and wind generation equipment. One of the biggest forms of support comes via artificially high state-set prices for renewable energy, which force big power companies to buy such clean energy at rates that are well above the cost of power from more conventional fossil fuels. The use of such high, state-set fees is also common in the west, used as a policy tool to promote the clean energy sector’s development.

Under the new 5 year plan, China’s tariffs for solar generated power will be reduced by a hefty 50 percent by 2020, falling from the current 0.9 yuan per kilowatt-hour to 0.6 yuan, according to an unnamed government energy official. Wind power tariffs will also be cut sharply, falling to 0.4 yuan per kilowatt-hour from the current 0.6 yuan. Equally interesting is a more general quote from the official saying the solar panel and wind equipment makers should improve the efficiency of their products “instead of depending on government subsidies.”

This is one of the first times I’ve seen a government official openly acknowledge what western governments have been saying all along, namely that Chinese solar panel makers like Trina (NYSE: TSL), Yingli (NYSE: YGE) and Canadian Solar (Nasdaq: CSIQ) get a big advantage over their western rivals due to extremely strong state support through a wide range of favorable policies from Beijing. Such support led Washington to slap anti-dumping tariffs on Chinese solar panels last year, and the European Union has also considered taking similar action.

So what does this flood of new information mean for the Chinese panel industry? The ambitious construction target means that Beijing will continue to push for construction of new solar power plants, even if such plants aren’t economically viable. That problem could become worse as solar power prices are lowered, leading to a bumper crop of unusable solar and wind power plants by 2020. That means that the big Chinese solar panel makers could see strong business over the next 5 years from a domestic building boom, but could then see a sharp slowdown if many new projects prove to be economically unviable.

Bottom line: China’s aggressive new energy power goals and determination to reduce state support could result in a building boom of economically unviable solar and wind power generation plants.

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

August 18, 2014

Hannon Armstrong's Strong Q2 Keeps It In My Top Picks

By Jeff Siegel

Hannon Armstrong (NYSE:HASI), one of my top picks for 2014, just made me very happy.

Yesterday, the company announced its Q2 Core Earnings of $4.7 million or $0.22 per share. On a GAAP basis, the Company recorded net income of $2.9 million.

Here are some other highlights. . .

  • Raised approximately $70 million in April, 2014 in a follow-on offering.
  • Increased the flexibility and expanded the capacity of its existing credit facility by $200 million.
  • Completed more than $200 million worth of transactions, including the acquisition of a $107 million portfolio of land and leases for solar and wind projects.

CEO Jefferey Eckel commented on earnings, saying. . .

April 23, 2014, marked the first anniversary of HASI's initial public offering (IPO) and we are pleased to continue our success with the accomplishments of the second quarter of 2014. Since the IPO, we have completed nearly $1 billion of transactions. For the quarter, we generated and paid a $0.22 dividend, completed a follow-on equity raise and closed more than $200 million in transactions. This includes acquiring a portfolio of long-duration lease streams for solar and wind projects as well as the rights to finance additional transactions from this new platform client. As we have demonstrated over the past few quarters, we continue to execute on high credit quality transactions that should translate well into dividend growth for our shareholders.

Opportunities for HASI continue to be robust. The recently announced Presidential initiative calling for an additional $2.0 billion of federal energy efficiency projects and the EPA proposed regulations to cut carbon emissions from existing power plants will encourage more investments in energy efficiency and clean energy throughout the country. HASI is well positioned to capitalize on these opportunities and will continue to seek projects generating attractive risk-adjusted yields.

Hannon Armstrong remains one of my top long-term picks in the alternative energy space. With top-notch management in place, continued demand for alternative energy financing, and a solid 6% dividend, this is a must-own stock for any savvy energy investor.


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

July 23, 2014

Chinese Policy Tailwinds For Ruifeng Renew

by William Gregozeski, CFA

China Ruifeng Renewable Energy Holdings Limited [HK:0527 (“Ruifeng Renew”)] is a holding company with ownership interests in three energy-related businesses.  Its current focus is on wind farm operations, via its majority holdings in Hongsong, a long established wind farm, and Langcheng, a greenfield wind farm (after various purchases and sales of ownership interests it will own 85.36% of the two wind farms on a beneficial level and 68.17% on a direct equity level.  These wind farms have a current installed capacity of 398.4MW, and are expected to increase to 1,190.4MW by the end of 2017.  It also owns a power grid construction business that installs transmission lines and related energy infrastructure for the State Grid and Southern Grid, as well as installs turbines and transmission infrastructure for its wind farms.  The Company also owns a wind turbine blade assembly plant in Chengde, where it builds blades for AVIC Huiteng Windpower, one of the large turbine blade manufacturers in China.
Hongsong was established in 2001 as the first wind farm in Hebei Province with its installation of 2.4MW of capacity, which was comprised of four Goldwind [HK:2208, OTC:XJNGF] turbines, making Hongsong one of Goldwind’s earliest customers.  Since then, Hongsong has completed eight phases of capacity expansion, each adding 49.5MW of capacity using 492 Goldwind turbines.  Hongsong’s current installed capacity stands at 398.4MW, with the expectation that 49.5MW will be added annually through 2017, bringing its final installed capacity to 596.4MW.  Hongsong is taxed at the full 25% rate, however all new phases of installed capacity (starting with Phase 8) will enjoy a full tax exemption for three years, followed by a 50% reduction for the following three years, after which it will pay the full tax rate.  
Langcheng was established in 2005 to develop a 594MW wind farm in Hexigten Qi in Inner Mongolia.  With the initial infrastructure in place, the Company intends to begin installing wind turbines in 2014, aiming to add three phases of 49.5MW each year through 2017.  Like Hongsong, each new phase of installed capacity will enjoy a full tax exemption for three years, followed by a 50% reduction for the following three years, after which it will pay the full tax rate.  
Ruifeng Renew enjoys a number of benefits from its ownership of Hongsong and Langcheng.  The two wind farms are located 30km apart, which allows for shared management and shared substation distribution; Hongsong currently has the infrastructure to support the distribution of up to 596MW of wind power, which will be ramped up to meet the expected increase capacity over the next three years.  The Company’s Power Grid Construction business is expected to install the turbines and distribution systems, which will help reduce the capital expenditure of each phase of increased capacity, while creating additional revenue for that business.  The most recent expansion, Phase 9 at Hongsong, cost approximately RMB270 million and we estimate future phases of increased capacity will cost RMB 270 to RMB 300 million, below the market rate for other producers, which enables management to obtain funding for most of the expansion with near PBOC rate bank debt.
Management intends to add capacity in 49.5MW increments, as any wind farm addition of 50MW must apply for a license from the NDRC (National Development and Resource Commission) at the national level, whereas capacity additions below 50MW can receive license approval from the regional arm of the NDRC.  The expectation is that all turbine purchases will be from Goldwind, the third largest wind turbine manufacturer in the world, who grants the Company favorable pricing on turbines due to the longstanding relationship between Hongsong and Goldwind.
Ruifeng Renew’s Wind Farm Operations generate revenue primarily from the sale of turbine-generated electricity sold to the State Grid Corporation of China, the seventh largest company in the world according to Forbes.  The State Grid does not enter into formal power purchase agreements (PPAs) with individual producers, but rather commits to buy electricity put on the grid at a fixed price set twice a year, which is currently RMB 0.43/kWh.  Renewable energy producers also receive RMB 0.11/kWh in subsidy revenue from the Finance Ministry, resulting in a total energy tariff of RMB 0.54/kWh.  The average wind farm in China operated for 2,000 hours in 2013, up from 1,900 hours in 2012, but still well below the historic average of roughly 2,250 hours at Hongsong and the expected 2,300 to 2,350 hours at Langcheng.
Based on the information above, and put in the context of the growth drivers of the energy and wind power market in China as described in our last article, we believe Ruifeng Renew is ideally positioned to build shareholder value in the coming years.  
William Gregozeski, CFA is the Director of Research at Greenridge Global, a provider of institutional-based sell-side services to underfollowed Asian-based companies and special situation stocks.  The author of this article, Greenridge Global and its affiliates do not have a beneficial ownership in the companies mentioned herein or any other disclosable conflicts of interest.

July 21, 2014

China Poised For Significant Expansion In Wind Power Generation

by William Gregozeski, CFA

China is the world’s largest producer of electricity, surpassing the United States in 2011, with demand increasing alongside its strong, sustained growth in GDP.  Electricity generation in China has increased 9.6% annually, from 2005 to 2013, reaching 5,425.1TWh of electricity.  Coal-fired plants currently make up over two-thirds of power generation, which is partly the result of an abundance of coal in China.  Despite this growth, the country expects demand to continue to increase at a rapid pace, reaching 7.295TWh of demand in 2020 and 11,595TWh in 2040. 
However, the growth in electricity production from coal-fired plants has resulted in an increase in air pollution and general lack of efficiency.  China is now moving aggressively to curb pollution and increase the supply of renewable power.  The central government has prohibited new coal-fired plants to be built around Shanghai, Guangzhou and Beijing, which is currently in the midst of having all of its coal plants being converted to natural gas.  Its 12th Five Year Plan, running through 2015, targeted non-fossil fuel energy to account for 15% of total energy consumption.  One of the key industries expected to help meet these goals is wind power. 
China Energy Consumption by type.png  
China installed capacity by fuel.png  
China is the world’s largest wind energy producer, with over 90GW of installed capacity as of the end of 2013.  Despite this large figure, the country added 16.1GW of capacity in 2013, up from 13.0GW of new capacity in 2012, and is aiming to add 18.0GW of new capacity in 2014.  By comparison, China added roughly 3.0GW of solar power in 2013, reaching 10.0GW of installed capacity.  In 2013, wind power contributed 137.1TWh of electricity generation, which equates to just 2.5% of total power generation in China.  Based on 90GW of installed capacity at the end of the year and the average wind farm in China operating for 2,000 hours in 2013, up from 1,900 hours in 2012, China’s installed wind capacity was operating at a run rate of 180.0TWh of power generation. 
China wind power growth.png  
 While 15% is the near term renewable target, the potential of wind in China is much greater.  In 2009, researchers from Harvard and Tsinghua University found China could generate all of its power profitably from wind alone, making wind power an attractive alternative to coal power, especially as the government moves to reduce pollution.  While the potential for 100% wind power exists, there are a number of practical issues that must be resolved first, including the country’s power grid.  Roughly 15% to 20% of all of the country’s installed wind capacity is not grid connected, due to the lack of transmission infrastructure. 
Like other industries in China, the central government plays a key role in the power industry, controlling the power grid and electricity prices.  The power grid in China is tightly controlled by three State Owned Enterprises, led by the State Grid Corporation of China, which provides power to 88% of China and is the seventh largest company in the world, according to Forbes.  The other two grid companies in China are China Southern Power Grid and Inner Mongolia Electric Power Transmission.  Investment in the Chinese power grid has grown 11.4% annually over the last five years.  This growth should accelerate as the State Grid announced in January it plans to increase power grid construction by nearly 20%, with investments that include constructing ultra-high voltage transmission lines and cross-region grids, which should help spur demand for wind energy and enable off-grid wind capacity to be brought online. 
The role of the National Development and Reform Commission (NDRC) on the power production industry is also favorable to wind power.  The NDRC not only sets power prices, but also has the role of pushing for increases in renewable power production through measures such as legally requiring the power grid to purchase all renewable power and establishing a subsidy to spur investment in the industry.  Prices set by the NDRC are generally not based on market dynamics, but rather set based on the greater good of the country.  The price of coal has been volatile in recent years.  This, coupled with the constant electricity purchase price has led to large swings between profitability and losses for these producers.  On the other hand, wind is well suited to thrive in this environment due to its lack of a commodity feedstock and small ongoing operating expenses. 
William Gregozeski, CFA is the Director of Research at Greenridge Global, a provider of institutional-based sell-side services to underfollowed Asian-based companies and special situation stocks.  The author of this article, Greenridge Global and its affiliates do not have a beneficial ownership in the companies mentioned herein or any other disclosable conflicts of interest.

July 18, 2014

Rulings Boost China Wind, Solar In US

Doug Young

In a quirk of timing, 2 completely unrelated rulings are boosting the outlook for Chinese new energy firms from the wind and solar sectors in their complex relationship with the US. The 2 cases are quite different, but each reflects the wariness Washington feels towards these Chinese firms due to their government ties. In the bigger of the 2 cases, a World Trade Organization panel has ruled that US anti-dumping tariffs against Chinese solar panel makers violate WTO rules. In the second case, a US judge’s ruling has given a boost to a Chinese firm that planned to build a wind farm in the state of Oregon, only to get vetoed by Washington over national security concerns.

Neither of these rulings is the end of the story, and it’s still quite possible that Washington could prevail in one or both cases. But the WTO ruling in the solar case could be a tough one for Washington to fight, for reasons that I’ll explain shortly. That could be good news for the entire solar panel sector, as it could force Washington to seek a negotiated settlement in the matter. Such a deal would benefit nearly everyone by maintaining strong global competition, which is a critical element to foster rapid industry development.

All that said, let’s start with a look at the WTO ruling, which was part of a broader series of decisions critical of Washington’s anti-dumping duties. (English article) Washington had argued that Chinese solar panel makers received unfair government subsidies in a number of ways, from subsidized use of government land, to cheap loans from state-run banks, and tax incentives. The US conducted its own investigation 2 years ago, which ended with its decision to impose punitive tariffs against the Chinese firm.

The WTO’s ruling doesn’t dispute Washington’s premise of unfair state subsidies, but rather finds fault with part of the process. Put simply, the WTO’s rules say countries can only impose such anti-dumping penalties if they can prove the guilty companies are wholly or at least partly state owned. That’s a bit problematic in this instance, since many of China’s biggest solar panel makers started out as venture-backed private companies that are now big publicly-traded firms.

In my view the WTO ruling seems based on a technicality, since China clearly subsidizes all domestic solar panel makers due to Beijing’s decision to aggressively promote the industry. But rules are rules, and Washington and everyone else needs to respect the WTO’s guidelines. Washington could still try to prove that private Chinese panel makers like Yingli (NYSE: YGE) and Canadian Solar (Nasdaq: CSIQ) are somehow partly state-owned; but I’m hopeful that maybe the Obama administration will use this moment to re-examine its stance and try to seek a negotiated settlement in the matter.

Meantime on the wind front, a US judge has ruled the Obama administration wasn’t transparent enough when it cited national security concerns as its reason for vetoing a planned wind farm being built by construction equipment maker Sany Heavy (Shanghai: 600031). (English article) This particular case dates back nearly 2 years ago, and reverses a previous ruling by a lower court that had sided with the Obama administration.

In this latest ruling, the judge said the Obama administration was too secretive about its reasons for vetoing the plan, which denied Sany the right to defend itself or seek modifications that might placate the government. Previous reports had speculated that Washington was worried about spying, since the wind farm’s location was near a defense plant making high-tech drone aircraft. I would agree with the judge in this matter, and say that Washington needs to provide at least some of the evidence behind its decision that is likely to cost Sany millions of dollars in lost investment.

Bottom line: A WTO ruling against US anti-dumping tariffs on Chinese solar panels could force Washington to re-think its stance in the matter and seek a negotiated settlement.

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

June 09, 2014

Ming Yang To Build 300 GW Chinese Wind Farm

Doug Young

Wind power company Ming Yang (NYSE: MY) became China’s latest new energy equipment maker to dip its toe into project finance and development last week, when it announced a new plan for a massive wind farm project in Jiangsu province. Its announcement follows similar moves by many of its peers from the solar sector, and comes as Beijing embarks on a broader plan to clean up China’s air through initiatives like clean energy development.

Plans like Ming Yang’s will certainly help China to meet its ambitious goals; but they also carry a huge burden and risk for new energy equipment makers whose own financial position is already quite tenuous as their sector emerges from a 3 year downturn. To promote healthier development, Beijing should actively encourage big state-owned companies to finance and build the dozens or even hundreds of new solar and wind farms that will be needed to help the country meet its goals.

Beijing has set an ambitious target of building 35 gigawatts of new energy power capacity by the end of next year, with Chinese firms expected to supply the big majority of wind and solar equipment needed to meet the target. The plan is designed not only to lower China’s reliance on dirtier fossil fuels, but is also aimed at promoting a battered field of new energy equipment makers that are only now emerging from a prolonged sector downturn.

Ming Yang is one of the country’s leading wind power equipment makers, and was in the headlines last week when it announced it will build new wind farms with a massive 300 gigawatts of capacity in eastern Jiangsu province. (company announcement) Ming Yang said it received approval for the project from the energy bureau in the coastal city of Rudong, and the company itself would build and operate the massive project.

Ming Yang’s plan is just the latest that is seeing new energy equipment giants like Yingli (NYSE: YGE) and Canadian Solar (Nasdaq: CSIQ) also embark on similar construction. Yingli announced in April that it would set up a 1 billion yuan ($160 million) fund with a Chinese private equity partner to build new solar plants, with Yingli supplying most of the solar cells for new construction.

Canadian Solar has also been a longtime user of the business model, which sees equipment makers build plants using their own funds, and then sell them to longer term investors after completion. Such a model is somewhat logical, as it puts project development in the hands of companies that understand the business and therefore can build plants with the biggest chances of success. Such a strategy also gives equipment makers an important sales outlet for their products.

But the business model also carries big risks for the equipment makers, who must shoulder big financial burdens for the 1-3 years required for development of new plants that can cost tens of millions of dollars. Such self-financing of new projects was partly to blame for the collapse of former industry leader Suntech, which ultimately went bankrupt. Like Suntech, most of China’s new energy equipment makers have huge debt burdens after posting losses for most of the last 3 years, and already have difficulty finding money just to support their day-to-day operations.

The financial challenges they face have been on display in the last 6 weeks, when first Yingli and then Trina Solar issued new shares to raise cash, and then saw their stocks tumble due to investor skepticism. Yingli ultimately had to sell its new shares at a 20 percent discount to their price before its announcement, while Trina offered a 15 percent discount.

A handful of major cash-rich state-owned companies have stepped forward to finance new plant construction, with names like Zhenfa New Energy and 3 Gorges New Energy announcing projects this year. Aviation Industry Corp of China was also in the headlines last month when it announced an ambitious plan to develop its solar power expertise by helping to build and fund 300 megawatts worth of solar power plants in Britain.

Beijing should encourage more of these big state-owned companies to engage in similar domestic plant construction by offering more preferential policies and also by helping to educate the companies about the fundamentals of developing economically viable projects. Doing so will remove the burden of new plant construction from the equipment makers, allowing them to focus their energies on rebuilding their financial positions and improving their products.

Bottom line: Beijing should work harder to cultivate a new generation of new energy power plant builders to help meet its ambitions construction plans.

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

May 06, 2014

Offshore Wind A Big Part Of Why GE Wants Alstom

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

By Jeff Siegel

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

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

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

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

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

A Rival Suitor

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

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

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

Ripe for the Picking

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

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

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

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

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

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

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

Offshore Wind

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

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

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

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

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

March 31, 2014

Finavera Wind Energy: Bak From The Dead

Tom Konrad CFA

Disclosure: Long FNVRF, short PEGI $30 and $35 calls, $20 and $25 puts.

The Good News

Finavera Wind Energy (TSXV:FVR, OTC:FNVRF) shareholders have had a long and trying wait for the sale of its wind projects to Pattern Energy Group (NASD:PEGI) since the deal was announced in December 2012.  The timeline has slipped repeatedly, two of the projects proved impossible to permit, and there have been questions about just how large the remaining ones would be.  The long silence since the company’s interim financial update last November has probably led many investors to give the company up for dead.

Rumors of the company’s demise were premature.  On March 17th, Finavera announced that it had “executed agreements that provide for the Assignment of the 184 MW Meikle Wind Energy Project Electricity Purchase Agreement (‘Meikle EPA’) from Finavera to Pattern.  The assignment of the Meikle EPA from Finavera to Pattern is the last major milestone outstanding to close the Pattern acquisition of the Meikle project for gross cash consideration of $28 million.”

The key numbers here are 184 MW and $28 million.  Those correspond to a strong wind regime at Meikle, allowing the Meikle and nearby Tumber Ridge projects to be consolidated into one giant “Super-Meikle” project.  I spoke to Finavera CEO Jason Bak by phone later the same day, and he confirmed that this was the case.  There is  a wind speed adjustment in the contract with Pattern which could reduce the $28 million figure by $1 to $2 million.

The 116MW of PPAs which the announcement stated had been canceled are likely the Wildmare (77 MW), Bullmoose (60MW), 47 at Tumbler Ridge (47MW)  projects, after allowing for the 67 MW expansion of Meikle over the earlier 117 MW plan.  Bak says Meikle was re-designed and expanded to accommodate additional turbines.  While the other three PPAs have been canceled, other permits remain in place.  Over the longer term, Finavera could yet see some revenue from Wildmare, Bullmoose, or Tumbler Ridge.

The announcement is unadulterated good news.  More confirmation can be had that this is a better-than-expected outcome in Pattern’s 2013 Annual Report, page 63 of which conservatively lists the Meikle project as a 175 MW (not 184 MW) pre-construction project.


Bak tells me that he expects the Meikle sale to close in the next few weeks, which will trigger a $10 million payment from Pattern to Finavera, which Finavera will use to repay the project loan from Pattern made last year.  In addition to that $10 million, Pattern has demonstrated its confidence that this project will go forward by spending $4 million in development costs to date.  An additional $2 million may be spent to bring the project to financial close in late 2014 or early 2015.  All but $2 million of this $4 to $6 million of this will be deducted from Finavera’s final payment, but Pattern will not be reimbursed for these expenses if the project does not close.


The 184 MW project size and $28 million (elsewhere $27.9 million – $26.5 after wind speed adjustments) gross payment remove the largest piece of uncertainty regarding Finavera’s value going forward.   Below, I give my estimates Finavera’s net cash position after Meikle’s financial close and the final Cloosh payment over the next six to twelve months.

Assets: (Canadian $ except €)

Expected proceeds from Pattern: $26 million to $27.9 million, after wind speed adjustments.

Expected Payment for Cloosh Wind Farm: €7.14 ($11. million.)  This project has also been delayed, and is now expected to close in 2014.

Value of 10% interest in Cloosh: $3 million to $4 million

Other potential upsides:

Potential value in Wildmare, Bullmoose, or Tumber Ridge.

Value in the new business opportunity Bak plans to present to shareholders after the Pattern sale is finalized in the next few weeks.


Liabilities on Interim Report: $24 million to $26.9 million (the low end may result through negotiations with creditors.)  $2.4 million of these liabilities are secured by Cloosh, and are payable only from the proceeds from Cloosh.

Finavera’s share of Meikle development  costs: $2 million to $4 million, payable out of final Meikle incentive payment.


$9 million to $17 million. My best guess: $12 million.

Shares Outstanding

39.7 million

Options Outstanding

2.46 million at $0.085.  (42.2 million shares outstanding if exercised for $0.21 million.)

Value Per Diluted Share

$0.21 to $0.40 ($0.19 to $0.36 US).  Best guess: $0.28 ($0.26 US)

The future

The press release also stated that

Finavera continues to work diligently on a strategic plan for the Company. The imminent close of the Pattern transaction will provide a solid platform for the next stage in Finavera’s development. Further information on the Company’s strategic plan will be released following the close of the Pattern transaction.

As Bak has said all along, there will be a shareholder vote on the use of the proceeds, including the option to return them to shareholders.  He has been working on the strategic plan mentioned above for at least half a year.  He told me that he has not been willing to bring it to shareholders until he has the working capital to pursue the opportunity.  Bak seems very confident that shareholders will like the strategic plan when they see it.  If they don’t, they will have the opportunity to vote for a cash distribution from the wind farm proceeds, instead.

Bak also told me that he expects to issue more frequent updates on the company’s prospects over the coming months.


Given the years of delays and disappointments, it’s not surprising that Finavera’s stock has been trading at only 8 Canadian cents.  I expect that the elimination of a major source of uncertainty and the final size of the Meikle project will finally breathe life into the stock.  More frequent updates from the company going forward may also bring investor interest “Bak” from the dead.

This article was first published on the author's blog, Green Stocks on March 18th.

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.

Continue reading "Finavera Wind Energy: Bak From The Dead" »

March 25, 2014

AMSC Consolidates US Wind Operations To Focus on Europe

Meg Cichon

AMSC (NASD:AMSC) will shutter its manufacturing facility in Middleton, Wisconsin by the end of 2014, but hopes to fold its product development operations and employees that are willing to relocate into its headquarters in Devens, Massachusetts, which recently underwent a workforce reduction.

While it consolidates its U.S. workforce, AMSC plans to open a new wind turbine controls manufacturing facility in Timisoara, Romania in 2014, which will serve all of its clients outside of China. Its Chinese facility will continue to cater solely to China customers. With this move, AMSC corporate communications manager Kerry Farrell said it has better access to reach its “target market" of Eastern Europe and allows it to be closer to its Austria facility. According to the REW 2014 wind outlook, there is much promise in emerging northern and eastern Europe despite overarching policy uncertainty.

“By expanding our manufacturing footprint into Eastern Europe, we are enhancing our distribution capabilities and our global reach in a region that is a target market for our wind and grid products," explained AMSC CEO Daniel P. McGhan. "Romania is a European Union member state and cost-efficient manufacturing location with a highly skilled workforce and reliable infrastructure.”

Overall, AMSC said these changes will reduce its workforce 5-10 percent from its 330 total employees as of March 2013. The transition process will cost the company anywhere between $4-6 million by the end of 2014. However, it expects these changes to ultimately save the company $3 million annually, and to be cashflow positive by its fourth fiscal quarter, said Farrell.

Meanwhile, AMSC continues to struggle in court with wind turbine manufacturer Sinovel after it accused the Chinese company of stealing its intellectual property in 2011. AMSC has filed four separate lawsuits and is seeking more than $1.2 billion in damages against what used to be its largest customer. According to Bloomberg, China Supreme Court recently ruled in favor of AMSC in two of its suits, and the cases will be heard in court, rather than being moved to arbitration at Sinovel’s request. Despite the litigation, AMSC continues to focus on product development.

"Key to our growth strategy is product development and the development of system solutions...[yesterday’s] action will help to ensure that we are in the best position to deliver these products to market," said McGhan. "The strategic initiatives we are announcing today mark the beginning of a new chapter for AMSC as we focus more intently on manufacturing and product development across all lines of our business.”

Meg Cichon is an Associate Editor at, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for and REW magazine, and manages social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

This article was first published on, and is republished with permission.

January 17, 2014

Google's Renewed Cleantech Investment Binge

James Montgomery

google earthday06
Google Doodle for Earth Day 2006
This week the Internet giant Google revealed that in December it invested $75 million in Pattern Energy's (NASD:PEGI) 182-MW Panhandle 2 wind farm in Carson County, Texas, northeast of Amarillo, expected to be operational by the end of this year. Pattern will hold an 80 percent stake in the project, whose owners also include Google and two institutional tax equity investors, with Morgan Stanley providing construction and equity bridge loans and a letter of credit.

Google certainly has displayed a healthy appetite for Texas Panhandle wind energy. Last fall it committed to purchase all the output from EDF Renewable Energy's 240-MW Happy Hereford wind farm southwest of Amarillo. A year ago it plunked down $200 million in EDF's 161-MW Spinning Spur Wind Project in Oldham County, Texas, also west of Amarillo, which went operational in late 2012. (Note that EDF is taking over Spinning Spur III from Cielo Wind Power, in case Google is eyeing more investments for power circa 2015.)

This new deal adds yet another renewable energy feather to Google's cap, spanning projects and procurements from Texas to Finland. To date the company has committed more than a billion dollars in 15 renewable energy projects totaling more than 2 GW of electricity annually. That's enough to power all public elementary schools in New York, Oregon, and Wyoming, or 500,000 US homes, the company points out. Last year the Internet giant purchased over 727,000 MWh of renewable energy via long-term contracts, covering 22 percent of its total electricity consumption.

"We believe that corporations can be an important new source of capital for the renewable energy sector," writes Kojo Ako-Asare, Google's senior manager for corporate finance, in a blog post announcing the investment.

That's a neat segue to our next Google news item. While the company continues to lunch on renewable energy deals, this week it swallowed its biggest meal yet: $3.2 billion for Nest Labs, maker of the Nest smart thermostat and a newer line of smoke/CO2 alarms. (Sorry, anyone who predicted Nest as one of the most anticipated 2014 IPO offerings.) Here's a bit of sunshine for other cleantech investors: the deal means Nest's early VC investors are exiting with 15-20× multiples, including a $400 million payday for Kleiner Perkins Caufield & Byers.

Google has had an investment say in Nest since 2011, and the firm "has the business resources, global scale and platform reach to accelerate Nest growth across hardware, software and services," writes Fadell in a blog post. "Google will help us fully realize our vision of the conscious home and allow us to change the world faster than we ever could if we continued to go it alone. We've had great momentum, but this is a rocket ship." An Apple-watching news site explores why Google, not Apple, is buying Nest: ultimately managing data about home usage is more in line with Google's business, while smaller hardware plays like chips has become Apple's pursuit. And Google's cash warchest gives it the freedom and wherewithal to take big shots like this.

The deal is the latest showcase in a $17 billion two-year push out of its core Web search and advertising platform and into hardware and software. It also underscores the increased competition between Google and Apple: the two already were at odds over smartphone platforms (iOS vs. Android), and nearly a third of Nest's 300 employees are Apple expats, including founder Tony Fadell who helped design the iPod. (One report suggests there's been even more direct competition and recruitment.)

Jim Montgomery is Associate Editor for, covering the solar and wind beats. He previously was news editor for Solid State Technology and Photovoltaics World, and has covered semiconductor manufacturing and related industries, renewable energy and industrial lasers since 2003. His work has earned both internal awards and an Azbee Award from the American Society of Business Press Editors. Jim has 15 years of experience in producing websites and e-Newsletters in various technology.

This article was first published on, and is reprinted with permission.

January 16, 2014

Google Buying Pattern Energy Wind Farm

By Jeff Siegel

google earthday06 Google announced yesterday that it has ponied up $75 million for a wind farm in Carson County, TX. In it's lock box of wind farm assets, this is number 15 for the Internet giant.

Patterson Energy Group (NASDAQ:PEGI), one of my top picks for 2014, is developing the project, which provides enough juice to power 56,000 homes.

As I wrote last year, Pattern Energy Group is an independent power company that owns and operates eight wind power projects in Canada, the United States, and Chile. Total owned capacity is just over one gigawatt.

Each wind project the company owns is contracted to sell nearly all of its output on a long-term, fixed-price power purchase agreement. Pattern also has two new projects in development. One is in Chile, a 115-megawatt project expected to start commercial operations in April 2014. The contract for this one runs through 2034. And the second project soon to go online is in Ontario. This one is a 270-megawatt project with a power purchase agreement locked in through 2034.

Overall, the weighted average remaining on contract life is about 19 years.

Management is quite conservative, and risks are minimal, as this is not a turbine manufacturer, but rather a developer operating primarily in wind-friendly regions.

Even with dirt-cheap natural gas, demand for wind — in the right places — remains strong.

Net profit for the first six months of 2013 grew from $6.44 million one year prior to $29.14 million, while revenue rose 62% to $102.54 million. Pattern has about $2 billion in assets and about $1.4 billion in liabilities. And for income-oriented investors, the company expects to offer a yield of approximately 6% [Ed. note: based on its $22 IPO price.]

For the 12 months ending December 31, 2014, management expects to generate $55.4 million for distribution and $217.7 adjusted EBITDA.

All in all, I actually like Pattern based on historical data and management’s ability to keep growth steady, but not overly risky. Whether or not that will be enough in today’s market is still questionable.

Broader market action and, of course, any potential loss of government support in Canada, the U.S., and/or Chile could chip away at this thing pretty quick. Even though power purchase agreements are already locked in, the market doesn’t typically distinguish these types of things when it comes to renewable energy. This isn’t necessarily a criticism, but rather a reality that investors should not ignore.

As well, while I love the target dividend of 6.25% [Ed Note: $1.25 at $20, the midpoint of the planned IPO range], I don’t know how much room that leaves for growth...

In any event, this deal should definitely draw some positive attention for PEGI.

To a new way of life and a new generation of wealth...


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

November 01, 2013

Investors Expect Rapid Growth At Pattern Energy Group

Tom Konrad CFA

Pattern Energy's Gulf Wind Farm in Armstrong, Texas

Disclosure: Long BEP.

Pattern Energy Group (NASD:PEGI, TSX:PEG) completed a very successful Initial Public Offering (IPO) on the Nasdaq and Toronto stock exchanges on September 27th.  Not only did the shares price at $22, near the top of the expected range, but the underwriters exercised their full over allotment option to purchase 2.4 million shares in addition to the initial 16 million offered.  Total proceeds from the offering were $404.8 million.  Most of the proceeds went to Pattern Energy Group, LP (PEGLP) in consideration for a number of contributions and class A shares sold in the offering, but $56 million will be used to pay down debt and $60.2 million will be retained for general corporate purposes.

Investors greeted the offering enthusiastically, and the stock is trading comfortably above the offering price at around $23 per share since the IPO.

The Company

Pattern owns six wind power projects in the US and Canada with total capacity of 1040 MW and two development projects in Ontario (270 MW) and Chile (115 MW) which are expected to enter production in 2014.  Post-IPO, public shareholders will control only a minority of the company’s common stock.  Control of the company is held by PEGLP, which, along with its partners, will control 63.1% of voting rights through as combination 47.4% of Class A shares and 99% of Class B shares.  Management owns the remaining 1% of Class B shares.  Class B shares do not currently pay a dividend, but will convert into Class A shares at the end of 2014, or upon commercial operation of the Ontario Wind farm, if that has not yet occurred.

Distributable cash flow for 2014 is expected to be approximately $55 million,80% of which the company plans to pay to shareholders as a quarterly dividend of $0.3125 per share.  Achieving this cash flow will depend on the on-time completion of the Ontario and Chilean wind projects.  At $23 a share, $0.3125 quarterly amounts to a 5.4% annual dividend.

While completion of the Ontario and Chilean wind projects in 2014 can be expected to increase distributable income, conversion of Class B into Class A shares will offset this in 2015 by increasing dividend-paying shares by 29%.  As a back-of-the-envelope estimate, if the income from the new wind farms is comparable to the existing wind farms on a per MW basis, we can expect distributable income to be increased by 37%.  Given the wide range in profitability of wind farms, however, I feel it is safer to assume that the increased income from the Ontario and Chilean wind farms will only serve to offset the share dilution.

After the transaction, Pattern’s capitalization will be approximately 67% debt, and 33% equity, which is stronger than its closest comparable, Brookfield Energy Partners (NYSE:BEP, TSX:BEP-UN), which has about 20% equity and preferred equity.  Brookfield’s longer track record and larger and more diversified portfolio of hydropower, wind, and solar assets should allow it to offer a lower yield than Pattern, but at $27.43, Brookfield’s yield of 5.3% is almost identical to Pattern’s.


Pattern’s shareholders seem to be betting on Pattern achieving rapid growth, or at least faster growth than comparable companies such as Brookfield.  However, most of its growth in distributable income over the next two years is likely to be offset by the increased number of shares paying dividends, when class B shares convert to class A shares.

At the current price, Pattern Energy Group seems fully valued relative to its US-listed peers, and expensive relative to clean energy power producers with only Canadian listings.  As such, the stock may be useful to increase the diversification and income in a clean energy stock portfolio, but it will probably not produce much share price growth in the near future.

This article was first published on the author's blog, Green Stocks on October 22nd.

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.

October 25, 2013

Offshore Wind Investment Opportunities

By Harris Roen

A significant alternative energy investment theme with potential for growth over the next few years is offshore wind. This article looks at the promise of marine based wind, potential pitfalls, and names three investments that could benefit from large-scale offshore wind development that is likely coming.

The Potential of Offshore Wind

Wind_map_small[1].jpg In 2011, the U.S. Department of Energy and the U.S. Department of Interior jointly published a national offshore wind strategy. According to the report, in areas with less than 100 feet of water the generating potential of offshore wind equals the entire generating capacity of the current U.S. electric system. If you include all of the potential offshore wind capacity, marine-based windmills could generate four times the current U.S. electrical demand!

A big plus is that some of the best offshore wind sites are near major population centers of New England, the mid-Atlantic, Gulf of Mexico and mid-Pacific coasts. The strategy estimates a deployable offshore resource that could generate 10 gigawatts of electricity in less than 10 years, at a cost of $0.10/kWh. This projection increases five-fold by 2020, to 54 gigawatts generated at $0.07/kWh. This would make offshore wind very competitive with both fossil fuel and renewable based generators.

So far, there have been two successful auctions of offshore wind leases in the U.S.—in Virginia and Rhode Island. Together, these auctions have generated $5.4 million by the Bureau of Ocean Energy Management (BOEM), leasing out 277,369 acres that could generate gigawatts of clean power. The fact that these two auctions generated positive action is a very good sign. Accordingly, BOEM plans to auction off leases in New Jersey, Maryland and Massachusetts in 2014.

Offshore Wind Challenges

Pun intended, but there are some significant headwinds to successfully executing offshore wind in the U.S. and abroad. The farther off the coast you go, the stronger the wind speeds. However, this means deeper depths, which increases technical challenges. Even at a large scale, offshore wind costs more to build and maintain than its land-based counterpart.

Another limiting factor pointed out by PennEnergy Research is the shortage of suitable operation and maintenance vessels. In order to tug large payloads, secure offshore towers, lay cables and the like, you need costly specialty ships. The competition for these ships is especially acute because of the increase in new offshore oil and gas fields. Oil and gas can offer better prices to gain access to this limited specialized fleet.

Another concern is that federal tax credits favorable to wind are set to expire at the end of 2013. Though there is a real risk that these credits will dry up, I believe there is a good chance the tax credits will be extended. Developing domestic sources of clean energy is a white-hat issue for both parties. Even during the fierce budget battles at the tail end of the Great Recession of 2012, congress had the votes to extend the credit.

Offshore Wind Investment Strategies

Two companies and an Exchange Traded Funds (ETF) are worth a look at as investments in offshore wind. Keep an eye on price, though, given the current frothy condition of the market.

ABB Ltd. (ABB) is a Swiss company whose products and services include power transmission, distribution and power-plant automation. Its systems are key in addressing the challenges of constructing, transporting and connecting large, distant offshore wind platforms. As a result, ABB recently secured a large offshore wind order. ABB has solid earnings and growing annual sales, but looks overvalued at current trading levels in the mid 20s. This stock looks more like a buy in the mid to high teens.

Parker-Hannifin (PH) is a large, diversified industrial manufacturing company that has a wide array of products. Of interest here is that Parker-Hannifin is a key supplier of underwater high-voltage power cables. We believe it is well positioned to take advantage of the growth of offshore wind with its subsea power cables. This well run, profitable company has excellent cash flow, but seems overpriced at current trading levels. The stock would look more interesting if it traded back down in the low to mid 80s.

Since there are very few publically traded pure-play wind companies in the U.S., a good way to add wind to a portfolio is by investing in an alternative energy ETF. A good wind-oriented ETF is First Trust ISE Global Wind Energy Index Fund (FAN). Compared to other alternative energy ETFs, this fund has a relative low expense ratio and management fee structure. On the other hand, FAN has a high potential capital gains exposure. Though this fund has been beat up in the past, it has posted an astounding 74% return in the past 12 months.


Even though the price of solar photovoltaics continues to drop dramatically, wind power is still one of the most economical forms of clean energy. Though offshore wind is much more expensive to develop than its onshore cousin, the potential for large amount of steady generation cannot be ignored. The long-term clean energy investor would be wise to have a strategic position in this sector.


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

About the author

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

October 23, 2013

Broadwind: Optimism In The Wind

by Debra Fiakas CFA

  In early October 2013, Broadwind (BWEN:  Nasdaq) announced over $100 million in new wind tower orders, tipping the value of orders received in the year 2013 over the $300 million mark.   Wind energy has been a fickle market to pursue, alternatively showing great promise as policy makers show support for renewable energy sources and then sinking as cheap natural gas substitutes flood the market.

Broadwind’s expertise is in gearing of various kinds.  In addition to supplying gearboxes for wind turbines, the company offers maintenance services to tower owners.  Oil in gearboxes must be changed regularly and wind blades must be checked and replaced regularly.  The company applies its experience in steel fabrication to more than just wind towers.  Broadwind also builds large, complex fabricated steel structures for use in the aerospace and automotive industries, including crane masts, booms, and engine frames.
Revenue has been building back up since the 2009-2010 recession, but Broadwind has yet to report a net profit.  The net loss in the most recently reported twelve months was $14.8 million on $197 million in total sales.  What is even more concerning is that the company has burned a fair amount of cash to keep operations going  -  $23.2 million over the last three fiscal years alone.  However, in the most recent twelve months the company managed to reverse the cash drain, generating a net $13.6 million in cash from operations.
Cash on the balance sheet at the end of June 2013 was $17.9 million  -  about enough to keep Broadwind going for a while even if it cannot maintain positive cash flow.  There is $4.3 million in debt on the balance sheet, well within reason to pay off with current cash resources.

There appears to be some optimism that better times are ahead for Broadwind.  There are only two analysts with published earnings estimates for Broadwind.  They appear to be in agreement on the potential for profitability in 2014.  The consensus estimate is $0.15 in earnings per share in 2014 on $267.5 million in total sales.

BWEN is trading at 66.0 times forward earnings (2014).  That might seem dear, but this and next year are still transition years for Broadwind.  The shares have built up considerable momentum in recent weeks, after languishing for some time under the $5.00 price level.  The stock seems poised to grow into its valuation.

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

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

October 21, 2013

Did You Catch Kaydon In Time?

by Debra Fiakas CFA

KaydonID[1].gif Most investors with an interest in the alternative energy industry think first of the energy source  -  solar, wind, geothermal or biofuel.  There are other roads to access the returns promised by the shift from fossil fuel to alternative sources.  But do not waste time as these gems are in the sights of strategic buyers as well.

Kaydon Corporation (KDN:  NYSE) produces components and sub-systems used in the alternative energy industry.  Its friction control products are critical for the efficient operation of wind turbines and blades.  These products include large diameter turntable bearings and specialty balls.  The company also makes fuel cleansing systems and air filtration systems.  The company reported $55.4 million in sales to customers in the wind energy sector in 2012, in-line with 2011 sales of $54.3 million but well off the sales levels in the previous years  -  $103.0 million in 2009 and $95.9 million in 2010.  Despite the drop in sales to the wind energy sector, it still represented a solid 12% of total sales. 

The friction control segment represents over half of Kaydon’s total sales, which were $462.4 million in the most recently reported twelve months.  Kaydon has been consistently profitable over the years, but took a non-cash charge of $46.3 million in 2012 to write-down the value of its wind energy production equipment.  The impairment charge was triggered by a restructuring of the company’s wind energy business line.  The restructure was needed to bring the business in line with the reduced pace of growth in the wind segment.

The impairment charge in third quarter 2012 resulted in a deep loss for the quarter.  While the price/earnings multiple for KDN is negative, operating cash flow is another story.  In the most recently reported twelve months Kaydon turned 24% of sales into cash.  Indeed, Kaydon distributed $367.9 million in dividends in 2012.   The stock had been trading below ten times trailing cash flow from operations.  If you did not see this as a bargain you are now too late.  The strong cash flows were probably one of the attractive elements that brought SKF Group of Sweden to make a $35.50 cash tender offer for Kaydon shares that closed October 16th.

SKF Group is a worldwide supplier of bearings that has built a network of over 15,000 distribution centers for its bearing products as well as maintenance and engineering services.  Tucked  into SKF, Kaydon will probably lose its alternative energy character.  Just the same, the suppliers behind the scenes remain a smart way to play the transforming energy sector.

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

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

September 26, 2013

Finavera Wind Energy: Slow Progress

Tom Konrad CFA

Finavera Logo Without a press release since June, and the stock price in the doldrums, investors have been looking for updates on Finavera Wind Energy (TSXV:FVR, OTC:FNVRF.  Disclosure: I own this stock.)  In fact, there has been an update: Finavera’s second quarter interim report, filed on August 28th on SEDAR, but without a press release or news articles, many investors seem to have missed it.

Despite the lack of updates, progress continues behind the scenes, although Jason Bak, Finavera’s CEO is yet not able to say much about the ongoing initiatives.  On Friday, he told me, “I’m keen to get more news out to shareholders, towards the end of September or early October may be appropriate.”  Until then, we’ll have to make due with what we can glean from the interim report.

Selling wind projects to Pattern

The timeline for the sale of Finavera’s Canadian wind projects to Pattern has slipped slightly, although progress continues.  According the the interim report, “Closing of the Pattern Transaction is now dependent upon the receipt of various required consents and regulatory approvals; performance of the Company’s covenants and obligations under the PSA Agreement; assuming no Material Adverse Changes and other standard closing conditions.”

In particular,

  • Finavera expects to receive between C$11.7 and C$18.7 million, net of loan repayments, depending on the final project sizes (see below.)  It anticipates between C$3 million and C$5 million in additional development costs to bring the projects to financial close, the first $2 million of which will be paid by Pattern.  The Q2 MD&A was not clear if the C$3-C$5 million was in addition to the the amount covered by Pattern, or inclusive of it, but I have confirmed with the company that the latter is the case, and the expected development costs payable by Finavera range between C$1 and C$3 million.  Finavera has internally budgeted $2.7 million (at the upper end of the range) for these development costs.
  • The company has received shareholder approval and consent from the Toronto Venture Exchange.
  • There has been some delay submitting the Meikle project for environmental review.  When I last spoke to Bak, he expected this in July, he now says it will be submitted in mid September.
  • Finavera has been collecting wind data on which the final project sizes and payments will depend.  Bak tells me a decision on project size is “imminent.”
  • The company is in the process of obtaining preliminary assent from BC Hydro for the transfer of the Power Purchase agreement to Pattern.  According to the interim report, “Such preliminary consent is expected imminently” as of August 28th.  Bak was not able to give me any further information about the timing.
  • Financial close of the transaction is “expected mid-2014 to early 2015.”  This was previously expected in the second half of 2014.

Cloosh Valley Wind Farm

This 105 MW estimated capacity wind farm is still anticipated to close on project financing in late 2013.  At that point, Finavera expects to receive €7.14 million (C$9.79 million.)  It is considering options for its remaining 10% stake in the farm.

Use of proceeds from the Pattern transaction

Data in C$ million, except for shares (millions) and per share data.


Item Worst Case Expected Best Case
Pattern Proceeds $20.9 $22.7 $27.9
Future Development costs ($3) ($2.7) ($1)
Cloosh Payment $9.8 $9.8 $9.8
Sale of 10% Cloosh Stake $3 $3 $4
8/28/13 Net Liabilities ($23.9) ($23.9) ($23.9)
Totals $6.8 $8.9 $16.8
Diluted shares 39.6 39.6 39.6
C$ per share $0.17 $0.22 $0.42
Data in C$ millions except shares (million) and per share data. Sources: Finavera Q2 2013 MD&A, Jason Bak interviews.

After repaying all its obligations after the close of the Cloosh and Pattern transactions, Finavera should have between C$6.8 million and C$16.8 million in cash on hand, or between 17 and 42 cents per share (see table.)  This is less than my previous estimates.  Ongoing development costs have risen from my previous estimates.  My most recent estimates are shown in the table to the right.

Finavera plans to give shareholders a say in the use of these proceeds, and the company is currently working on the terms of a future development deal to present to shareholders.  When the terms of this deal are finalized, it will be presented to shareholders.  An alternative use of the funds will be  to simply return it to shareholders.


With timelines slowly slipping, costs inching up, and an earlier revision to the deal with Pattern which greatly reduced the potential payoff, I’m very disappointed.  Other shareholders are, too, which is why the stock is currently trading at C$0.15, and has traded as low as C$0.13 recently.

With only a 50% expected gain left after another year which could produce yet more timeline slippage, I’m not in a rush to buy more, although the potential gains are easily enough to keep me around at this price.

This article was first published on the author's blog, Green Stocks on September 16th.

Disclosue: Long FVR

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.

May 11, 2013

Finavera Takes $28M for Two (Not $40M for Four)

Tom Konrad CFA

finavera_logo[1].gifMonday morning, Finavera Wind Energy (TSXV:FVR, OTC:FNVRF) announced that it had finalized its agreement with Pattern Energy Group  to sell two of its four Canadian wind energy projects for $28 million.  This should come as a relief to shareholders, who had been concerned when the original date by which they had expected to ratify the deal, March 31st came and went.

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

The revised agreement is only for the purchase of Finavera’s 47 MW Tumbler Ridge and 117 MW Meikle Wind Energy Projects.  Pattern retains an option (but not an obligation) to purchase the 77 MW Wildmare and 60 MW Bullmoose projects for the remaining C$12 million of the C$40 million originally envisioned for the four projects.  According to Bak, these latter two projects had run into a number of obstacles in discussions with the local utility (BC Hydro) and “other stakeholders.” Because of this, Finavera will not be able to bring them to financial close as quickly as hoped.  Since Pattern’s purchase had always been contingent on the projects reaching financial close, the downgrade of the agreement from an obligation to purchase the projects to an option is less of a change in Pattern’s position than it may seem at first.  The real problem are the difficulties bringing these projects to financial close in the near term.

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.


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.


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.

Bottom Line

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 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.

April 14, 2013

Key Players in New Wind Turbine Technology

David Appleyard
Vestas Wind turbines in Sloterdijk. Photo by Aloxe.
With annual market growth of almost 10 percent, and cumulative capacity growth of about 19 percent according to the latest figures from the Global Wind Energy Council, the wind sector continued to make robust progress in 2012. But while these figures suggest a relatively buoyant market for installations, perhaps a more accurate way to judge the health of the wind sector is to consider investment in R&D, and more specifically the products of that research, development and testing.

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.


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.

David Appleyard is Chief Editor of Renewable Energy World. He also currently holds the position of Chief Editor for sister publication Hydro Review Worldwide. A journalist and photographer, he graduated with a degree in Applied Environmental Science.

This article was first published on, and is reprinted with permission.

March 23, 2013

Maxwell's Misreported Revenue: More to Come

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.

MXWL AR and Revs.png

 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.


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 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.

March 18, 2013

Zoltek Rebuffs Offers, But Quinn Isn't Going Away

Tom Konrad

zoltek logo.pngOn March fifth, St. Louis, MO based carbon fiber manufacturer Zolek’s (NASD:ZOLT) shares jumped 14% to $10.52, having traded as high as $11.70 intraday when Quinpario Partners LLC  and allied investors disclosed a 10.13% stake in the company.

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 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.

February 15, 2013

GE Snatches Wind Installation Crown from Vestas

James Montgomery

Offshore Wind Farm photo via Bigstock.
Preliminary rankings of global wind installation capacity show something not seen in 12 years: longtime market leader Vestas looking up at someone else.

BTM Consult, a division within Navigant's Global Energy Practice, says General Electric (NYSE:GE) installed more wind turbine MW capacity than any other original equipment manufacturer (OEMs) in 2012. While not offering specific numbers, Aris Karcanias, senior analyst with BTM, acknowledged that it was "a clear win" for GE, and "not a difference of 50 megawatts)," though also "not a landslide."

The full report isn't due until late March, but here's a quick look at BTM's preliminary rankings:

  • 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.
The change at the top of the rankings carries some importance because of Vestas' longtime position of market leadership, particularly amid the past few years of turmoil. "Vestas has always been the one to catch," points out Karcanias -- even while also being at the front of the pack in feeling growing pains following the financial crisis.

GE's success can be attributed almost entirely to the robust US wind market, where roughly 13 gigawatts (GW) was installed in 2012 amid a mad rush to get wind projects completed ahead of the expiring production tax credit (PTC). As much as three-quarters of GE's 2012 installed capacity was domestic, which boosted its business relative to its more international competitors, according to Karcanias.

Such reliance upon a single market is a double-edged sword. The PTC's renewal could very well cause another rush in the US later this year, but even GE admits it likely will be nowhere near last year's wind capacity surge. Many firms are awaiting clearer definition of "continual construction" as a key metric for PTC qualification; "there is very little spillover, very little construction at present," he said. That means GE, despite making inroads into other markets e.g. Latin America, likely won't have the same bump in business in 2013, while wind OEMs with a more distributed portfolio (Vestas, Siemens) might fare better. A 2013 return to the top for Vestas could very well happen, Karcanias said.

Other trends being gleaned from BTM's forthcoming report:

- Policy uncertainty weighs down many key markets: the US, Europe (Spain, Italy, France, Portugal, the UK), and Asia (India, Australia, Japan). Even so, 2012 showed record global installations, with the U.S. and China accounting for 60 percent of the global market for wind power.

- Delayed payments from utilities to power producers in India (up to 14 months) and China (up to two years) are tightening cash flow throughout the wind turbine value chain.

- There's a lack of transmission buildout, both land-based (China, Brazil, Mexico, Germany, US) and offshore (Germany). The big question: who's ultimately responsible for the buildout -- is it a state-level or national regulatory issue? This won't be answered quickly, and will cost a lot of money.

- Capacity factor improvements are pushing down wind's levelized cost of energy (LCOE), but new shale gas extraction methods are lowering the bar for natural gas too, so the generation cost comparison for wind power isn't as compelling. Karcanias suggests grid parity for wind might occur around 2017, but offshore wind is "still a long way from being cost-competitive."
Jim Montgomery is Associate Editor for, covering the solar and wind beats. He previously was news editor for Solid State Technology and Photovoltaics World, and has covered semiconductor manufacturing and related industries, renewable energy and industrial lasers since 2003. His work has earned both internal awards and an Azbee Award from the American Society of Business Press Editors. Jim has 15 years of experience in producing websites and e-Newsletters in various technology.

This article was first published on, and is reprinted with permission.

February 14, 2013

Western Wind & Brookfield: Time To Declare Victory and Go Home

Tom Konrad CFA

Western Wind logo.png Yesterday, I tendered my shares of Western Wind Energy (TSX-V:WND, OTC:WNDEF) to Brookfield Renewable Energy Partners' (TSX:BEP.UN, OTC: BRPFF) extended offer for Western Wind at C$2.60 a share.  This is despite the fact that I think (and was even quoted in a Western Wind press release) saying Western Wind is worth more than C$2.60.

Two things have changed.  After conversations with other investors, Western Wind CEO Jeff Ciachurski, and a representative of Brookfield, as well as reading some evidence of extremely bad governance in Western Wind's Q3 2012 filing, I no longer think that Western Wind's management or board are committed to the sale process.  If there is another bidder willing to offer more than C$2.60 a share, I don't have confidence that the directors will present it to shareholders.  On September 20, Western Wind issued a press release, signed by all five directors, where they committed to the sale process.  They said, "The highest bid will not be denied and regardless of market conditions, the highest bid will be forwarded to the shareholders, for their approval."

C$2.60 is the highest bid, yet the directors are recommending we reject it.  It does not build confidence.

I went into a lot more details as to why I don't think we'll see a higher bid and why we should tender our shares in an article on Forbes yesterday.  Here are the basic points:
  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.
The title of this article comes from my conclusion:
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.
You can read the details here.

You'll note that point 5 above was that Ciachurski has a habit of alienating possible buyers.  It's not just buyers he goes after... it's anyone who gets in his way.  Here's an email he sent me this morning, in response to the Forbes piece.
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.

February 10, 2013

Why Did Finavera Wind Energy’s Stock Crash?

Tom Konrad CFA

finavera_logo[1].gifA 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 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.

January 08, 2013

Valuing Finavera's Deal With Pattern Reveals Buying Opportunity

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.

On October 1st, following the failed sale of Finavera Wind Energy’s (TSX-V:FVR, OTC:FNVRF) 77 MW Wildmare Wind Energy Project to Innergex Renewable Energy Inc (TSX:INE, OTC: INGXF), Finavera announced that it was in talks with three potential bidders and would review all offers for the company.  Finavera did not have much choice in the matter: the proceeds of the Wildmare sale had been needed to repay an overdue note to GE.

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.


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 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.

January 03, 2013

Improved Wind Energy Tax Credit Extension Passes with Fiscal Cliff Deal

Renewable Energy World Editors
Offshore Wind Farm photo via Bigstock.

On January 1, 2013, Congress passed legislation that included the long-sought extension of wind energy tax credits in a bill to avert the "fiscal cliff" that now moves to President Obama for his expected signature.

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 and is reprinted with permission.

December 16, 2012

Zoltek: High in Fiber, Low in Valuation

by Debra Fiakas CFA
  The Stohr DSR has an all carbon fiber body (Photo credit: Rhots/Wikimedia Commons)
Zoltek Companies (ZOLT:  Nasdaq) is in the business of fibers, mostly carbon fibers.  Plain, simple fibers may not seem very impressive.  However, Zoltek’s carbon fibers are in wide demand for renewable energy applications such as wind turbines blades and deep sea oil and gas wells.  After two years swimming in red ink, Zoltek has managed to bring sales back up to 2008 levels.  The company earned $22.9 million in net income on $186.3 million in total sales in the fiscal year ending September 2012.  During the same period Zoltek cleared 9.3% of total sales as operating cash flow.

Analysts are expecting modest growth in the next fiscal year.  The consensus estimate is $0.69 on $189 million in total sales in fiscal year 2013.  The estimate has remained unchanged in the most recent weeks, even though Graftek failed to meet earnings expectations for the September 2012 quarter.

Zoltek’s management is a bit more enthusiastic about its future.  That is because the carbon content of durable goods is rising at a fast pace  -  so fast some manufacturers are concerned about a shortage of carbon fibers in the future.  For example, aircraft are adopting carbon composites for floors, luggage bins and even seats as a means to reduce overall aircraft weight.  Boeing’s Dreamliner 787 is the first large-scale commercial aircraft made using 50% composite materials including plastics and carbon fiber.

The company has been working on new technologies for cutting and milling carbon fibers to facilitate mixing carbon fibers with thermoplastics.  Such plastics are now used in electronics such as computer hard drives and printers.  Lacing the thermoplastic with carbon would add durability and extend the range of potential applications. Most likely new markets would be automotive and aerospace.

Zoltek has spent $23.8 million or 5% of sales on research and development efforts over the past three years.  Indeed, R&D has taken on added visibility over the past couple of years with the central effort carried out at the company’s plant in St. Peters, Missouri.  Much of the effort is aimed at improving production processes, but management is also keen on finding new ways to use carbon.

The automotive industry figures prominently in Zoltek’s growth plans.  In 2010, the company formed a new subsidiary, Zoltek Automotive, to help facilitate the adoption of carbon materials in cars and trucks.  Tesla Motors (TSLA:  Nasdaq) already uses Zoltek fibers for its electric sports cars.

Zoltek can afford to move aggressively on market opportunities.  At the end of September 2012, there was $29.9 million in cash on its balance sheet.  Debt totaled $27.1 million, but the debt to equity ratio is a modest 0.09.

We have added Zoltek to the Materials Group in our Mothers of Invention Index for innovators in energy, efficiency and conservation.  The stock trades at 11.1 times forward earnings, which looks like a bargain for a well-capitalized company that appears poised to offering significantly higher growth.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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

November 27, 2012

China Finances Ming Yang Wind in India

Doug Young

Rice farmer in India with wind turbines.  Photo courtesy of Vestas Wind Systems (VWDRY)
With its new energy sector tottering on the brink of collapse, China no longer seems to care if foreign government accuse it of unfairly supporting its sector with low cost loans and other state subsidies. That at least appears to be the message from a new plan by Ming Yang Wind Power (NYSE: MY), which has just announced a massive new tie-up with policy lender China Development Bank to provide financing for wind power projects in India. (company announcement)

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 .

August 12, 2012

Western Wind to Sell Company, Avoid Proxy Battle

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.

Kingman solar and wind.png
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.


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 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.

August 07, 2012

Finavera to Sell Wind Project for Three Times Its Market Cap

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 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.

August 01, 2012

On the Edge of the Subsidy Cliff: Will the US PTC Expire?

Steve Leone

Udall ptc.png
Sen. Mark Udall

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.

Steve Leone is an Associate Editor at  He has been a journalist for more than 15 years and has worked for news organizations in Rhode Island, Maine, New Hampshire, Virginia and California.

July 29, 2012

Western Wind Energy: A Matter of Trust, and Value

Tom Konrad CFA

Windstar wind farm
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.

WND balance sheet data
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.

WND per share
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.


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 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.

Western Wind Expects Full Cash Grant for Windstar

Tom Konrad CFA

Windstar wind farm
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.

On the tenth, I thought that investors should write off the 1603 cash grant shortfall, despite the fact that the company intended to send a delegation to Washington consisting of company management along with their advisers in order to argue for the full cash grant.  I wrote,

“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.

Disclosure: Long WNDEF

This article was first published on the author's 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.

July 20, 2012

Western Wind Energy Receives $78.3M Cash Grant: Good News, Bad News

Tom Konrad CFA

Windstar wind farm
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.)


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 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.

July 07, 2012

Where's Western Wind Energy's Tax Grant?

Tom Konrad CFA

 On March 22, Western Wind Energy (TSX-V:WND, OTC:WNDEF) applied for a $90,556,707 tax-free 1603 grant from the US Treasury on behalf of the completed 120MW Windstar project.  The press release stated that the grant is subject to approval by the Treasury and payable within sixty days.

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.


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 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.

June 16, 2012

Opposite Day Blows Wind Tower Stocks Offshore

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.

Industry role Change,
5/29 to 6/4
FAN Global Wind ETF Wind industry as a whole -4.3%
SI Siemens Chinese Wind Tower Customer -6.1%
VWDRY Vestas Chinese Wind Tower Customer -14.1%
BWEN Broadwind US Wind Tower Manufacturer -6.9%
TRN Trinity US Wind Tower Manufacturer -6.6%

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.

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 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.

May 31, 2012

DOC Imposes Tariffs on Chinese Wind Towers

Steve Leone
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.

Steve Leone is an Associate Editor at  He has been a journalist for more than 15 years and has worked for news organizations in Rhode Island, Maine, New Hampshire, Virginia and California.

A Gust of Wind Industry Mergers

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.


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.


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 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.

April 22, 2012

Wind: Oversupply Heralds 'Flight to Quality'

David Appleyard

A dramatic turnaround in the wind technology supply chain could bring opportunities for qualified suppliers, finds research by BTM Consultant ApS.

Over the past five years the whole of the wind technology supply chain has been in flux. The industry has seen a dramatic turnaround, with a negative supply situation for some key components and materials transformed into the current position, with a significant supply surplus. We present the key findings of the latest BTM Consult Supply Chain Assessment report.

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.

David Appleyard is Chief Editor of Renewable Energy World. He also currently holds the position of Chief Editor for sister publication Hydro Review Worldwide. A journalist and photographer, he graduated with a degree in Applied Environmental Science.

March 28, 2012

Sell Wind ETFs if Support is Violated

Steve Sollheiser 

Both Wind ETFs are showing interesting chart patterns.

PWND Chart

In the PowerShares Global Wind Energy Portfolio (PWND) chart we can see a Falling Wedge patern, that consists of two non-parallel trend lines that engulf price. The upwards trend line has been tested for 5 times, which is an indication of its strength.

The support trend line was tested four times, which confirms its validity and the accuracy of the pattern.

The Falling Wedge, contrary to intuition, is a Bullish pattern which predicts a breakout upwards and an uptrend in 68% of the time. We would expect price to break the resistance trend line and continue upwards, the target of the breakout calculated at $7.7, and would be reached in 70% of  breakouts.

In a longer-term analysis, we can also see a strong support level on the $6.6 price level, as price tested this level 3 times and did not break it. In case of a breakout below this level we would enter a short trade, and will add to this position in case price pulls back to this level from below. The conservative target for this trade would be calculated by the Measure rule and would be $5.4.

 FAN Chart 

The First Trust Global Wind Energy Index (FAN) is also showing very interesting (and quite similar) price-action.

There was a breakout of a ascending trend line and an accurate pullback to this trend line at March 19th, which resulted in a 4.3% bearish move (marked by the Red arrow on the chart). We can see the price is now on a support level at the $7.8 level.

This level was tested for 5 times, which makes it a strong short-term support level. We would expect high probability of a breakout of this level downwards, and a continuation of a bearish move. The target for such trade is at least $7.48. For the sellers, beware of the support level at $7.6 which was tested twice and can still be a barrier for price on its way down.

In conclusion, if FAN price breaks the support level of $7.8 we will sell it, expecting it to go even lower. If PWND stock will break the $6.6 we will also enter a sell trade, with target at $5.4

Steve Sollheiser is a trader and a writer with experience in trading stock chart patterns and Forex. In his site he shares his insight about chart trading and trading psychology.

March 26, 2012

Op-Ed: Vote Against Vestas' Proposed Board

Vestas' (VWDRY.PK) Board of Directors intend to grant management share options at a strike price one-third BELOW book value. The Board of Directors is rewarding management for its mismanagement and past profit warnings. This will not help restore investor confidence. Given Vestas' valuation, it is time for shareholders to stand up for their interests: Investors should vote against all nominees for Vestas Board of Directors at the AGM on March 29th.

The strike price of Vestas' share option scheme is only the latest in a series of decisions disregarding shareholder interests. Vestas needs to change! Vestas needs a Board of Directors capable of hiring qualified managers and willing to enforce shareholder interests. Vestas' old Board of Directors has failed to control management, eg in respect of risk taking (capacity expansion, R&D budget), the establishment of suitable organizational structures and the company's succession planning. Given these failures, no standing member of the Board of Directors should serve an additional term. Nor should investors quickly accept those candidates who have been proposed by the failed board as successors for its departing chairman and his deputy.  While these candidates may be excellent managers, they lack what is needed most in critical times like these. Vestas does not need more Scandinavians on the board; it needs a sound sector background in wind energy, not telecommunications.  Vestas needs the will and determination to replace CEO Ditlev Engel as soon as time and circumstances permit.

I invite Vestas shareholders to join me in voting against a renewal of terms of existing members of the Board of Directors, and their chosen successors. Vestas needs a new start with new people and new ideas.

I support restructuring measures as suggested by management and believe that the company has an interesting investment case IF:
  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.
Disclosure: Long position in Vestas (VWDRY.PK).

The author is an independent financial analyst and investor with more than 15 years working experience in the financial services industry.

March 11, 2012

Offshore Wind Power: Penny Foolish, Dollar Wise

Tom Konrad CFA

Offshore Wind Farm
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.
Capacity Value

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


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

March 05, 2012

The Best Offshore Wind Stocks

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:

Offshore Wind Stocks.png

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. 


A Diamond in the Rough
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.

February 25, 2012

Investing In Offshore Wind Power

Tom Konrad CFA

Offshore Wind in the United States

Last week, the long-embattled Cape Wind project got a break: Utility NStar(NST) agreed to buy 27.5% of the proposed offshore wind project's output.  Together with a previous power purchase agreement with National Grid (NGG), this gives Cape Wind a buyer for 77.5% of the project's total projected output.  Jim Gordon, Cape Wind's President speaking at Offshore Wind Power USA in Boston, called the NStar deal the "starting gun" for Cape Wind's financing round.

Yet speakers and attendees at Offshore Wind Power USA agreed that the Cape Wind story remains a cautionary tale for potential offshore wind developers, rather than a signal the the US offshore market is open for business.  While the Bureau of Ocean Energy Management has made progress in defining the leasing process, this process is still expected to take six to eight years to complete.  There remains a notable lack of coordination between and among the score federal and state agencies which have a say in the process.

Perhaps more importantly, the Production Tax Credit (PTC) and Investment Tax Credit (ITC) were not extended as part of the payroll tax cut extension.  The American Wind Energy Association is continuing to pursue the PTC extension through other legislation, but many observers at the Offshore Wind conference opined that these incentives will not see any action until Congress' lame duck session, after November election.  Few offshore wind developers are willing to invest to move their projects forward until they have some certainty about the PTC and ITC, so most offshore wind projects in the United States are likely to remain on hold at least until the end of the year.


Offshore wind in the US is far from the whole story.  The European Offshore Wind industry is entering its full commercial stage, with projects amounting to several gigawatts of capacity expected to be built over the next few years, making the global industry worthy of investors' attention.

European offshore wind is not without hiccups.  The European financial crisis has slowed (but not stopped) financing for wind farms, despite the fact that some farms require investments in the billion Euro range.  Another recent problem, which will be familiar to onshore wind developers, is grid interconnection.  Although Germany has a legal requirement that transmission operators connect new wind farms to the grid, this is an unfunded mandate, and the transmission companies do not have the funding or even enough of the right sort of cable to meet this obligation in a timely fashion.  Grid connections for two large wind farms were recently delayed by 12 and 15 months because of such problems, costing the developers hundreds of millions of euros in electricity sales.

Offshore Wind as an Investment

Such hiccups happen in new industries, and they can lead to buying opportunities for investors.  Often the best time to buy stock is after most people realize everything is not smooth sailing, but before all the problems are resolved.  This allows excess returns, as stocks which were initially priced as highly risky investments gain value as the industry learns to tackle such challenges.

 As the only renewable energy resource able to produce power on the scale of hundreds of gigawatts close to the world's most energy-hungry and population dense cities in Europe and America's Eastern seaboard, offshore wind will play a prominent role in the transition away from fossil fuels.  The only question in my mind is when this transition will occur.  My feeling is that this maturation of the offshore wind market (at least in Europe) will come within the next few years, leading to substantial rewards for investors with good timing.

Offshore Wind Stocks

Most onshore wind turbine manufacturers either already have turbines designed for offshore use, or are developing them.  The current market leaders are Siemens (SI) and Vestas (VWDRY.PK), but Vestas is rapidly losing ground to a host of new entrants, including Chinese players like Sinovel (601558.SS) who are largely responsible for the fierce price competition which led to the poor performance of wind power stocks in 2011. 

Given the inauspicious competitive environment among turbine manufacturers, I think better investments are to be found in other parts of the wind farm.  According to Walt Musial, the manager of offshore wind and ocean power systems at the National Renewable Energy Laboratory, the turbines only account for 32% of the cost of a wind farm, on average.  Fully 52% of the cost lies in other farm components, such as support structures, the undersea cables that collect power from the turbines and send it to shore, and the various power converters needed.

In short, many of the best offshore wind investments are the companies I call Strong Grid Stocks: the companies which help grid operators move electricity in bulk.  I'd include among these cable manufacturers such as Prysmian (PRYMF.PK) and General Cable (BGC) (recall the German wind farms with grid connections delayed in part because of lack of cable, a sign of scarcity which leads to pricing power.)  I'd also include the companies such as Siemens (SI), ABB Group (ABB), and Alstom (AOMFF.PK) who supply many aspects of the power conversion and interconnection hardware needed to tie wind farms to the grid.  One of the reasons Siemens is expected to maintain its position as the world's leading offshore turbine supplier for the next few years is the company's ability to supply many of the parts and services offshore wind farms require in addition to the turbines.  Alstom also seems to be following this strategy by introducing a broad range of new products (including a new 6MW direct drive turbine) for offshore wind.

Besides equipment manufacturers, offshore wind is likely to be a boon to shipbuilders with the capability of constructing the specialized ships needed to install large wind turbines and foundations, which are in short supply.  Harbors near promising wind farms will also have to be improved to accommodate the large ships needed to install them, which is likely to help dredging companies such as Great Lakes Dredge and Dock (GLDD).


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.


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.

February 18, 2012

A Harsh Winter for Sinovel and China's Wind Industry

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  This article first appeared on Renewable Energy World.

January 25, 2012

Dark Clouds Threaten German Clean Energy Ambitions

John Petersen

During the fourteen years that I've lived in Switzerland, the Germans have been the world's staunchest supporters of green power and alternative energy. Their aggressive development of wind power was breathtaking, as was their warm embrace of photovoltaic power. Over the last few weeks, however, there has been an ominous change in the mainstream German media's tone as the political class finally comes to grips with the unpleasant reality that rooftop solar panels are worthless on short, grey winter days and "For weeks now, the 1.1 million solar power systems in Germany have generated almost no electricity." Three recent and highly negative articles from Der Spiegel Online include:
As recently as last year, articles like these would have been unthinkable. Today they're viewed as reasonable discussions of critical issues as the laws of thermodynamics and economic gravity assert their absolute primacy.

The Germans have been trailblazers in all things green since the emergence of the Green Party in the 1980s. In fact, it's hard to name an alternative energy technology that Germany hasn't welcomed with open arms. When it comes to green power and alternative energy, the Germans have been on the far left of the technology adoption curve for a very long time.

1.24.12 Tech Lifecycle.png

If the tone of the recent Der Spiegel articles is a reasonable indicator of public sentiment, the innovators are getting ready to throw in the towel on green panacea solutions and get down to the serious work of conserving energy instead. They're weighing the costs and benefits, and reaching an entirely predictable conclusion that it's impossible to depend on variable and inherently unreliable power sources as the backbone of an industrial economy. As Germany goes, so goes the world.

If the world's standard-bearer for green power and alternative energy abandons the quest and chooses a more sensible path of conservation and energy efficiency, the backlash against the solar power industry will be immense and risks to the wind power industry will skyrocket. After all, it's hard to argue the merits of "One for the Price of Two" power solutions; which is exactly what you get when wind and solar power have to be fully backed up by conventional power plants. If the solar and wind power dominoes fall, they'll almost certainly take out the emerging electric vehicle industry that demands huge amounts of money and natural resources to simply substitute one fuel source for another.

Currently all eyes are on Germany as the epicenter of European efforts to restore fiscal balance in an age of profligate and unsustainable government spending. The apparent German surrender on green power and alternative energy may just be an unfortunate victim of that broader effort. Until the dark clouds dissipate and we have a clearer view of the landscape, I'd minimize my exposure to solar, wind and electric drive and focus instead on less costly energy efficiency technologies that work with the laws of thermodynamics and economic gravity instead of fighting them.

Disclosure: None

September 30, 2011

A New Way to Skin the Renewable Energy Cat

Tom Konrad CFA

It's not often that I come across a new type of renewable energy and think, "This could really work."  But that's what I thought when I heard the concept for the downdraft tower proposed by Clean Wind Energy Tower (CWET.OB.)

First, a couple caveats.  The concept is not new, it's been around 25 years in draft form.

The physics is simple.  Build a very tall, hollow tower in a hot, dry climate; cool the air at the top with a mist of water (even salt water will work), and capture the resulting energy from the downdraft with an array of wind turbines arranged around the bottom.  Most of the water is condensed at the bottom of the tower, and (since it has been effectively distilled) used as fresh water, a valuable commodity in the dry regions that are appropriate for downdraft towers.

Downdraft Tower.PNG
Because the tower needs to be extremely tall in order to make the downdraft strong enough to generate electricity economically, the tower also features vanes designed to direct prevailing winds down to the base to be captured by the same turbines.

The company expects that the combination of generation from prevailing winds and the induced downdraft wind will combine to give the tower a capacity factor in excess of 60%, much higher than typical solar or wind capacity factors, while most of the power will be produced in the afternoon and evening during spring, summer and fall, meaning that this power is likely to be more valuable to utilities than either wind or solar photovoltaic. 

The reason no one has attempted to build a downdraft tower before is that we did not have the technology to build a tall enough tower.  Now we do.  In particular, the Kroll self-erecting cranes used to build such skyscrapers as the Burj Dubai, along with other construction methods used to keep such extremely tall skyscrapers upright in strong winds and earthquakes.

I spoke briefly with Ron Pickett, CWET's President and Stephen Sadle, the firm's Chief Operating Officer at the Modern Energy Forum in Denver in early September, and I got the impression that the two men are used to success.  They, and two others of their team have worked together on four successful start-ups, from telemedecine to the incineration of municipal solid waste recycling.

This time they're thinking bigger: The commercialization of a new clean energy technology.  Although they are careful to stress that they are simply combining and commercializing proven technologies, I find it hard to believe that they will be able to raise the funding necessary to build their demonstration tower in the current environment.  Bond investors are generally unwilling to fund anything that seems even remotely new, a problem that might have potentially been overcome  by a program like the DOE loan guarantees, but it's unlikely that anything resembling that program will be authorized in the next few years considering the current Solyndra brouhaha.

I hope I'm wrong and they do get the money they need to succeed, since this downdraft tower concept has the potential to be a valuable addition to our clean energy arsenal, but at this point, I can't recommend small investors buy the stock.

DISCLOSURE: No Position.

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.

July 11, 2011

Saviors and Saboteurs in Alternative Energy

John Petersen

Last week Societe Generale published a thematic research report titled "A new world order, when demand overtakes supply" which examines the macro-economic and demographic trends that will transform the global economy over the next 20 years. It mirrored the theme of Jeremy Grantham's April 2011 quarterly letter titled "Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever" and did a great job of summarizing an issue I touched on in "How PHEVs and EVs Will Sabotage America's Drive For Energy Independence."

In the words of Societe Generale:

"So, while up until now less than one billion people have accounted for three-quarters of global consumption, over the course of the next two decades, the new Chinese, Indian, Indonesian, Latin American and African middle classes will bring an additional two billion consumers with similar needs and aspirations as today's North American, European and Japanese consumers." (Page 12)

"Beyond growth in demand for finished products, the most spectacular effect likely to be brought about by the stronger development of the emerging economies will be the enormous rise in demand for raw materials." (Page 14)

"A structural increase in raw materials prices is in fact an inevitable consequence of chronic resource insufficiencies, whether we're talking about industrial, energy or agricultural resources." (Page 19)

The following table from Mr. Grantham's quarterly letter summarizes China's current consumption of key energy, industrial and agricultural commodities as a percentage of total global consumption and drives the point home with the subtle clarity of a sledge-hammer.

7.10.11 China.png

If we've seen this kind of demand dislocation as a result of a few decades of growth in China, what's going to happen when the surging middle class populations of India, Indonesia, Latin America and Africa decide to show up for the dinner party? The answer, of course, is that we'll be thoroughly screwed unless we stop wasting time, money and materials on pipe dreams, toys and panacea solutions, and focus instead on finding relevant scale solutions to persistent global shortages of water, energy, food and every commodity you can imagine. We all face a clear, present and persistent danger that can’t even be addressed until we accept the entire ugly reality with all its vulgar implications!

One of the most disturbing conclusions in the Societe Generale report is that while per capita energy demand in advanced economies will remain stable at 5,463 kg of oil equivalent, or maybe even decline to 5,000 kg per person by 2030, global average demand will increase from current levels of 1,818 kg per person to 3,312 kg per person in the low case and 4,228 kg per person in the high case. All of the increased demand will come from emerging and developing economies.

Our fundamental problem is that per capita global production of energy resources is 100 to 200 times greater than per capita global production of the technology metals that underlie all alternative energy schemes. To make things worse, all of those metal resources have critical competing uses that cannot be set aside or ignored in the name of advocacy. At a recent grid-based energy storage conference in Brussels I used the following table to emphasize the point. The orange highlight quantifies available energy resources while the green highlight quantifies technology metal resources.

7.10.11 Energy vs Metals.png

The mathematically challenged optimists in our midst earnestly believe we can solve our energy problems with cool toys like wind turbines, solar panels, electric cars and other materials intensive energy schemes that fire the imagination but can never be sustainable. These aren’t solutions! They’re the energy and transportation equivalent of graphic novels and just a half-step removed from warp drive. In the final analysis, the dreamers who want to waste metals and other natural resources in the name of conserving coal, oil and natural gas are not saviors. They're unwitting saboteurs who can only make the problems worse!

Whether we like it or not, the only technology that has a prayer of generating enough new energy to satisfy even a small fraction of anticipated global demand is nuclear, a point that was forcibly driven home by Bill Gates in a recent interview at the WIRED Business Conference 2011. The naive idea that we can cut hydrocarbon consumption for the laudable goal of saving the planet is sophistry. Given a choice between freezing in the dark and burning hydrocarbons human beings will always choose the later because immediate personal need will always trump long term societal goals, especially fuzzy green goals.

I'm an unrelenting critic of obscene raw materials users like Tesla Motors (TSLA), A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) that want to build a future out of making toys for our emerging eco-royalty because I've read about the French Revolution and remember how 'Madame Le Guillotine' put a uniquely sharp edge on popular discontent over conspicuous consumption. These business models are doomed to fail because they're diametrically opposed the needs of society.

The only alternative energy investments that stand a chance of survival, much less profitability, are basic efficiency technologies that slash waste and deliver real savings for every ounce of natural resource inputs. Nuclear power, idle elimination, fuel efficiency, demand response, building efficiency, ebikes, recycling and a host of other technologies that do more with less are the only possible future. Wind turbines, solar panels, electric cars and all of the other feel-good graphic novel schemes are merely pleasant distractions, a bit like Nero's fiddle.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock because Axion's disruptive third generation lead-acid-carbon battery technology uses 30% less lead to deliver impressive gains in power, cycle-life, charge acceptance and overall real world utility.

June 24, 2011

The Alternative Energy Fallacy

John Petersen

In 2009, the world produced some 13.2 billion metric tons of hydrocarbons, or about 4,200 pounds for every man, woman and child on the planet. Burning those hydrocarbons poured roughly 31.3 billion metric tons of CO2 into our atmosphere. The basic premise of alternative energy is that widespread deployments of wind turbines, solar panels and electric vehicles will slash hydrocarbon consumption, reduce CO2 emissions and give us a cleaner, greener and healthier planet. That premise, however, is fatally flawed because our planet cannot produce enough non-ferrous industrial metals to make a meaningful difference and the prices of those metals are even more volatile than the prices of the hydrocarbons that alternative energy hopes to supplant.

The ugly but undeniable reality is that aggregate global production of non-ferrous industrial metals including aluminum, chromium, copper, zinc, manganese, nickel, lead and a host of lesser metals is about 35 pounds for every man, woman and child on the planet. All of those metals are already being used to provide the basic necessities and minor luxuries of modern life. There are no significant unused supplies of industrial metals that can be used for large-scale energy substitution. Even if there were, the following graph that compares the Dow Jones UBS Industrial Metals Index (^DJUBSIN) with the Amex Oil Index (^XOI) shows that industrial metal prices are more volatile and climbing faster than hydrocarbon prices, which means that most alternative energy schemes are like jumping out of the frying pan and into the fire.

6.23.11 Metals vs Oil.png

For all their alleged virtues and perceived benefits, most alternative energy technologies are prodigious consumers of industrial metals. The suggestion that humanity can find enough slop in 35 pounds of per capita industrial metals production to make a meaningful dent in 4,200 pounds of per capita hydrocarbon production is absurd beyond reckoning. It just can't happen at a relevant scale.

I'm a relentless critic of vehicle electrification schemes like Tesla Motors (TSLA) because they're the most egregious offenders and doomed to fail when EV hype goes careening off the industrial metals cliff at 120 mph. Let's get real here. Tesla carries a market capitalization of $2.8 billion and has a net worth of less than $400 million, so its stock price is 86% air – a bubble in search of a pin. Tesla plans to become a global leader in the development of new electric drive technologies that will use immense amounts of industrial metals to conserve irrelevant amounts of hydrocarbons. Even if Tesla achieves its lofty technological goals it must fail as a business. Investors who chase the EV dream without considering the natural resource realities are doomed to suffer immense losses. Tesla can't possibly succeed. Its fair market value is zero. The stock is a perfect short.

I won't even get into the sophistry of wind turbines and solar panels.

Next on my list of investment catastrophes in the making are the lithium-ion battery developers like A123 Systems (AONE), Ener1 (HEV), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI) that plan to use prodigious quantities of industrial metals as fuel tank substitutes, or worse yet for grid-connected systems that will smooth the power output from inherently variable wind and solar power facilities that also use prodigious quantities of industrial metals as hydrocarbon substitutes. Talk about compounding the foolishness.

I can only identify one emerging battery technology that has a significant potential to reduce hydrocarbon consumption and industrial metal consumption at the same time while offering better performance. That technology is the PbC® Battery from Axion Power International (AXPW.OB), a third generation lead-acid-carbon battery that uses 30% less industrial metals to deliver all of the performance and five to ten times the cycle life. There may be other examples, but I'll have to rely on my readers to identify them.

Humanity cannot reduce its consumption of hydrocarbons by increasing its consumption of industrial metals. The only way to reduce hydrocarbon consumption is to use less and waste less.  There are a world of sensible and economic fuel efficiency technologies that can help us achieve the frequently conflicting long-term goals of reduced hydrocarbon consumption and increased industrial metals sustainability. They include but are not limited to:
  • 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
My colleague Tom Konrad wrote a 28 part series on "The Best Peak Oil Investments." While I'm skeptical about the future of biofuels after suffering major losses in the biodiesel business, Tom's work provides an exhaustive overview of the energy efficiency space and a wide variety of investment ideas that have the potential to make a real difference. Since we can't simply take a couple of giant leaps into the future, we'll just have to get out of our current mess the same way we got into it – one step at a time.

We live in a cruel world. There is no fairy godmother that can miraculously accommodate the substitution of scarce industrial metals for hydrocarbons that are a hundred times more plentiful. We can and we must do better, but we can't solve humanity's problems until we accept the harsh realities of global resource constraints without the filters of political ideology and wishful thinking.

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

June 23, 2011

Wind Fall

Debra Fiakas

Angela Merkel’s coalition government may not have looked at the nuclear power question for anything more than a “cover your behind” solution.  Nonetheless, the wind industry sees last month’s decision to phase out Germany’s nuclear power generation industry by 2022 as  -  no pun intended  -  a windfall.  Policy makers say as much as half of the deficit left by the shutdown of nuclear power plants will need to be made up from other power sources, principally wind power.

This is no small undertaking.  A total of 21,607 wind turbines with an overall capacity of 27,214 MW were in service in Germany at the end of 2010.  To replace half of the nuclear power capacity going off-line by 2022, wind installations need to increase by as much as 40% by 2022.  German Wind Energy Institute (DEWI) reports that 1,551 MW of new wind power capacity was installed in 2010, well below goals for 1,900 MW installations.  The German wind power industry will need to maintain if not accelerate its current pace of development in order to meet Merkel’s nuclear replacement goal.  This means many new wind turbines sprouting up across the German countryside.

The most logical winner in this turn of events is Germany’s own Siemens AG (SI).  Siemens has dedicated considerable investment in developing its line of seven wind turbines models.  The company boasts 7,800 turbines installed around the world, producing over 8,800 MW of power a year.  For U.S. investors Siemen’s ADR has some appeal as it is priced at a multiple of 11.4 times forward earnings and offers a 2.8% dividend yield.  However, the stock trades not on its wind power business but on the relative strength of worldwide earnings against currency fluctuations and other macroeconomic factors.

Germany’s Nordex (NRDXF.PK) lays claim to first-mover status in the wind power world.  In 1995 with already a ten year track record in the wind business, Nordex was the first to put a megawatt system on the market.  Since its inception Nordex has installed more than 4,400 Nordex wind turbines with a total rated output of more than 6,500 megawatts in 34 countries around the world.  Of its large turnkey projects only a small portion are located in Germany.  Expect Nordex to make some aggressive moves to get a larger part of the domestic market.

Denmark’s Vestas Wind Systems (VWDRY.PK) is not in the least intimidated by the Siemens/Nordex home advantage.  That is because Vestas has installed over 43,000 turbines around the world with capacity to produce over 44,000 MW of power.  Over 5,800 of those turbines are in German and Vestas is likely to use its track record in Germany to get another big bite of the strudel so-to-speak.  That fact that Vestas does not report its financial results in the U.S. should not be a deterrent for U.S. investors.  The company provides financial information in English on its corporate web site.  Vestas ADRs trade on the Pink Quote system in the U.S. with fairly good volume and the bid/ask spread is reasonable.  Otherwise it is necessary to pick up shares on the Danish exchange.

For small-cap sector purists it will be necessary to consider at PNE Wind (PNE3.DE) and REpower Systems AG (RPW.DE).  Both are Germany-based wind technology companies that are likely beneficiaries of domestic wind power policies.  

With a knack for developing and installing wind power projects, PNE Wind recently broke into the U.S. market with the sale of a wind farm to Black Hills Power near Belle Fourche, South Dakota.  (As a native, I can vouch for the fact that there are a lot of Germans in South Dakota.)  

REpower Systems is another wind turbine producer with a full product portfolio that ranges from wind turbines with an output from 1.8 MW up to 6.15 MW and rotor diameters from 82 up to 126 meters.  It boasts the ability to install workable solutions even in areas with weak wind experience.

In scrutinizing these company’s investors will need to take a magnifying glass to cash flows and capital expenditures.  Even a whiff of inadequate resources for investment would be a tip to stay away from long positions.  Also a good look at product portfolios would be helpful as sites for eventual wind power installations are identified.  Not all turbines are created equal and some may not be the right configuration for Germany’s landscape.

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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  All stocks mentioned in this article are included in Crystal Equity Research’s Earth, Wind and Fire Index in the Wind Group.

June 06, 2011

American Superconductor: Time to Catch a Falling Knife?

Tom Konrad CFA

What is AMSC stock worth?

AMSC Stock Chart

American Superconductor Corporation (AMSC) investors panicked yet again on June 1st when the company said it would delay filing its annual report, needing additional time to review its recognition of revenue from Sinovel Wind Group (601558.SS) in the last three quarters of their fiscal 2010 (July 2010 thru March 2011.) 

The stock promptly dropped another 20+% and is trading for around $8 as I write, down over 70% since the start of the year. 

The Story So Far

The delayed annual report should not have caught investors by surprise.  When AMSC first announced that Sinovel had not paid for previously delivered product and was refusing to accept deliveries in early April, it was fairly clear that some revenue recognition would have to be restated.  That, after all, was the main grounds for the several class action lawsuits which promptly sprang up.  So investors are selling simply because of the increased uncertainty of not having new financial statements, not because of new negative news.

The other piece of recent news was the announcement on May 24 that Daniel McGahn, AMSC's former President and COO, would be taking AMSC founder Gregory Yurek's place as CEO.  Although the board attempted to pass this off "as part of the CEO succession plan that has been discussed with the Board of Directors since late 2010", I'd be willing to bet that the succession plan in question was significantly accelerated due to recent events.  In any case, Yurek will stay on as board chairman, and McGahn is a company insider, so while this may represent a change in emphasis for the company, it's no revolution.

When I first looked at AMSC after the Sinovel announcement, I thought the company was a speculative buy below $12, but quickly changed my mind when I found out that Sinovel had been working to establish a China-based competitor to AMSC.  With the recent sell-off I'm looking at the stock again, but with the immediate risk of dilution as the company attempts to raise funds in order to complete their acquisition of
The Switch Engineering Oy ("The Switch"), it's difficult to point to any price as a bottom, even if the company's fundamental value is much higher.

Back of the Envelope Calculations

One reader suggested that AMSC's Dec 31 cash on hand of $4.79 might serve as a useful floor for the stock price.  However, that amount represents only $243M, and any amount not needed to maintain operations will almost certainly be used as part of "The Switch" acquisition.  The rest will either be raised in the form of debt, or additional share offerings.  At the current share price, I expect that management will attempt to fund the rest of the acquisition with debt, if they can find a bank or banks willing to make the loan. 

The company's book value per share was $9.86 on Dec 31, a number which represents the cost paid to acquire the company's assets, minus any depreciation.  Book value is a notoriously inaccurate guide to the current replacement cost of assets, and to the extent that these assets are dedicated to servicing the needs of Sinovel, they may in fact be worth much less than the company paid for them.  Hence, it is also difficult to place a floor under the possible stock price based on book value.

Finally, we should consider future potential earnings as an indicator of the company's value.  In the June 1st press release, AMSC said it "
currently expects to reverse the recognition of a material amount of revenue that it had included when estimating revenues of "less than $355 million."  With shipments to Sinovel having not yet resumed two months into fiscal 2011, I think it is reasonable to expect much lower revenues this year. 

My current guess is that Sinovel will again accept shipments from AMSC this year, but they will never return to former levels, and could easily decline over time.  I'm far from confident in this guess, but given that Sinovel previously accounted for 70% of AMSC revenues, I think a reasonable guess for revenue in FY 2011 would be on the order of $150M (not including revenues attributable to "The Switch.")  Those revenues will come from any resumption of sales to Sinovel, revenues to other customers (Sinovel was only 70%, after all) and growth, especially from AMSC's eponymous superconducting wire business.

If AMSC maintains their previous gross margin of 29%, $150M revenues will translate into an operating profit of $43M, or an EBITDA of $28M.  If overhead were not reduced from last year, net loss would be about $7M.  But the company is working to reduce overhead, and said that they had already reduced headcount by 10% in the June 1st press release.  Therefore, we can reasonably expect overhead to fall, leaving the company near break-even or at a tiny profit.

If AMSC does not achieve a significant profit in 2011 as I'm guessing, a reasonable way to value the company would be based on sales.  Here are the price/sales ratios of other publicly traded wind industry players:

Price/Sales (ttm)
P/E (ttm)
Broadwind Energy (BWEN.OB) 1.15
Gamesa (GCTAF.PK) 2.79
Kaydon Corp (KDN) 2.55
Vestas Wind Systems (VWDRY.PK) 0.58
Zoltek (ZOLT) 1.23

Given the uncertainly currently surrounding American Superconductor, Broadwind and Zoltek are probably the better comparables than the established companies Kaydon, Gamesa, and Vestas, so I will use a prospective Price/Sales ratio of 1.0 to 1.3.  Using my $150M revenue estimate, we get a market capitalization of between $150M and $200M. 

The Switch acquisition was valued at
€ 190-million, or about $273M at current exchange rates, and was supposed to be immediately accretive to AMSC's sales. It seems reasonable that, to the extent that the acquisition can be funded without outside funds, it should increase AMSC's market cap.  Given AMSC's cash on hand at the end of the year of $243 million, I'm comfortable attributing another $200M market cap to The Switch, for a total market capitalization of between $350M and $400M.  This translates to a stock price of between $6.90 and $7.90. 


Given the uncertainty in all my guesstimates and calculations, it may already be time to pull the trigger on AMSC, given that the company seems relatively fairly valued even if we assume (as I did in my back-of-the-envelope calculation above) that most revenue from Sinovel is gone for good.  The recent response to their delayed annual report has the feel of panic selling. 

Yet panicking sellers do not pay much attention to valuations, back-of-the-envelope or otherwise.  Are you brave enough to try and catch a falling knife?

DISCLOSURE: Long Gamesa.  Considering a near-term purchase of 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.  

June 03, 2011

Financial Innovation is Blowin' in the Wind

Tom Konrad CFA

Owning a wind farm is about to become a lot less risky.

Wind power is cheap, clean, uses no water, and emits no pollutants.  Yet wind is far from a perfect source of electricity, since the wind blows when and where it will. 

While wind power will never be as constant as baseload power, geographic diversification and better dispatch procedures can go a long way to mitigate the problems to utilities caused by wind's variability.  Yet wind farm developers and financiers are at the mercy of the weather in their particular location.  Not only does wind output swing significantly from day to day and season to season, wind output can also vary greatly from year to year.  Farm owners also have to worry that some of their turbines might need maintenance just when the winds are at their best.  This can lead to unpredictability of wind farm revenues, which in turn makes wind farms more expensive to finance.

Two recent announcements go a long way to solving these problems for wind farm developers and owners.

First, on May 19th, energy risk analysis leader 3TIER and weather risk management firm Galileo announced that they would be offering financial products to hedge the risk of wind variability.  With cash payouts based on 3TIER's leading wind resource data, Galileo can offer to mitigate the cost to wind farm developers for a premium which can be expected to be much less than the risk premium charged by project financiers who do not have the expertise to assess wind resource risk as well as Galileo and 3TIER, and who also seldom have large and geographically diverse enough portfolios of wind investments to accept such risks at a price that is affordable for many wind farm developers.

Second, General Electric (GE) announced on May 23rd that they will be offering production based availability (PBA) guarantees as an option for new and existing operations and maintenance contracts on all GE 1.5 and 2.5 megawatt series wind turbines.  Not only will this remove a level of risk and make wind farms cheaper to finance, but it is also likely to be a competitive advantage for GE Wind, which recently slipped into third place by market share behind Chinese manufacturer Sinovel Wind Group (601558.SS).  While first place Vestas Wind Systems (VWDRY.PK) might be able to offer comparable guarantees, I can't see bankers putting much faith in the strength of a production guarantee from the Chinese firm, especially after their recent dust-up with American Superconductor (AMSC).

Together, these two financial innovations could do as much to reduce the cost of wind power and increase the pace of wind farm development as years' worth of technical innovation developing better wind turbines.

This article was first published on the Green Stocks blog at


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.

May 01, 2011

Is Sinovel Planning to Replace American Superconductor?

Tom Konrad CFA

Sinovel's recent refusal to accept shipments from American Superconductor (AMSC) may be due to more than just a slowdown in the Chinese wind market.

Many of my best ideas come from readers.  When American Superconductor (AMSC) announced that their largest customer, the Chinese Wind Power company (and the world's second largest wind turbine manufacturer) Sinovel (601558.SS) had refused shipments, and not yet paid for some previous deliveries, my first thought was that Sinovel's reasons would likely remain an enigma for several months.  I did not write anything, knowing that anything I said would be mostly guesswork.  However, a couple persistent readers pointed out that AMSC had been one of my Ten Clean Energy Stocks for 2011, and so I should really follow up on this important news.

The result was my attempt to decipher the news announcements and press releases from Sinovel and AMSC last week.  While I felt I was able to provide a good picture of the background, I could only guess at the most important question: Is Sinovel just trying to work off excess inventory due to a slowdown in the Chinese Wind marke, or are they beginning to shift some of their business to other suppliers?

This question is crucial because Sinovel accounted for about three quarters of revenue in 2010, although the AMSC has been moving to lessen its dependence on the Chinese wind giant.  The worry is that if Sinovel were to find another supplier for the power converters AMSC sells, AMSC's considered goal of reducing their dependence on Sinovel may become a premature fait accompli. Then Sinovel's share of revenue might drop not because AMSC has other sources of revenue, but because they lose Sinovel as a major customer.

GT Electric

That brings me back to my readers, among whom were a hedge fund analyst and fund manager in Palo Alto.  Their fund is short AMSC, so they have two important incentives: They have an incentive to dig through the Chinese press to figure out what is going on, and they want US investors to find out about any bad news.  If they found any good news I don't know about, they kept it to themselves.

They found that Sinovel affiliate Dalian Guotong Electric (GT Electric) started producing frequency converters in 2010, and is ramping up production at the typical Chinese breakneck pace.  Sinovel owns a 22.5% share in GT Electric, giving them a strong incentive to prefer their frequency converters over AMSC's.

GT Electric's product website (Chinese only) is here, and much of the other information they found is in the August 2010 China Wind Power newsletter, which said GT's factory will be "capable of import substitution." 

GT does not have the capacity to replace AMSC yet, and Sinovel will likely want to have more field experience with GT converters before abandoning AMSC.  But the contract Sinovel signed with GT electric for 2011 gives them 4% of their total... in GT's second year of operation. 

Final Thoughts

I still believe that Sinovel will resume purchases from AMSC later this year, but I think it is unlikely that those purchases will grow in coming years.  Further, AMSC still needs to raise $100-$200 million to complete the (revenue-diversifying) purchase of "The Switch" I discussed in the previous article.  The fear of dilution will likely depress AMSC's share price over the next couple of months, meaning that I no longer think that AMSC is a good speculation where it currently stands in the $11.50 to $12 range. 

These events are unlikely to bankrupt AMSC, and I think many of the company's other businesses have great potential for growth, but from a very low base.  For now, I've sold my stake, but I will be looking for opportunities to buy again at lower levels. 

I may not be the only one looking for bargains.  I shot a quick email off to John Segrich, whose Gabelli SRI Green Fund (SRIGX) holds "a little" of the stock.  He thinks AMSC is a lot more interesting now that it has fallen so far, and speculates that it could be a buyout target for someone wanting to own the technology.


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.

April 24, 2011

Petersen's Wind Power Paradigm Paralysis

Tom Konrad CFA

I published my rebuttal to John Petersen's recent article "" on November 1st last year.  It was titled Alternative Energy: The Paradigm is the Problem

That article had two parts.  The first part focused on electric vehicles, and argued that the problem with the electric car was not electric propulsion, but the car paradigm.  I concluded that electric propulsion makes considerably more sense for electric bikes, trains, and buses.  John clearly understood that section, because he published an article just last week "," showing how a recent report from Lux Research confirmed my ideas that electric bikes, and heavy vehicles (delivery trucks, buses, and train locomotives) would be the dominant electric vehicles for the next decade.

Trapped in an Invalid Paradigm

The second part of my Paradigm article was headed "Wind and the Grid," and it appears that John stopped paying attention at this point.  He certainly missed the sentence where I said "critiques of wind power's variability implicitly assume that nothing can be done to make the electric system more accommodating to wind, when in fact there is much that can be done," as well as the steps I outlined to address the problem.

Let's dissect how John's paradigm leads him to invalid conclusions.

John analyzed wind production data from five widely dispersed regions, finding that his model grid produced less than 12.5% of rated capacity 18.5% of the time, less than 6.25% of rated capacity 1.6% of the time.

That sounds pretty bad, doesn't it?  He clearly thought it was bad, because he concluded, "wind power will never be stable or reliable enough to serve the needs of an industrialized society."

I find this conclusion a little hard to swallow.  If he had said "never be stable or reliable enough to serve all the needs of an industrialized society," I would not have a problem with his statement.  But he's trapped by the paradigm that says the only useful electricity is either always on (baseload) or dispatchable (on-demand.)  Even with geographic diversification, wind and solar are neither, but they do serve the highly useful function of allowing us to conserve precious dispatchable resources (hydropower, some biomass, natural gas, energy storage, and demand response) to fill in the gaps when they are not available.  This function does not serve all the needs of society, but it does free up valuable resources to serve those needs at other times.

Rated Capacity: The Wrong Yardstick

John's use of "rated capacity" of wind farms to measure shortfalls in production is also an artifact of the conventional power paradigm that exaggerates the lows in wind power production.  With baseload resources such as coal and nuclear, which are often operating at full rated capacity, measuring output in comparison to rated capacity makes a certain sense, although even coal would not stand up to the test that Petersen expects wind to pass.  A typical coal plant has a capacity factor of 80% to 90%.  About 10% of the time, the coal plant is not operating at all (it may be down for maintenance, coal supplies may be delayed, or there may be some mechanical problem which forced it to shut down.)  By Petersen's apparent logic, if coal plants are not operating at all 10% of the time, they must not be stable or reliable enough to serve the needs of an industrialized society. 

This, of course, is bogus.  Coal plants are useful, because most of the shutdowns are predictable enough that other resources can be made available to fill the gap in electricity supply.  With planning, coal plants can even be shut down during periods when seasonal electricity demand is low, and electricity production from wind is high. 

Wind is less predictable than coal, but weather is not random, especially over large regions a few hours in advance.  With good weather prediction, the gaps in wind power can also be filled with other resources.

Maximum Production

Returning to "rated capacity," wind power produces on average between 20% and 40% of rated capacity, while a coal plant's average production (capacity factor) is between 80% and 90%.  Comparing actual production to average production might bias the numbers in favor of wind, just as comparing actual production to rated capacity biases the numbers in favor of coal.  A fairer comparison falls in between: comparing actual production to maximum production.  For dispatchable and baseload resources, maximum production and rated capacity are the same.  For a diversified portfolio of variable resources, maximum capacity is considerably lower than rated capacity. 

For the portfolio of four widely dispersed wind turbines I discussed in my article "" the maximum production was 93% of rated capacity.  That was for a portfolio of four widely dispersed turbines. 

Petersen collected much better data than my own, so I asked him for a copy of his spreadsheet.  He gathered wind production data for five widely dispersed regions, each of which contains hundreds of turbines.  Over such a large region and so many turbines, maximum production will be far below the rated capacity of the system.  In particular, the maximum production from his 16 GW-rated supergrid was only 7 GW, well below half the rated capacity.

Compared to the maximum output of 7 GW, the electricity production from Petersen's supergrid looks much more stable.

Supergrid Jan 2010.png
Supergrid July 2010.png
The two graphs above show distributions of the wind power production during six hour intervals over the two months for which Petersen collected the data.  I created them by sorting each month's worth of intervals by total power production during the interval.

As we can see from the graph, wind power production in January is fairly well behaved.  Minimum production was 900 MW, or 13% of the system's maximum production.  July production falls well short of 1 MW for two six hour periods, when it is 468MW and 356MW, or 5% and 7% of maximum production.  While these lows in production are not good, comparing them to notional rated capacity (more than twice maximum production) creates the illusion of a much greater shortfall in production than actually exists.

Below, I've prepared a histogram of wind output for Petersen's supergrid.  I found the relative consistency of wind output in January 2010 particularly striking, with wind production being between 3 GW and 4 GW over 40% of the time.
Supergrid Histogram.png


Variable resources like wind cannot substitute for dispatchable power, but they can produce valuable energy cheaply when they are available.  The less variable the wind power resource is, the less dispatchable power is needed to back it up, and the most economical way to reduce variability is geographic diversification.

To see just how effective geographic diversification can be, compare the above histogram of the wind power output of Petersen's supergrid with the equivalent histogram below of one of the supergrid's five components: the wind output from the Bonneville Power Association (BPA) region.

BPA Histogram.png
If we want to see large-scale integration of inexpensive wind power, producing no global warming emissions and requiring no water, we'll also need to greatly enhance our electric grid.  Wind power investors should also be transmission investors.

Data & Charts

The spreadsheet I used to create all the charts above is available here as an Open Office spreadsheet and here in Excel.

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.

April 22, 2011

American Superconductor: Reading the Tea Leaves

Tom Konrad CFA

American Superconductor (NASDAQ:AMSC) dropped 52% since their profit warning on April 6th.  Is it a screaming bargain, or does it have farther to fall?

AMSC Chart

Two readers asked me to take a look at American Superconductor Corporation (AMSC) after the company issued a profit warning on April 6th.  Although the stock was included in my list Ten Clean Energy Stocks for 2011, (which has produced more buying opportunities than profits so far this year) I did not own the stock in any of my managed portfolios, and so the research had to take a backseat to taxes. 

I spent a few hours catching up with the company this week, and, now that it's trading below $12, I consider the stock a good, if very speculative, buying opportunity. 

What Happened

On April 6, AMSC shocked investors with an announcement that their largest customer, the Chinese Wind Power company (and the world's second largest wind turbine manufacturer) Sinovel (601558.SS) had refused shipments, and not yet paid for some previous deliveries.

The first hint of problems had come three weeks earlier, in the press release announcing AMSC's "The Switch" Acquisition  on March 14th.   In that release, the company said that organic growth would slow, and 2010 revenue would be at the "lower end" of the previous $430-$440MM guidance range.

At this point, AMSC management most likely knew there was a problem, but may still have expected Sinovel to continue paying for deliveries.  Sometime in the next three weeks that changed.  In the profit warning they said that Fiscal 2010 revenues (through March 31st) would be $355MM, a full $75MM (17.5%) lower than the previous estimate.  Since AMSC's revenues in the first three quarters had been $313MM, they were saying that 4th quarter revenues would be 64% below previous guidance, and they would show a quarterly loss.

AMSC also said that they expected that Sinovel would continue to refuse deliveries until the company had run down inventory in a slowing Chinese wind market before accepting future shipments.

Without the expected revenue from their largest customer, analysts now expect that AMSC will need to raise between $100MM and $200MM in order to complete The Switch buyout.  This is somewhat ironic in that one of the main reasons for the acquisition was to diversify AMSC's revenue and make them less reliant on a single customer (Sinovel.)   The need for that revenue diversification is now even more obvious, but it leaves investors wishing that AMSC had done more to diversify, sooner.

As is to be expected with any large negative surprise, the class action lawyers have leapt into action, with Levi & Korsinsky filing on April 15, and Wolf Haldenstein Adler Freeman & Herz LLP on April 18th.

Although wind is the largest part of AMSC's business, and Sinovel is by far their largest customer, the company does have other business.  Their eponymous superconducting wire seems to be gaining traction in more markets, with RenewGrid reporting that AMSC superconducting wire was used in Electrical Substation in China on April 21st.

What's Next?

In the short term, the need to raise capital for "The Switch" acquisition will put pressure on the stock price, most likely leading to excellent buying opportunities.  But knowing if those buying opportunities will appear when the stock drops below $12, as it is as I write, or possibly at much lower levels greatly depends on what is really happening at Sinovel.

If the company is right that Sinovel will resume accepting shipments after they have worked off their excess inventory, then we might expect revenues to return to previous levels, and possibly even grow.  If, on the other hand, Sinovel decides it no longer needs AMSC as a supplier, they may not be a significant source of revenue for AMSC at all going forward.  These scenarios account for the wide range in analyst's revenue expectations for 2011: between $160M and $456M. 

If the low estimates are correct, AMSC has much farther to fall.  If, on the other hand, Sinovel reduces its inventory in a quarter or so, and then begins accepting (and paying for) shipments at something near the previous pace, we may see revenues for FY 2011 somewhere near the higher end of the range.

In either case, confidence in AMSC management has suffered long term damage, and so we cannot expect AMSC to trade at the same multiples at which it was trading at the start of the year.  If we assume that FY 2011 revenues will be $350-$400MM, and give the stock a 30% discount on previous Revenue multiples, the stock should be worth $20-$23.  If we expect only $160MM revenues with the same discount, then the stock is  worth $9 or even less.

Since I think the more optimistic scenario is more likely, the stock seems like a good speculative buy below $12.  More cautious investors might consider buying calls rather than buying the stock outright.  I'm doing a little of both.


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.

April 21, 2011

Gone With The Wind – Debunking Geographic Diversity

John Petersen

Earlier this month I wrote a pair of articles (here and here) that questioned the reasonableness of the near universal assumption that the wind is always blowing somewhere and wind power infrastructure with a wide enough geographic dispersion would offer a relatively stable power output. I presented graphs from the Bonneville Power Administration and a study by the John Muir Trust that raised substantial doubt in my mind. The articles drew a well-reasoned response from my colleague Tom Konrad (here).

While many commenters understood the point I was trying to make, many others argued that the sample areas were too small or they didn't fairly test the geographic dispersion theory. Since I hate unresolved questions, I went looking for a better answer and found it in historical wind power production data from five power authorities:
Most people would agree that a sample of five major systems spread over 17 timezones and two hemispheres has enough geographic diversity to provide a reliable basis for analysis. To simplify the process I took the following steps:
  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.
While the model is not a perfect representation with spot on accuracy, it's certainly close enough to provide a reasonable representation for the purpose of testing the geographic dispersion theory. When all the calculations and adjustments were done, my model wind supergrid produced the following combined output for the month of January 2011.

4.20.11 January Wind.png

It produced the following combined output for the month of July 2011.

4.20.11 July Wind.png
Overall, the model wind supergrid would include over 16 GW of installed capacity. In January 2010, it would have had 16 intervals where it was unable to provide 2 GW of reliable power and two intervals where it was unable to provide 1 GW. In July 2010 it would have had 30 intervals where it was unable to provide 2 GW of reliable power and two intervals where it was unable to provide 1 GW.

My undergraduate degree was in accounting and while my first two articles on this topic were only enough to raise a question about the fundamental validity of the geographic dispersion theory, I believe a five power authority model that's about as dispersed as anyone could imagine does far more than raise an inference.

It proves the theory of geographic dispersion is complete and unadulterated balderdash! The harsh reality is that wind power will never be stable or reliable enough to serve the needs of an industrialized society.

I continue to believe that investments like the First Trust ISE Global Wind Energy Index ETF (FAN), the PowerShares Global Wind Energy Portfolio ETF (PWND) and a host of publicly traded wind power stocks should be avoided.

Disclosure: None.

April 18, 2011

Kaydon: Profits Behind the Scenes

Debra Fiakas

Most investors when they consider the alternative energy sector think about the big solar photovoltaic manufacturers or the ethanol producers.  Engineering firms like Kaydon Corporation (KDN:  NYSE) rarely come to mind.  With special expertise in fluid processes, Kaydon is an indispensable partner in a variety of alternative energy projects such as wind, renewable diesel and ethanol plants.

The company earned a 12% net profit margin on $4645 million in total sales in the year 2010.  As impressive as that might be the really bright spot in Kaydon’s financial picture is its ability to generate cash  -  $93.9 million in 2010.  This implies a cash conversion rate of 20.2%.

Kaydon is not a high profile company with flashy investor relations outreach.  Its corporate web site is static and is directed primarily toward customers who might happen by looking for custom bearings or rings and seals.  Perhaps this customer-centric orientation is why Kaydon is growing in a field that is challenging for others.

The company just announced a key acquisition in German adding springs and dampers to the product line.  Kaydon is buying HAHN-Gasfedern GmbH for an undisclosed sum.  HAHN-Gasfedern is doing approximately $20 million in annual sales and is reportedly profitable.  The new product line should be interesting to customers all across Kaydon’s base in the energy, renewable energy, pharmaceutical and other process manufacturing industries.

The stock is selling at 23.5 times trailing earnings and 20.8 times forward earnings, suggesting analysts following the company see earnings growth ahead.  The consensus rating at this time is hold.  However, we believe investors should consider company’s like Kaydon that have been consistently delivering profits for a play on the alternative energy industry.  KDN also offers a 2.0% dividend yield at the current price level, suggesting that even at even with a forward earnings multiple near its growth rate, the stock offers value.

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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  KDN is included in Crystal Equity Research’s Earth, Wind and Fire Index in the Wind Group.

April 12, 2011

Why Geographic Diversification Smooths Wind Power

Tom Konrad CFA

Canadian weather data shows the variability-smoothing potential of a robust continental electric grid.

Intelligent skepticism is valuable to me as an investor when it makes me question my assumptions.  When I'm wrong, it makes me find out sooner (and hopefully get out of a bad trade sooner, or never get into it.)  When I'm right, I emerge with my thesis tested, which leads to the confidence needed to stick to a trade when the stock market voting machine moves against me in the short term, before it comes around in the longer term.

Over the last month or so, John Petersen and I have been going back and forth regarding the potential to smooth wind power output.  Most recently, he latched onto a study and some graphs from the Bonneville Power Association which he felt demonstrated that geographical dispersion does not work.  He wrote, "I am unwilling to assume that integration across multiple regions will do the trick without seeing a compilation and overlay of the hard data from those regions and a plan that lays out how the interconnections will work."


Actual wind output data is usually kept private by wind farm operators and utilities, so instead I turned to publicly accessible wind speed data.  I found data in usable form from Canada's Weather Office.  I then selected four widely dispersed Canadian weather stations which had hourly historical data available, and copied the wind speed data into a spreadsheet for the week of April 1st to 7th, 2011.  In selecting weather stations, I chose one each in British Colombia, Yukon Territory, Newfoundland, and Nunavut that seemed to have enough wind to be suitable locations for wind farms.

Wind Power CurveI then converted these wind speeds into simulated power output using a wind power curve, shown here.   This takes the wind speed data, and replaces it with the likely power output (expressed as a percentage of rated output) for a wind turbine.  Wind turbines don't produce any power at very low wind speeds, ramp up quickly to their full rated power output as wind speed increases, and cut off suddenly to protect themselves in extremely high winds.

Over the week selected, the simulated wind output from my four weather stations was basically uncorrelated between the widely dispersed sites, as you can see from the following correlation matrix:

Dease Lake (AUT) British Columbia Argentia (AUT) New-
MAYO A (Yukon) Cambridge Bay A Nunavut Wind 4 Sites ERCOT North ERCOT 2010
Dease Lake (AUT) British Columbia
1 -0.05 -0.03 -0.19 0.35 0 0.02
Argentia (AUT) New-

1 -0.06 -0.15 0.53 -0.04 -0.09
MAYO A (Yukon)

1 0.10 0.49 0.07 -0.10
Cambridge Bay A Nunavut

1 0.40 0.01 -0.12
Wind 4 sites

1 0.01 -0.16

1 0.74
ERCOT 2010


The "All 4 sites" column represents the sum of the simulated output from the four sites, while the ERCOT North and ERCOT 2010 columns contain demand statistics for the Texas grid for the same week in 2010 (I did not know where to find 2011 data.)  ERCOT North is one of eight Texas sub-regions.  I'm using ERCOT data for load simply because that was the load data I found most readily available.

Note that the correlation between "All 4 sites" and each individual wind site is approximately 50% in each case.   This is what we would expect if the wind sites were truly independent and uncorrelated.

ERCOT North is similarly highly correlated with ERCOT because not only is it is part of the larger region, but because the distances involved are smaller and because electric loads tend to be much more highly correlated across regions than weather patterns.


The low correlation in wind output is key because when low or uncorrelated variables are added, the deviation of the average of all the variables is lower than the deviation of the individual variables.  The calculations are simplest for uncorrelated variables, but diversification has some use whenever variables are not perfectly correlated. 

In the case of n uncorrelated variables with the same standard deviation s, the standard deviation of the average of all n is s / sqrt(n).  Since I am using 4 basically uncorrelated sites in this example, the standard deviation of the average of all four sites is approximately half the standard deviation of each of the individual sites, as shown in the blue bars of the following chart and table.

Variability measures

BC Newfoundland Yukon Nunavut Wind 4 Sites ERCOT North ERCOT (2010) load
Std Dev 36% 48% 35% 39% 19% 11.4% 11.1%
min 0% 0% 0% 0% 7% 55% 59%
max 100% 100% 100% 100% 100% 100% 100%
avg 35% 41% 40% 60% 48% 80% 79%
Percent = 0 30% 55% 27% 19% 0% 0% 0%

Not Baseload

A quick glance at the following chart showing wind output from the four sites demonstrates that while there may be some value to diversification, we're not talking about anything like baseload power here.  It's not necessary for wind to produce baseload power in order to be effectively integrated into the grid.  Aggregate wind power needs only to be reasonably predictable and not so volatile that utility systems cannot keep up.  After all, utilities have been coping with variations of demand, which is neither entirely predictable, nor flat.
Hourly output
The following chart compares the output from the average volatility simulated wind site (Cambridge Bay, in British Columbia) with the output from an average of all four sites, and ERCOT load data from Texas. 

wind vs ERCOT
Here it is clear to see that the average wind output (blue line) is much less volatile than the wildly swinging green line.  If we wanted to reduce average wind output volatility to the same level as we see in the ERCOT North demand curve, it would require 12 uncorrelated wind sites [39.5% / sqrt(12) = 11.4%], or a larger number of partially correlated sites.  Given my experience with the data so far, I think it would not be difficult to find a sufficient number of partially correlated sites within Canada, and the exercise would be simple if the area were expanded to cover both the US and Canada.

Such a large grid would have the added benefit of smoothing the volatility of demand.  We see this on a small scale when comparing the volatility of the ERCOT North sub-region to ERCOT as a whole, but, as with weather, correlation in demand curves will fall with distance due to different working habits, industries, weather conditions, and time zones. 

Lower volatility in overall demand compared to local demand would free up dispatchable resources to help compensate for the remaining volatility of wind output.

In the Real World

In theory, we can reduce the volatility of wind output to less than the volatility of demand by building a North American continental grid.  In practice, such a grid is unlikely to be built anytime soon.  But we do not need a continental grid to achieve many of the benefits of diversification. Shorter connections, especially when chosen to maximize differences in weather patterns can be of great benefit in smoothing wind output and demand. 

Complete lack of correlation is not necessary to reduce overall volatility, although there would be benefits in not only siting new wind farms to maximize power output, but to also consider the correlation of local winds to the output of other wind farms and local electric demand.  Such steps could do much to reduce the strain that the variability of wind puts on the electric grid, and in the end allow greater wind penetration.

The addition of solar resources can also greatly reduce the overall variability, given that solar output is somewhat correlated with demand and not particularly correlated with wind.  The output of solar sites tends to be much more correlated with that of other solar sites than for wind, but solar sites are not completely correlated, since output varies with cloudiness, latitude, orientation, temperature, and solar technology. 

The fact that summer electric loads tend to peak in the evening just as the sun is setting can also be alleviated with transmission and planning.  The output of West- and North-west facing panels is more correlated with load, and, even without storage available from technologies such as Concentrating Solar Power, traditional PV panels in the desert Southwest are producing power long after the sun has set in New York.

Conclusions for Investors

Wind farms are currently overly clustered in areas with good wind and access to transmission.  As a result, we see graphs of actual wind output that are much more variable than the technology need be inherently. 

While electricity storage is effective for smoothing short term volatility in electric supply and loads, long distance transmission, especially High Voltage DC transmission is the most cost-effective technology for smoothing long-term variations.  Prospective wind investors should also be considering companies involved in building, maintaining, and supplying transmission, especially leading HVDC suppliers Siemens (SI) and ABB (ABB). 

Calculations and Data

For those interested in my data and methodology, I have uploaded the spreadsheet I used for my calculations to Google Docs in both native Open Office Calc and MS Excel formats.

DISCLOSURE: No Positions.

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.

April 09, 2011

Another Reality Check for Wind Power Investors

John Petersen

Last Wednesday I stirred up a hornets nest with an article titled "A Reality Check for Wind Power Investors" that included two graphs from the Bonneville Power Administration, or BPA, which manages a four state, 300,000 square mile service region that's home to over 40% of the installed hydro capacity and roughly 12% of the installed wind capacity in the US.

The first graph tracks the BPA's regional load and power production from hydro, thermal and wind facilities over the last seven days and shows why the region is one of the largest power exporters in the country.

4.9.11 BPA Load.png

The second graph provides stand-alone tracking data for wind power in the BPA region over the last seven days.

4.9.11 BPA Wind.png

My concern was that the BPA graphs clearly contradict widely accepted notions that:
  • 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.
Until I saw the BPA graphs I assumed that wide geographic dispersion of facilities would ameliorate the erratic nature of wind power. The graphs proved my assumption wrong. Once it became clear that broad regional dispersal wasn't enough, I began looking for comparable data on a nationwide basis and couldn't find it – ANYWHERE.

Yesterday, Jack Lifton pointed me in the direction of a March 2011 "Analysis of UK Wind Power Generation" that was commissioned by the John Muir Trust, Britain's premier wildlands conservation charity, and found that:
  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 study's most startling conclusions were that:
  • 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.
While the complete set of 28 monthly tracking graphs that accompany the UK Analysis are less colorful than the BPA's, the erratic and wholly unreliable character of the UK's wind resource is remarkably similar to the BPA's resource.

4.9.11 UK Load.png

My undergraduate degree was in accounting and I understand statistics well enough to know that data from a single region does not disprove the theory that geographic dispersion of wind facilities will solve the intermittency problem. However, my accounting professors taught me that when two substantial samples from regions as diverse as the UK and the Pacific Northwest leave room for reasonable doubt, prudence requires a larger sample and a more granular analysis.

The idea of geographic dispersion is so inherently plausible that it's accepted without question. What if it's a lie? We know it doesn't hold water in the BPA region and we know it doesn't hold water in the UK. The raw data almost certainly exists. Compiling the hard data into a national landscape would require little more than an Excel spreadsheet, particularly if we assume away the need for a robust and flexible interstate transportation grid. The only reason I can imagine why nobody has published results from such a study is that the results are dreadful and they disprove the theory.

I would love to be proven wrong on this point because my preliminary conclusions are damned inconvenient. The time for platitudes and calm assurances from advocates and promoters is past. We need detailed analysis of hard day to day data if we ever hope to have a sensible energy policy that works in the real world.

In light of the clear data from the BPA and confirmation from comparable analysis in the UK, I continue to believe that investments like the First Trust ISE Global Wind Energy Index ETF (FAN), the PowerShares Global Wind Energy Portfolio ETF (PWND) and a host of publicly traded wind power stocks should be avoided like the plague.

Disclosure: None.

April 03, 2011

The Magma/Plutonic Merger

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.Statistics

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.


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

March 18, 2011

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

John Petersen

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

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

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

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

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

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

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

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

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

In their discussion of storage economics, the authors said:

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

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

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

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

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

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

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

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

March 10, 2011

Must Renewable Energy Be Diversified?

Dana Blankenhorn

Most renewable energy companies specialize.

Solar companies do solar. Wind companies do wind. Geothermal companies do geothermal. Biomass companies do biomass.

But a small Canadian merger challenges that assumption.

Magma Energy (MGMXF.PK), a geothermal company, said it will spend about $100 million in stock to buy Plutonic Power (PUOPF.PK), which has wind and hydropower projects, and ambitions to get into solar. The combined companies will go by the name Alterra Power.

Both companies are based in Vancouver.

Size really does matter, crowed Magma CEO Ross Beatty on a conference call announcing the deal. Their merger presentation calls the resulting company "a dominant renewable power developer in Canada."

True, but is this truly size?

Plutonic has only two projects operating at present, with three more under construction. The solar play is, for now, an ambition.

What the deal may really speak to are the prospects of the geothermal industry. "Geothermal is a small energy sector and has real limits to its growth since it only occurs in specific places on earth and many of the world's best geothermal assets are already developed," Beatty said on that same conference call.

Is that true? Last time I heard the Earth was round, and its thermal assets are beneath all of us.

What Beatty is doubtless referring to are the current requirements of geothermal plants. They need to be relatively close to warmth, so they can reach it at low drilling cost, but they can't be so close that the ground they are drilling through will be unstable, prone to earthquakes.

The question I'm asking of my friends in the business today is, then, are these limits absolute? We can drill miles down into the Earth, and slant that pipe so it goes horizontally. We already do this for natural gas. Why not for heat? And I know you don't want to tap directly into magma (despite the company's original name) but aren't there ways to tap heat that don't require absolute stability?

The floor's yours on this one.

There's a second question asked by this merger. Should renewable energy companies specialize in one form of energy, or is consolidation in the whole space inevitable? What is really gained by combining wind, solar, hydro and geothermal assets under one corporate umbrella, other than financing power?

Good questions for this week of the Renewable Energy World show in Tampa.

DISCOLSURE: No positions.

Dana Blankenhorn first covered the energy industries in 1978 with the Houston Business Journal. He returned last month after a short 29 year hiatus because it's the best business story of our time. In between he covered PCs, the Internet, e-commerce, open source, the Internet of Things and Moore's Law. It's the application of the last to harvesting the energy all around us he's most excited about. He lives in Atlanta.

December 17, 2010

Chinese wind power company seems to understand American political capitalism

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.

December 16, 2010

Rare Earth Element Shortages Threaten Global Wind Power Development

by Kidela Capital Group

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

Related articles: Rarer Rare Earths Are Not Going To Sink the Wind Power Sector
Can America Regain the Rare Earths Crown?

February 22, 2010

Beijing Cramps Foreign Offshore Wind Developers, Giving Boost to Domestic Firms

Bill Paul

As it scrambles to develop an offshore wind power industry that potentially may generate as much as 200 gigawatts of electricity, China has decided to hamstring all would-be foreign developers, which should provide a big lift to certain Chinese companies.

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

December 11, 2009

Hidden Gems? Why Green Investors Should Look at Daewoo Shipbuilding and Ener1

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:

Bill Paul is Managing Editor of


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

November 24, 2009

Wind Works Power Corp

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.


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.


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.

October 18, 2009

What A Portfolio Approach To Climate Policy Means for Your Stock Portfolio

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

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.


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.)


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.

 abatement cost.GIF

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.  abatement portfolios.bmpSince 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.


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 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 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.


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 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.


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.

October 14, 2009

Oil & Alt Energy Redux

Charles Morand

Last week, I conducted an analysis showing the lack of evidence supporting claims that oil and alt energy returns are strongly correlated (claims that sometimes come from outfits as reputable as Bank of America Merrill Lynch).    

I don't want to belabor this topic but I thought I would post the results of another, similar analysis I conducted following comments I received on how to improve the first one. In a nutshell, the comments suggested I do the following:

1) Look at daily correlations or even smaller periods, as "common knowledge" market movements can often dominate over the real relationship in the short and very short run

2) Look at absolute (price) correlations as well as relative (return) correlations (my first analysis looked only at relative movements)

3) Look at directionality (i.e. what % of the time do assets X and Y move in the same direction regardless of the size of the move)

4) Extent your analysis to five years or greater

New Analysis, Same Difference

The three sets of tables below show daily return correlation coefficients, daily price correlation coefficients and daily directionality statistics (% of days that the assets close Up, Down or No Movement together) for oil, nat gas, the S&P 500 and alt energy stocks.

The time periods have been extended from three to five years or since inception. The oldest alt energy ETF available is PBW that was listed on March 03, 2005 - not quite 5 years but a decent chunk of time nonetheless. The other 3 ETFs (sector specific) were all listed in the 2nd half of 2008.

Correl Returns Oct 14-09_3.bmp

Correl Prices Oct 14-09.bmp

Correl Returns Oct 14-09_2.bmp

The first set of tables show that returns on oil are not particularly useful at explaining returns on alt energy stocks on a daily basis (let's say that we enter useful territory at 0.5 and above), although the results for PBW show the relationship strengthening somewhat in the last year (which has been anything but a normal year for the markets). These results are in line with those from my previous analysis which looked at weekly returns.

As far as absolute prices go (the second set of tables), correlation coefficients for oil and alt energy are high, but they are just as high if not higher for alt energy and the S&P 500. PBW shows the relationship strengthening over time, but it strengthened even more between oil and the S&P 500, something Tom opined might be the case a few months ago.

I don't find absolute price correlations all that useful. In the medium and long terms, returns matter far more than absolute prices. If a $1 movement in oil consistently results in a $1 movement in an alt energy ETF over the long run, the high coefficient could obscure a divergence trend between the returns on both assets as their prices rise.

Finally, the directionality tables (note that assets appear in a different order) show a fair bit of co-directionality between oil and alt energy (with the exception of PTRP [alternative transportation], something Tom and I discussed last week). But here again, the S&P 500 emerges as the stronger predictor.


I did not go any more granular than daily data: anything beyond that becomes relevant only to traders.

Once again, the general conclusion that emerges from this analysis is that oil - whether in terms of returns, prices or directionality - is not a particularly useful indicator to go by when investing in alt energy stocks, especially when compared to equity markets in general (i.e. the S&P 500).

The implication for investors is that they should not invest in alt energy as a hedge against or a play on rising oil prices. If anything, what little relationship does exist will probably tend to disappear overtime as alt energy and cleantech stocks respond more to core business fundamentals than to seemingly logical yet unproven narratives about external drivers.  


October 07, 2009

Crude Oil & Alt Energy: The Non-Relationship That Just Won't Go Away

Charles Morand

The relationship - or lack thereof - between oil prices and the performance of alt energy stocks has been a long-time interest of mine. I discussed it last in late March when I looked at correlations between the daily returns of alt energy and fossil energy ETFs. At the time, I found that only a weak relationship existed between the two and that if someone wanted to make a thematic investment play on Peak Oil, alt energy ETFs were not an ideal way to do so. 

Seeing as the popular press and countless "experts" continue to claim, whenever they get a chance, that the fortunes of alternative energy stocks are closely tied to the price of oil, I figured I would revisit the topic.

Fossil & Alternative Energy: The Relationship That Isn't There

This time around, I took a slightly different approach for my analysis: I correlated the weekly returns for US oil and US natural gas directly (as opposed to through an ETF) with returns for the S&P 500 and four alt energy ETFs. For US Oil and Nat Gas, I used price data provided by the Energy Information Administration here (Spot Price FOB Weighted by Estimated Export Volume) and here (Contract 1), respectively. I got ETF and S&P 500 price and index value data from Google Finance.

For the ETFs, I picked the Claymore/Mac Global Solar Index ETF (TAN) as the solar sector representative, because I took a position in it in March (which I liquidated last week even though I initially claimed I would hang on to it for 18 to 24 months. I have now grown more worried about downside risk than I am optimistic about upside prospects over that time horizon, so I took my money out).     

The other ETFs were: the First Trust Global Wind Energy Index (FAN) for wind, because it represents a more direct play on the sector than the alternative; the PowerShares Clean Energy (PBW) ETF for alt energy other than solar and wind, as an analysis I conducted earlier this year indicated it is the best way to access other sectors; and the Powershares Global Progressive Transport (PTRP) ETF, as it provides the only proxy I know of for returns on a basket of stocks with exposure to alternative modes of transportation.          

The graph below displays returns for all four ETFs, Oil, Nat Gas and the S&P 500 between Jan. 1, 2007 and Sep. 25, 2009 (click on the image for a large view).             

Oct 7-09 Chart 1_2.bmp

The table below shows returns and volatility for all seven assets over the same time interval but broken down into sub-periods. Seeing as 2009 and the post-Lehman collapse period have been eventful times to say the least, I thought it would make sense to create a few distinct sub-periods for analytical purposes.

What jumped out at me from this table is the relatively strong performance of the Powershares Global Progressive Transport (PTRP) ETF, even after adjusting for volatility. As the correlation analysis below demonstrates, this performance is not due to a rise in oil prices.

My going theory is that there is a Green Stimulus Effect at work given how much of global stimulus dollars have gone to transportation programs. This would be something worth exploring further but it certainly seems in line, at least on the surface, with a prediction I made nearly one year ago. 

Oct 7-09 Fig 1_2.bmp

The following three tables contain the real meat of my analysis. They are fairly self-explanatory: they show correlation coefficients between US Oil, US Nat Gas and the S&P 500 with all other assets. The correlations are for the periods outlined in the tables or since inception in the case of PTRP (Sep. 19, 2008), TAN (Apr. 18, 2008) and FAN (Jun. 20, 2008). The correlation coefficients above 0.5 are highlighted.

Oct 7-09 Fig 2.bmp

These results are, once again, in line with my expectations: there is little reason to believe that there is a strong relationship between changes in the price of oil and the performance of alt energy stocks. Even for natural gas, where one could expect a correlation with wind and solar given that all three fuels are used in power generation (or load abatement), there does not seem to be a strong relationship.

TAN and FAN have not yet been around for long enough to analyze returns going very far back into the past, but PBW has. Although the correlation between PBW's returns and oil's returns seems to have strengthened somewhat in the past year, it certainly does not qualify as strong.

I must admit that I was fairly surprised to find such a low correlation between the returns on oil and those on the PTRP ETF. My guess is that this ETF hasn't been around long enough, and that a relationship might emerge under an extreme Peak Oil scenario. That said, spending on public transportation is heavily dependent on the fiscal health of various levels of government, and we've just been moved from the emergency room to the critical care unit.    

On the other hand, I was not particularly surprised to see that returns for all four alt energy ETFs are strongly correlated with returns for the S&P 500 - that seems intuitive enough given that they all belong to the same asset class. 


It doesn't really matter how one slices and dices the data: there just does not appear to be a strong relationship between returns on oil and returns on alt energy stocks, including alternative modes of transportation.

That's not going to matter to a great many commentators who will continue to claim in newspaper and magazine articles, on blogs and on TV that the success of alt energy stocks is closely tied to the price of crude, even though that's mostly untrue.

Those who invest in alt energy should, however, pay close attention. These results suggest that there are far more important factors than oil prices, most notably returns in equity markets in general and regulatory incentives by governments.

There is a good chance that equity returns and returns on oil will diverge in the next couple of years as oil prices climb and equities stagnate or decline. If such a scenario materializes, those who have the relationship backwards could be in for unpleasant surprises.   

September 16, 2009

Another Look at the Algonquin Power Income Fund

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).


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.


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.


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.

September 10, 2009

Book Review: Investment Opportunities for a Low Carbon World (Wind + Solar)

Charles Morand

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

Sep 10-09 book review.bmp

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

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

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

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

Wind Power

By Mark Thompson, Tiptree Investments ltd

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

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

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

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

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

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

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

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

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

Solar Power          

By Matthias Fawer, Bank Sarasin

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

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

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

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

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

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

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

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


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

August 29, 2009

Rarer Rare Earths Are Not Going To Sink The Wind Power Sector

Charles Morand

Once the electric and plug-in hybrid vehicle frenzy fizzles out, as cleantech frenzies typically do when reality comes knocking (i.e. corn ethanol and solar PV), the next hot thing to hit the world of alternative energy investing could very well be rare earths, or the lack thereof. Rare earth metals are used in a number of technologies, most importantly for alt energy investors in NiMH HEV batteries and in permanent magnets for wind turbine generators and electric motors (made with the element neodymium). This article, as its name indicates, will focus on the wind sector.

Consider the following two quotes on the significance of rare earths to the wind power industry (I got them from articles I found on the Climateer Investing blog, which has been keeping on top of this issue for the past few months. Click on the link above to access a number of articles on that topic):

"To make the most efficient, lightest weight, lowest service wind turbine generator of electricity takes one ton of the rare earth metal, neodymium, per megawatt of generating capacity." (Jack Lifton, 5/07/09)

"Let's take a look at wind turbines. In certain applications, two tons of rare earth magnets are required in the permanent magnet generator that goes on top of the turbine. If the permanent magnet is two tons, then 28% of that, or 560 lbs, is neodymium." (Mineweb, 5/13/09)

Why does this matter? Because China, which accounts for around 95% of global output, is purportedly planing on severely curtailing the export of rare earth minerals. Naturally, this has some people worried. Given the total tonnage of neodymium that goes into each utility-scale wind farm, some may wonder whether this trade ban will throw a spoke in the wheel of wind power development; a wheel, as industry observers know, that has been spinning incredibly fast over the past five years.

Understanding Wind Energy Costs

Perhaps the single most important metric in power generation is the levelized cost of the energy produced. The levelized cost includes all of the costs over the lifetime of the facility (capital and operating) plus a pre-determined return on capital. All of these costs (capital costs, operating costs and cost of capital) are then expressed in present value terms and amortized over the facility’s total lifetime production (generally expressed in $ per kWh or MWh).

When assessing the cost competitiveness of electricity generation fuels, the levelized cost approach yields a true apples-to-apples comparison. Thus, when trying to gauge the impact of various events (e.g. higher natural gas prices, higher cement prices, a trade ban on neodymium) on the relative cost positions of different generation technologies, the  impact on the levelized energy cost provides the best measure.

Last Friday, I read a recently-published study by Maria Isabel Blanco, former Policy Director at the European Wind Energy Association (EWEA) and now an academic in Spain, on the economics of wind power. In a nutshell, the study examines, based on survey of EWEA members (EWEA's membership accounts for around 80% of global wind turbine manufacturing) and a review of the literature, the generation costs of wind energy in Europe.

Because there are no fuel expenditures for wind, capital costs make up the vast majority of the levelized cost of wind energy. According to the study, capital costs make up around 80% of the total cost of wind energy over the lifetime of a typical onshore facility (offshore wind is not addressed in this article). The wind turbine ex works - meaning the machine itself plus the tower, transportation to the site and installation - makes up around 70% of capital costs, or 56% of the total lifetime cost. Balance of plant costs include grid connection and site preparation (e.g. roads and other civil engineering work), among others.

The first figure below comes from an article on the wind power supply chain by BTM Consult published in the January/February 2007 edition of Wind Directions (see pages 5 and 6 for the full-size image). The second figure comes from a September 2007 report written by Garrad Hassan for the Canadian government on wind turbine manufacturing (see page 33 for the original figure).       

Aug 29-09 Wind.bmp

Aug 29-09 wind II.bmp

Both figures show the approximate contribution of each core component to the final cost of a wind turbine. There is, of course, variation around the percentages shown here based on the turbine model, the manufacturer, the location of the turbine assembly plant relative to where components and sub-components are manufactured, etc. However, taken together, these two figures yield a good ballpark estimate of how the cost of a wind turbine is broken down between its main parts. 

Both sources agree that the generator, the component that requires significant amounts of neodymium, represents around 3.4% of the total cost of a turbine. The generator thus accounts for around 2.4% of the total capital cost of a typical wind project.

The table below looks at the impact of generator costs on the installed cost (i.e. capital cost) of a fictional wind project. The data comes from EERE's 2008 Wind Technologies Market Report, where capacity-weighted average installed wind costs in the US are reported at around $1,915/kW, and capacity-weighted average turbine costs ex works are reported at around $1,360/kW, or approximately 71% of installed costs (in line with the European numbers above). The calculations assume that all other costs remain constant.

Original Generator Cost @ 3.4% of Turbine Cost ($/kW) % Increase In Generator Cost New Generator Cost ($/kW) Installed Cost  Following The Increase In Generator Cost ($/kW)
% Increase In Installed Cost
46 50% 69 1938 1.2%
46 100% 92 1961 2.4%
46 150% 116 1984 3.6%
46 200% 139 2007 4.8%
46 250% 162 2031 6.0%
46 300% 185 2054 7.2%
46 350% 208 2077 8.5%
46 400% 231 2100 9.7%
46 450% 254 2123 10.9%
46 500% 277 2146 12.1%
The Levelized Cost of Wind Energy

Using a model she built, the author of the European study discussed above calculated the levelized cost of wind energy in Europe, based on actual capital, operating and financing costs and ignoring all incentives and taxes - she therefore computed the "true" cost of wind power.

She found that the single most critical variable impacting the levelized cost of wind energy was full load hours, or the average annual production divided by the facility's nameplate capacity (the more often cited capacity factor is equal to full load hours divided by total hours over the measurement period). Capital costs came in second.

A drop of 10% in full load hours, according to the author's model, leads to a cost increase of 8.5%. In comparison, a 10% increase in capital costs, all else equal, triggers a 7.7% increase in total lifetime costs. As can be noted in the table above, generator costs would have to increase by over 400% to trigger a 7.7% increase in levelized energy costs - while 7.7% is not a trivial number, especially if the increase is sudden, it probably does not constitute a project killer in most cases.

Of course, the costs and calculations presented here are rough estimates and will differ across installations and regions. Nevertheless, they provide a good approximation of the potential impact of higher generator costs on the cost of wind energy.

The Market For Wind Generators

Over the past three years, the supply of many core components for wind turbines has been incredibly tight, leading to a reversal of the long-term trend toward lower levelized wind energy costs (for a recent analysis this reversal in the US, see the EERE's 2008 Wind Technologies Market Report). Generators, however, were not one of those rare components. Bearings and gearboxes are the two parts for which the most severe shortages exist (or did, pre-crisis), while the market for generators is relatively well supplied by the likes of Siemens (SI) and ABB (ABB).

Even though increases in copper prices have put upward pressure on generator costs in the past few years, it is fair to say that generators have not been a problem component in the wind supply chain.


It is too early to tell what impact Chinese restrictions on rare earth exports will have on the price of wind generators and, ultimately, on the levelized cost of wind energy. However, as shown above, the wind industry is an position to bear substantial cost increases in this one component before the overall economics of wind projects are affected. 

More generally, I believe it's premature to conclude that limits on the export of rare earths mean that China will also limit the export of value-added manufactured goods such as permanent magnets. The main idea here is, most likely, to bolster the country's manufacturing sector - the very same manufacturing sector that acts as a giant job creation machine and prevents China from experiencing widespread social unrest. As recently pointed out by The Economist, all of emerging Asia's consumers consume about 40% of what Americans do and, although this is gradually changing, it wouldn't be in China's interest to strain that trade relationship by depriving the West of a whole host of technologies that consumers here have gotten used to.

While rarer rare earths may materially impact certain sectors of the economy, the wind industry, by-and-large, should do just fine.

DISCLOSURE: The author is long ABB

August 01, 2009

Windpower: Focusing the Criticism Away from NIMBYism and Aesthetics

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.

July 20, 2009

Grid-Based Energy Storage; Notes, Questions and Heresies from Storage Week

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.
I wonder if they'll invite me back as a panelist for next year's conference.

July 09, 2009

$3 Billion For Cleantech & Alt Energy

Charles Morand

The DOE made public earlier today the amount of money that will awarded to clean power projects in lieu of the usual tax breaks: $3 billion.

This will allow project proponents to receive a direct cash grant now instead of a Production Tax Credit or an Investment Tax Credit later on. The guidance document notes the following:

"Section 1603 of the Act’s tax title, the American Recovery and Reinvestment Tax Act, appropriates funds for payments to persons who place in service specified energy property during 2009 or 2010 or after 2010 if construction began on the property during 2009 or 2010 and the property is placed in service by a certain date known as the credit termination date (described more fully below in the Property and Payment Eligibility section). Treasury will make Section 1603 payments to qualified applicants in an amount generally equal to 10% or 30% of the basis of the property, depending on the type of property."
This is the cherry on a sundae of cash handouts announced over the past few months for the alt energy and cleantech industries. Solar and wind installations - which account for the lion's share of alt energy investments - have yet to come back to life in any significant way. It is hoped by both government and industry people that this new measure will provide sufficient impetus in the near term to carry the sector through the remainder of the recession.

To be continued... 

June 05, 2009

Wind Investors Beware!

Charles Morand

I received a press release yesterday about a new Emerging Energy Research (EER) study on wind power installations in the US for 2009 and beyond.

EER argues that US installations could be down as much as 24% in 2009 from a record 8.55 GW in 2008. While utility-led projects remain mostly on track, smaller IPPs and developers that rely on project finance or other forms of external financing are finding the current market environment challenging.

However, record growth could return as early as 2010 with 9 GW installed, driven in large part by the stimulus package. EER sees the following encouraging signs:

  • 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 the wind power sector is decidedly more 'global' than most other forms of renewable energy - meaning there is greater geographical diversity to the industry's aggregate revenue base - the US remains, according to Ernst & Young, the top-ranked market in the long and near terms. In the near-term, defined as the next two years, the US and China are far ahead of the pack.        

The health of the global wind power sector has, in the space of a few short years, become very much tied to the health of the US wind power sector, with traditionally strong European markets such as Germany and Denmark gradually loosing their influence. What happens in the US over the next two years will thus be consequential for how wind power stocks perform.

It seems as though investors are already looking past the difficult year 2009 will almost certainly prove to be for the industry, having pushed both wind power ETFs, FAN and PWND, for beyond the rest of the market over the course of the latest bull run.

But investors beware! Just as the market was pricing in Armageddon for the clean technology/alt energy sectors just a few months ago, now might be a bit premature to get over-excited:
  • 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   
Wind continues to be among my favorite alt energy technologies and there are several years of strong growth left; the sector's expansion is not about to normalize. However, these are uncertain times and caution is of essence. Just as an onslaught of negative sentiment pushed wind stocks further south than they should have gone a few months ago, the current onslaught on positive sentiment - which is not justified, in my view - is doing the opposite.

DISCLOSURE: None             

May 18, 2009

AAER: Tailwinds Or Hot Air?

Charles Morand

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.

UPDATE (May 22, 2009): The company just announced that it fully sold its unit offering (~C$7.5 million) and issued another C$1.5 million worth of units to "suppliers and other business partners". This is positive news in my view as it indicates increased market appetite for the firm.

DISCLOSURE: Charles Morand is long AAER.

April 29, 2009

Our Undiversified Wind Portfolio

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

  mrO Simulation results.PNG
cross-firming wind solar.PNG
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.


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

March 28, 2009

Do You Need To Invest In Oil To Benefit From Expensive Oil?

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.

Though the correlation appears to have strengthened somewhat between crude oil and alt energy investments in the last six months, it remains weak enough that if someone wants to play a return to expensive oil they are still better off dipping a toe (or even an entire foot!) in the black stuff. The same holds for nat gas.

This quick and dirty analysis wouldn't withstand close methodological scrutiny. My only intent here was to see whether these relationships were worth exploring further - they are not. If you want to benefit from crude oil and nat gas price increases and have no ethical qualms about it, invest in them directly!

DISCLOSURE: Charles Morand has a long position in TAN.

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.

March 23, 2009

Drawing the Right Lessons from the Texas "Wind" Emergency

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.  


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.

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.

February 25, 2009

The Ontario Green Energy Act: What Can Alt Energy Legislations Do For Investors

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 


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

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

2) Energy Efficiency

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

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


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.   


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.

January 13, 2009

Focus On Clean Power Income Trusts

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             

Name Ticker Related Corp. Entity (Ticker) Yield (%)* Assets
Algonquin Power Income Fund AGQNF.PK N/A 9.16 Hydro, Cogen, WtE, Wind, Water/Wastewater
Boralex Power Income Fund BLXJF.PK Boralex (BRLXF.PK) 19.77 Biomass (wood residue), Hydro, Nat Gas Cogen
Macquarie Power & Infrastructure Income Fund MCQPF.PK N/A 18.88 Nat Gas Cogen, Wind, Biomass (wood residue), Hydro, Long-term Care Home
Innergex Power Income Fund INRGF.PK Innergex Renewable Energy (INGXF.PK) 10.81 Hydro, Wind
Northland Power Income Fund NPIFF.PK Northland Power (not public) 9.44 Nat Gas Cogen, Wind
Great Lakes Hydro Income Fund GLHIF.PK N/A 8.01 Hydro

*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.

December 02, 2008

A Few Dividend Paying Alt Energy Stocks

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. 

Name (ticker)

Div. Yield (%)

Main Alt Energy Areas
General Electric (GE) 7.20 Wind turbine manufacturing; wind park ownership
Otter Tail Corporation (OTTR) 6.30 Power generation; wind turbine components (DMI)
Portland General Electric Co. (POR) 5.40 Power generation with strong exposure to wind
Xcel Energy Inc. (XEL) 5.10 Power generation with strong exposure to wind
The Timken Company (TKR) 5.00 Bearings for wind turbines
Koppers Holdings (KOP) 4.10 Railways ties and utility poles (treated wood)

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.

November 02, 2008

Six Reasons Tight Credit Markets Won't Stop the Wind Industry

The Wind Power industry is gaining momentum in the U.S., with more wind power produced here than in any other country last year.  

My own Colorado is quickly becoming a wind manufacturing and R&D hub, with three Vestas (VWSYF.PK) plants, a wind tower manufacturing plant in Lamar, not to mention the National Wind Technology Center. When Vestas first announced the move to Colorado in January 2007, I assumed it was because of the central location in the wind belt and the great rail infrastructure, as well as the strong political support for wind.  At the New Energy Economy Conference two weeks ago, I learned one other reason, Denver has the only non-stop international airport in the Midwestern wind belt, meaning that Vestas executives can get here much more quickly than other windy cities.

Until the credit crunch, the advance of the wind industry seemed unstoppable.  Now articles about how lack of financing could kill the industry are popping up faster than new turbines.  With wind, financing is very important, because it's a lot like buying a natural gas turbine, and all the gas needed to run it the day it's built.  

With wind stocks having dropped even more than the market as a whole (the First Trust Global Wind Energy ETF (FAN) has dropped two-thirds from its launch in June.) I think it's worth reviewing the many reasons to be bullish.

  1. Both presidential candidates are calling for a Carbon Cap'n Trade system.
  2. The Production Tax Credit (PTC) was extended.
  3. Commodity prices are falling.  While that makes power from natural gas less expensive, it should also drop the cost of wind farms.
  4. State Renewable Portfolio Standards set a minimum for new wind production.
  5. In a slow economy, wind farms bring more jobs than fossil fuel generation, especially during construction.
  6. Many states are working to remove the transmission bottleneck. (CA, TX, CO, and KS to name a few.)

None of these will be enough to keep wind projects that can't get financing going, but markets tend to overreact.  The question we have to ask ourselves is, "Is the current fall an overreaction, or is there still more to come?"

DISCLOSURE: Tom Konrad  owns FAN.

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.

October 25, 2008

Trading Alert: EarthFirst Canada (ERFTF.PK or EF.TO)

A few weeks ago, I wrote an article on the upcoming Clean Power Call in the Canadian province of British Columbia (BC). In a nutshell, the Clean Power Call consists of an auction conducted by the government-owned integrated power company to award long-term power purchase agreements (PPAs) to private wind developers. This is the model that has dominated in Canadian wind power so far. The notable thing about this model is that the PPA facilitates access to financing significantly for successful bidders, since the counterparty is a proxy of a credit-worthy government.

EarthFirst Canada (EF) (ERFTF.PK or EF.TO) is one of the most active small-scale Independent Power Producers (IPP) in this region of the country. The company already holds a PPA for 144 MW of wind in BC (the Dokie I project), as well PPAs for a combined 75 MW of wind in other parts of the country. In total, the company's development pipeline in Canada is roughly 2400 MW, which is quite large for a pure-play wind power IPP.

A few months ago, EF was hit by the triple whammy: (1) it announced cost overruns for its flagship Dokie I project - capital costs were going to shoot up to $360 million (~$2.5 million/MW) from a previously planned $325 million (~$2.26 million/MW); (2) the firm's wind consultant reduced its estimate of the annual electricity output for Dokie I by 2.3%, thus reducing potential cash-flows and the amount of leverage the project can employ; and (3) the credit crisis swung into full gear, making it all but impossible to find reasonably-priced capital to complete construction of the project and even impacting EF's investment bank and financial partner negatively. With the Dokie I project less than 10% complete, running out of cash at this juncture could prove highly problematic.

The result from all this was that in late August the firm announced it would engage 'strategic' advisors to help formulate next steps. In other words, EF is no longer able to secure the project finance facility it was counting on to build Dokie I and it will almost certainly run out of cash before too long. EF has about $65 million in the bank right now and ploughed through, according to its Q2 2008 cash flow statement, $51.7 million in project development costs in the first six months of the year.

But is all lost for shareholders? I, for one, am not so sure. Like in many other industries, the result of this credit crisis for the wind developer sector will be a shakedown and consolidation. EF has about 220 MW of wind PPAs with solid counterparties (government-owned utilities), and an attractive growth pipeline. Canadian provinces have shown a willingness to push the wind industry forward, and, if anything, this could strengthen as the economy softens in Canada and governments look for counter-cyclical infrastructure spending. Lastly, I know from my own work in the field that a number of large international wind IPPs with good balance sheets are looking to enter the Canadian market, which is viewed by many as a potentially-strong market for wind.

EF has gotten battered so badly in recent weeks that I decided to take a look. Generally, when I invest, I analyze companies as going concerns, or businesses that will be around for at least the duration of my investment in them. In my view, EF should not be looked at as such; the company will either go out of business entirely or its assets will be picked up by another IPP. This makes analysis of this company quite easy, as all one has to do is go over the balance sheet and figure out whether there is more value per share in the business than what the stock is trading at.


The graph below shows the company's balance sheet as at Q2 2008, the latest period for which financial statements are available. I went through each item on the balance sheet and adjusted them by a discount factor meant to represent the fact that, should the business be bought out, it would likely be a fire-sale price. The adjustments I made are discussed below.

Cash - Cash should be cash, and probably doesn't need to be discounted. However, since EF probably used some of its cash in Q3, I reduced the amount by an arbitrary 50% and didn't make it up elsewhere on the balance sheet. This is part of working my margin of safety into this analysis as I go along.

Other current assets - I assigned no value to any of the other current assets. Why not? To be safe.

Fixed assets - Those are computers and chairs. I also assigned no value to them.

Windpower prospect development costs - This is the 500-lb gorilla in the room. This item effectively represents the nominal value of all of the expenses that have gone toward developing the wind projects to date. This includes items like foundation work on the projects, turbines, electrical connections, etc. Generally, companies would expense those items, and record them as costs on the income statement and reduce their income accordingly. However, EF has so far capitalized the majority of it, or made these expenditures into an asset. While some might term this approach "aggressive" as it understates losses on the income statement, it makes it a lot easier to perform this kind of an analysis, as it gives us a good idea of what a starting point would be for an asset sale: the total amount spent on project development to date. Here, I reduced the item by 70%. I think this is quite aggressive and the firm might fetch more than $0.30 on the dollar for those assets, but these are very uncertain times so better safe than sorry!

Liabilities - I kept all liabilities all as they were, again to be safe.

The result I came to was net (i.e. minus liabilities) adjusted assets of about $36.3 million, or roughly $0.35 per share. I had had a buy order at $0.10 for about a month (on the TSX) and it finally kicked in last Wednesday (Oct. 22). The position I took is tiny as this is emphatically a bet on a take-over or at least a significant asset sale. At the price I got and considering the analysis above, I think I have a solid margin of safety in case I missed something in my analysis. Nevertheless, I have no objective basis on which I can base the probability of EF being taken over rather than failing, thus my taking only a very small position.

UPDATE (Dec. 1, 2008): Despite having placed itself under creditor protection, EF still managed to submit bids for the upcoming BC Hydro Clean Power Call. They are clearly still looking for a major asset sale but the question is: what is the likelihood that BC hydro will award them power purchase agreements if they are uncertain the projects can be developed? I am holding on to my shares but have written this investment off. To be continued...

DISCLOSURE: Charles Morand has a position in EarthFirst.

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.

October 08, 2008

My Portfolio's Latest Casualty And Addition

The Casualty

Last Monday, I discussed how I had recently reviewed Railpower Tech with a view to potentially adding to my position on grounds that: (a) the company had a fair amount of cash in the bank, which reduced the need to go to capital markets for financing for a while; and (b) that it was getting badly battered by general market conditions, potentially offering an attractive entry point. Although my portfolio has taken a beating in recent weeks, I remain ready to take small positions in stocks if I feel they are being unfairly bashed, including in penny stocks. The current situation is bad to be sure, but I don't think we are at the point yet where every small and medium business faces certain bankruptcy.

I noted in the article that the reason why I decided not to commit any more money to Railpower for the moment was the lack of contracts being signed given the operating leverage the firm was taking on by building a new factory. Unfortunately, this exact problem forced Railpower to materially alter its plans, and on Monday evening it announced it was canceling construction of the plant on grounds that new orders were not coming in (PDF). I fully exited my position on Tuesday morning at a pretty handsome loss on a percentage basis, although luckily my position was very small and the cash loss wasn't needle-moving.

With my portfolio, I keep a log and always record the reasons why I enter and exit positions and what I've learned from different investments. What are main lessons I took away from this one? First, as money rarity spreads into non-financial industries, capital expenditures, especially for big-ticket items, will be some of the first things to be delayed or canceled. Prudence is therefore in order with firms that derive a large portion of their revenue from the capital expenditures of other firms. However, as pointed out by Tom yesterday, it is not impossible that the government may try to invest in infrastructure as a counter-cyclical measure.

The second thing I noted down was that in uncertain times, it is cautious to start out a position small and see how things develop. If the market turns in your favor, you can build up your position and the only real cost is an opportunity cost. If you missed something in your analysis or if the market ceases to pay attention to fundamental value as it is currently doing, you can exit the position at a smaller cash loss or you can try to weather the storm without loosing sleep over it.

Lastly, the balance sheet weighs a lot more heavily in my analysis in tough times in three main ways: (1) the cash position - it's gotta very strong; (2) debt levels - there has to be little or no debt and ideally refinancing isn't needed in the near-term; and (3) the value of tangible assets per share must compare favorably to share price (notably with the Price-to-Book-Value ratio). For penny stocks, I would look for firms with no debt, a completely depressed Price-to-Book ratio and assets that can be readily sold off to unlock some shareholder value should the going get too rough.

The Addition

Last Thursday, I purchased ABB Ltd. (NYSE:ABB) for the first time. I am down quite substantially since but it doesn't bother me very much. This is a long-term buy (3 to 5 years) that I had had my eyes on for quite some time but that I had always found too rich on a PE and Price-to-Book basis. ABB, a stock Tom has discussed on several occasions, is a prime play on the transmission infrastructure build-out and energy efficiency. I also applied my rule and took a very small position, which I stand ready to increase.

The Positive News

A stock that I've held for quite some time now, AAER Inc. (AAE.V or AAERF.PK), an emerging Canadian maker of utility-scale wind turbines, finally signed its first major contract on Monday. It is to deliver 100MW of turbines to a large Canadian wind project.

The next step in closing this transaction is for both parties to show they have secured financing within three months. This could prove tough in the current environment, so this is not a done deal just yet. However, if AAER can pull this through successfully, it could be the beginning of what patient investors such as myself have been waiting for for a long time - a buildup of the order book. The supply/demand situation for large turbines continues to be heavily skewed in favor of turbine companies and AAER should in principle be able to find customers.

Ironically, after the stock experienced a 40% pop last Friday probably because the news was leaked, I put in a sell order to exist most of my position Monday morning in case this was just an aberration. The company asked for a trading halt and I was never able to sell before the news came out. I wrote down in my log that I had been quite lucky on this one.

DISCLOSURE: The author is long ABB and AAE.V and does not have a position in RPWRF.PK

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.

September 15, 2008

Wind and Heat Pumps: A Winning Combination

This article has been cross-posted on The Oil Drum.

Last month, I brought you some nice maps showing when and where good wind resources are found in the US.  Now I've found something better: a visual comparison of electrical load with wind farm production[pdf file], published by the Western Area Power Administration in 2006.  The study compared electricity production from five wind farms in Northern Colorado, Southwestern Nebraska, and Central Wyoming in 2004, 2005, and the start of 2006, compared with electricity consumption in the same area over the same time period.

Comparison of Wind Production to Electricity Demand

I've copied four of the most representative graphs below.

The first and third heat graphs below show electricity production at the five wind farms studied in 2004 and 2005, respectively.  The Second and fourth show electricity demand in the surrounding territory.  Red(blue) denotes areas of high(low) production or demand. 

All Farms 2004.jpg wacm load 2004.jpg All Farms 2005.jpg wacm load 2005.jpg

For wind advocates, these are probably rather scary graphs.  The first thing you probably noticed was the big blue patches of wind production during summer peak demand, roughly 10am to 10pm in June, July, and August.   This is why wind is referred to as an "energy resource" not a "capacity resource."  Right when demand is highest (namely hot summer afternoons), the wind is least likely to be blowing.

On Second Thought - How Much Backup Do You Need?

That is just the first impression, and while it is a true impression, it's also an oversimplification.  If you look at the scale, you will notice that the blues on the wind production graphs actually represent wind generating at 10% to 15% of nameplate capacity.  If you factor in the fact that a normal capacity factor for wind is about 25-40%, that means that even on these hot summer afternoons, the farms are generating at one-third to one-half of their "normal" output.  This means that, contrary to popular misconception, wind does not require a "100% back-up with natural gas."   It is true that wind is less reliable than baseload power plants such as coal and nuclear, which typically run about 90% of the time, but in an apples-to-apples comparison, a 100 MW coal or nuclear plant will produce as much energy over the course of a year as a 270 MW wind farm.  During the peak summer months, the coal plant will need some backup power in case of an unscheduled shut down due to lack available coal (this happened in Colorado in 2005 due to problems with dust in rail tracks) or lack of available cooling water during a heatwave, and when a coal or nuclear plant goes down, it goes all the way down, so the 100 MW baseload plant has a small chance of needing 90 MW of backup to produce at its "normal" rate of power production.  On the other hand, the wind farm will be operating at (a conservative) third of its "normal" capacity, producing about 30MW.  To bring that up to it's normal capacity for the year, it will need 60MW of back-up power.  

In other words, because some part of a large distributed group of wind farms is always producing some power, it will never go completely down.  A large baseload power plant, on the other hand, is completely down about 10% of the time (although less during peak summer months, because utilities schedule maintenance in off seasons.)

Pick Farms to Match Your Load

Another point worth noting, is that the wind has different annual patterns in different locations.  The smallest (8.4 MW out of 139MW) of the five farms in the study was "Wind Farm B" in central Wyoming.  If you look at the following two heat maps below for 2004 and 2005, which show the production of just this wind farm, you will note that during the peak summer demand, this farm was producing at over 50% of "normal" capacity for much of the summer peak.

Wyoming Wind 2004.jpg Wyoming Wind 2005.jpg

Since we know what electricity demand looks like, if we plan new wind farms (and adequate transmission), we can choose to build wind farms that produce more power when we most need it.  If all the farms in the example in the last section had more favorable production patterns like Farm B, even less back-up generation would be needed to bring them up to "normal" capacity.

For instance, in the Texas Competitive Renewable Energy Zones study [.pdf 7.64MB] wind in the coastal area (along Texas's southern gulf coast) was found to be a much better match for the ERCOT load shape than wind in other areas, although the average capacity factor was considerably lower than panhandle wind.  See chart below.

 TX CREZ Hourly Capacity July.jpg

Hence, careful selection of wind farms can lead to wind production with higher capacity during peak loads, and correspondingly less need for dispactchable power.  Although Texas is currently focusing on developing wind farms in West Texas and the Panhandle because of their high capacity factors and correspondingly high annual energy output, the power from coastal wind farms is likely to become increasingly valuable as wind reaches higher penetration.

It's Not All About Summer Peak

Statements about wind's need for large dispacthable backup generation because of low capacity factors during peak times contain am implicit assumption that electricity demand is fixed.  This assumption is both false and pernicious, because shifting demand can be done cheaply, and often produces multiple benefits.  While it is true that most large scale electricity storage technologies, such as pumped hydropower, compressed air energy storage, and utility scale batteries are expensive or limited to a few available sites (pumped hydro,) technologies which shift the demand curve are not.

If you look back at the first set of four heat maps, you will note that wind actually does a quite good job serving the winter peak.  In 2004 (a year with a moderate summer) winter peak demand actually exceeded summer peak.  

Capacity during winter peak has some advantages over summer peak.  First of all, natural gas prices are higher during the winter, because natural gas is used extensively for home heating as well as power generation.  In February 2006, Xcel Energy had a series of major power outages in Northern Colorado which they blamed on insufficient natural gas in storage due to an unusually cold temperatures.  Yet as this heat map   All Farms 2006.jpg

shows, wind farms in the region were operating at 40-60% capacity factors (i.e. well above "normal" production) for January and February.  Note that the blue at the end of the year was due to lack of data, not lack of production.  Had there been more wind farms installed, this would have had a large impact on the amount of natural gas needed for electrical generation, and the outages would not have happened.   I don't have data to back it up, but my personal experience leads me to believe that cold winters in the great plains are also particularly windy winters, meaning that winter wind capacity is ideally suited to displace natural gas needed for heating.

How Heat Pumps Fit In

Which brings me to the title of this article: why heat pumps are an excellent fit with wind generation.  In my article on how to invest in the Pickens Plan, I mentioned that ground-source heat pumps (GHP) can displace gas used for heating with a smaller amount of electricity from wind.   Since a GHP is both an efficient air conditioner as well as an efficient heat source, it not only reduces natural gas used for heating, but also reduces electricity used for cooling in hot summer months, which in turn reduces summer peak loads.  

Deployment of GHPs does three things to make energy supplies fit energy demand:

  1. Winter electricity usage is increased just when wind capacities are highest.
  2. Summer electricity consumption is decreased when wind capacities are lowest.
  3. Use of natural gas for heating is reduced during times of peak gas demand.

GHPs, because of their extreme efficiency, also have the benefit of saving users a lot of money.

The Dual Fuel Option

Unfortunately, GHPs have not been widely adopted, due to the difficulties of installing the buried heat exchange loops, especially in urban areas (although some utility programs have been very successful.)  When I bought a house, it was in a New Urbanist development with very small lots which was close to my work.  While this saves me countless gallons of gasoline, it meant that I was unable to use a heat pump.  I opted instead for the most efficient natural gas furnace available from my homebuilder, in combination with the most efficient air-source heat pump.  Unlike GHPs, air-source heat pumps lack a ground loop, meaning that they only work efficiently when temperatures are above about 40F.  In my dual-fuel system, the heat pump heats my house during milder weather (which is frequent in Denver winters), and the natural gas furnace takes over when it is cold.   Since the heat pump is only slightly more expensive than the air conditioner I would have bought anyway, the dual fuel system will pay for itself rapidly, especially when natural gas prices are high.

From the perspective of the electric grid, my electric usage is higher and my natural gas usage is lower during the heating season, when gas demand is high and wind farms are at their most productive.  So while a dual fuel house is much less of a strain on the energy infrastructure than one with a furnace and an air conditioner, it also saves the homeowner money for a much smaller investment.  In addition, while the need for a ground loop makes a GHP nearly impossible to retrofit to an existing home, an air source heat pump is an option for anyone considering replacing or installing an air conditioner, and has the added advantage of having a back-up heat source during a natural gas outage.

Another retrofit option I hope to see available soon is a hybrid ground/air source heat pump [pdf].  These systems combine a short ground loop with an air heat exchanger.  By using the air exchanger during milder weather, only a smaller ground source loop is needed for use during more extreme conditions, reducing the up-front costs compared to a GHP, but without the performance loss of an air source heat pump.  A startup called Co-Energies has developed a way to retrofit existing air conditioners into hybrid heat pumps; see slides 33 and later of this PowerPoint.

Electricity Demand Can Shift

Heat pumps are just one option for changing the shape of the electricity demand curve.  Many such efficiency measures can do so.  Other examples are improved home sealing and insulation, which typically pay for themselves in a couple years or less, and, because air conditioners work less hard in the summer, reduce summer peak loads.  Wind is undoubtedly a tricky sort of electricity to use in the existing grid, but the fallacy that demand is fixed makes the problem seem much harder than it needs to be.

August 28, 2008

Playing The BC Hydro Clean Power Call

At a time when many people see clouds on the horizon for US wind, one Canadian jurisdiction is moving full-swing ahead with a procurement for renewable power. British Columbia (BC), Canada's westernmost province, announced in June the launch of its Clean Power Call, an initiative aimed at sourcing 5,000 GWh of clean power.

The structure of this process is distinctly Canadian and similar to what has occurred in the provinces of Quebec and Ontario. Like a US RPS, the government sets a target for renewable or clean power that the utility meets through procuring the electricity from private developers. The utility initiates a call for tenders and the most competitive projects are retained. Unlike the US, Canadian utilities are generally government-owned, so politicians tend to be more involved in the process than is the case for an RPS-based round of tendering.

Although the Clean Power Call calls for "clean and renewable resources" in general, wind is likely to feature prominently in the final mix of PPAs awarded.

This initiative is interesting for investors because, unlike in the US, the Canadian market features a number of publicly-listed pure-play wind developers, several of which are active in British Columbia. You can think of them as you would junior mining or oil & gas exploration plays: they go around acquiring rights to promising wind areas and if they can't develop the projects on their own, they sell their rights to a bigger player at a nice premium. A number of such firms are currently participating in the BC Clean Power Call, and stand a decent chance of getting a power purchase agreement (PPA) from the provincial utility, BC Hydro. These companies are:

Finavera Renewables (FNVRF.PK) - We've discussed Finavera and its travails in the past. The company is bidding five projects for a total of 300 MW (PDF). Should Finavera be awarded contracts by BC Hydro, this could lift the stock substantially.

EarthFirst Canada Inc (EF.TO) - I'm not sure if a US listing exists for this one, which is unfortunate for people whose brokers don't allow them to trade Canadian stocks because this is one of the cheaper plays on this. The company already holds a PPA for 144 MW of wind in BC, and has a good project portfolio in the province as well as in other parts of Canada. The stock was recently battered by investors following an announcement that development costs for one project had increased substantially, although it rebounded somewhat when the firm announced it had engaged a couple of investment banks to figure out what to do about this (people are speculating the project might be sold, unlocking some near-term shareholder value).

Naikun Wind Energy (NKWFF.PK) - Naikun specializes in developing offshore wind, and the BC coast is thought to have great offshore wind resources. The company is currently bidding 320 MW into the Clean Power Call.

Sea Breeze Power Corp. (SBEZF.PK) - This company is involved in wind and run-of-river hydro. I quickly glanced at the website and could not find anything about the Clean Power Call, although I would be surprised if they were not participating.

In all cases, we're talking about companies without earnings and whose stock price may have experienced a fair bit of volatility over the past few months. The biggest risk these firms face at the moment is the spiraling out of control of capital costs for new wind projects. This is especially acute in certain parts of British Columbia where a boom in gas exploration is pushing up the price of labor. You therefore want to go through the latest financial statements to ascertain what the cash and financing situations look like.

DISCLOSURE: The author is long Finavera Renewables

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.

August 21, 2008

Wind Energy ETFs: A Comparison

Three weeks ago, I wrote on the year ahead for the US wind sector and said I would analyze the two new wind ETFs now available to US investors: the First Trust ISE Global Wind Energy Index Fund (FAN) and the PowerShares Global Wind Energy Portfolio (PWND).

While I don't currently have a position in either ETF as I expect headwinds in the US (no pun intended) to place downward pressure on some of the global wind stocks in the next few months (the US accounted for 27% of global installed capacity in '07), I still intend to get in post-November elections when things get brighter on the policy side.

While these two ETFs cover the same sector, they offer two distinct options for investors and are therefore worth exploring in more detail.

Basic Valuation Metrics

The table above features a few basic valuation metrics. The expense ratio is what it costs you to invest in the funds, and many active investors shun mutual funds on grounds that high expense ratios eat away at returns. One of the benefits of ETFs is that they offer expense ratios that are lower than those of mutual funds, and this holds true for alternative energy. In this case, the 0.15% difference between the two really isn't material and probably wouldn't weigh very heavily in my decision.

The PE and Price-to-book-value are where things get more interesting from my perspective. Based on these metrics - especially PE - PWND has a higher weighting in stocks that are considered pricey than does FAN. A PE of above 76 is considered very high (the long-term average for the S&P 500 is around 15, and it peaked at around 35 in the late 90s), although it's not unusual in the alternative energy industry. This data is a bit dated so this likely is lower now, albeit it probably remains above the long-term average for the market. Depending on what your position is on growth stocks, this may or may not matter much. If you have a value leaning and believe low-PE stocks outperform in the long run, then this may be a red flag.

With regards to the share price premium over net asset value at yesterday's close, this isn't an especially useful metric on its own, and would probably be more useful if examined as a trend over a longer period of time. Nevertheless, this is something worth keeping an eye on - an ETF trading at an important discount to its NAV could present an interesting buying opportunity, while the opposite could spell downside risk.

Finally, PWND holds 32 securities, whereas FAN holds 67. This implies that PWND's positions are on average larger than FAN's - the average security in PWND makes up 3% of the portfolio, whereas that figure is 1.67% for FAN.


FAN's top ten holdings are somewhat more focused on the wind supply chain, whereas PWND has a more exposure to wind park operators. Again, as can be noted, PWND's positions are appreciably more concentrated than FAN's, with the top ten holdings making up about 65% of the portfolio Vs. 57% for FAN. Overall, I expect the supply chain to be less impacted by tightness in credit markets than park operators.

The following two graphs are based on categories I created. While both ETFs disclose their industry exposures on their respective websites (here for PWND and here for FAN), I wanted to dig a bit deeper to know what those exposures really meant in terms of the wind power value chain. I didn't know all of the companies so my superficial search might not have landed everything where it truly belongs, but by-and-large I believe this is a good approximation.

My categories are fairly self-explanatory, save perhaps the distinction between "Park ownership" and "Power gen". "Park ownership" refers to pure-play wind park and/or renewable power generation asset owners, whereas "Power gen" refers to larger electric utilities with exposure to a wide range of generation fuels.

We can note that, by market value of holdings, both funds are mostly focused on turbine makers and wind park owners - no big surprise here. One of the big differences is undoubtedly the fact FAN has three times the exposure to the Power gen sector than PWND does - this probably accounts in part for the PE differences between the two funds. Another notable difference is the comparatively smaller exposure to Blades FAN has relative to PWND, although I don't have an opinion one way or another on this.

Finally, country exposure. You will notice that in neither case does the final count come up to 100 - that's because in both cases only the top ten countries were provided. I'm not sure how much of a difference this makes, seeing as most of the top holdings are global businesses. This breakdown says nothing about the exposure of the underlying businesses to different geographical markets, which is arguably what matters most if you intent to hold the ETF for the medium or long term. Nevertheless, to some, this may be useful info in trying to time an entry point if you have an opinion on where each of these equity markets is headed.


These two ETFs offer distinct choices to investors, although the performance chart above tells a pretty similar story so far (and not a great one at that...). I view the recent downward pressure on the wind sector mostly positively because I like the space long-term and periodic hiccups provide good entry points.

PWND, with its more concentrated positions and greater focus on pure plays, probably offers a more direct way to play the space. If global wind stocks take off, you will experience greater capital appreciation with this one. However, those rich PEs and concentrated positions might be a red flag for more conservative investors.

FAN offers more diversification, and its larger exposure to the Power gen space might make it a tad less volatile. The top ten holdings have a greater concentration on the supply chain, which I believe will remain strong.

I am leaning towards FAN. I already have exposure to speculative wind in my portfolio, and would look to buying an ETF as a means of reducing my risks on a portfolio basis. I will provide an update on this after (and if!) I end up pulling the trigger.

DISCLOSURE: The author does have not a position in any of the securities discussed in this article

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.

August 20, 2008

How to Invest in the Pickens Plan

A friend recently asked me how to invest in the Pickens Plan.  I named a stock (see below).

He then surprised me by saying "You are the fifth person I've asked, and no one else knew how.  Several said it could not be done."

You can invest in T. Boone Pickens's plan.  Here's how:

The Plan

T. Boone's plan is both simple and audacious.  

  1. We will build wind farms all over the Great Plains.
  2. Build the necessary transmission to get that electricity to cities, displacing natural gas used in electricity generation for the use in automobiles.  
  3. This will give us an alternative, clean transportation fuel, to replace oil, which has peaked.  
  4. It will also cause an economic revival for rural America.

There are investments available for you to profit from all of these steps (so long as they are more successful than is currently expected by the market.)  Most of the links below are to articles about how the company fits into the clean energy picture.

1. Wind Farm Investments

To profit from the massive build out of wind farms, look no further than wind turbine manufacturers, and other wind related stocks. 

2. Transmission Investments

We've been pushing transmission investments at this blog for a long time.  It's nice to have an oilman hop on our bandwagon.  Here are some of our top picks.

3. Natural Gas

  • The most direct investment in the Plan is natural gas fueling stations.  Clean Energy Fuels (NASD:CLNE), operates fueling stations for natural gas fleets, as well as providing fueling stations to the public.  T. Boone owns about 37% of the company personally, serves on the board, and founded the predecessor company in 1997.   His wife owns another 7%.  Although he just recently hit the media with it, T Boone has been thinking about peak oil for a long time. (This is the stock I told my friend about.)

4. Rural Resurgence

  • Massive wind investment should be good for real estate values in rural towns in windy areas, mainly the great plains.  You don't have to buy the land that the wind farm is on to benefit; the economic revival should help land values in towns nearby, too.  The workers have to live, eat, shop, and sleep somewhere, and county tax rolls will benefit, leading to improved public services.
  • Another way to play the same trend would be to invest in a Midwestern REIT, such as Investors Real Estate Trust (NASD:IRET).  While this should profit by an improving Midwestern economy, I'd prefer a REIT with a rural focus, but have been unable to find one.


DISCLOSURE: Tom Konrad and/or his clients own ZOLT, GE, ABB, SI, CPTC, ITC, NGG, PWR, CLNE, OC, WFIFF, .

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.

August 14, 2008

When the Wind Blows

In the past, readers have challenged my assertion that wind in the Great Plains blows mostly in the winter.  In fact, I was once taken to task for it by a Colorado State Representative (a know-nothing Republican from suburbia) when I was testifying as to the advantages of Solar in Colorado in terms of timing.  In the past, I've only had secondary references to "NREL data," and ERCOT's Analysis of Transmission Alternatives for Competitive Renewable Energy Zones in Texas (pdf, 8MB), where wind in the Texas panhandle also conforms to this pattern.

However, I was just browsing NREL's Wind Energy Resource Atlas of the United States, and was able to see it quite dramatically from the maps.  As the Atlas says: "Because there is considerable seasonal variation in the wind energy resource, with maxima in winter and spring and minima in summer and autumn throughout most of the contiguous United States, assessments of the wind energy resource have also been produced for each season."  Here are the maps all on one page so you can see the difference (white/orange wind is weak; blue/magenta is strong.)

Map 2-12 Winter wind resource estimates in the contiguous United States


Map 2-14 Summer wind resource estimates in the contiguous United States


Map 2-13 Spring wind resource estimates in the contiguous United States


Map 2-15 Autumn wind resource estimates in the contiguous United States

Quite dramatic, isn't it?  It's also clear why T. Boone is building his wind farm in the Texas panhandle.

Tom Konrad

August 03, 2008

The Production Tax Credit & The Year Ahead For US Wind

Even though solar - and especially solar PV - has managed to capture the lion's share of public equity investors' attention over the past three years, wind remains far more competitive with with fossil-fired power generation on a cost basis than solar, and thus presents a fundamentally stronger investment case for the time being (and I emphasize for the time being). What's more, wind as an industry is more mature than solar; for solar, the lack of earnings for many companies and the wildly inflated PEs for others make the sector potentially volatile and risky for investors.

While installing a kW of commercial wind in 2007 in the US would have cost you on average $2,200 according to the DOE's EERE (PDF document), installing the same amount of commercial solar PV would have set you back more than twice that amount. In 2007, the cumulative-capacity-weighted-average wind power price (the amount wind farm owners were paid for their electricity on average) was below the nationwide price band for a flat block of wholesale power.

It is therefore not a surprise that, for 2007, the US installed 27% of all global wind (5,329 MW), 62% more than number two China. In fact, between 2004 and 2007, US wind installations were on a tear with a CAGR of 35%, making the US the number one global wind hotspot for that period.

As can be noted from the graph above (the y-axis is MW), the steepening of the curve has corresponded with a period of uninterrupted Production Tax Credit (PTC) availability. The PTC is a federal incentive for wind power that comes in the form of a tax break per kWh of electricity produced, and has historically been responsible for driving growth in the industry. In fact, the past cycle of PTC expirations and renewals led to a boom-and-bust cycle in US wind, as can be seen from the graph for the period 1999 to 2004.

Is PTC The Whole Story?

The PTC is set to expire again at the end of 2008 for the first time since October 2004, and the Senate currently appears to be in no mood for an early renewal. Needless to say, this is causing headaches in some quarters. Throw on top of that an inflationary environment for power plant capital costs (tune in later this week for a piece on this) and a credit crisis that's raising the cost of capital, and you've got something like a perfect storm brewing for US wind in 2009. Could the party be about to go on hold?

Not so fast. Another phenomenon has been impacting the US wind sector over the past four years that can undoubtedly explain some of the growth: an explosion in state Renewable Portfolio Standards (RPSs). RPSs are state targets for renewable power that are made into legal obligations and often include a penalty for non-compliance - the stick instead of the carrot.

As can be seen from this table, about 58% of US states currently have a formal RPS, and another 8% have a target. Of those, 76% have either enacted or amended (generally to increase it) their RPS or target on or after 2004. The result is that 63% of US installed capacity now sits in a state with an RPS or target, as does 71% of the population.

What Has Really Been Driving Growth?

While keeping the PTC alive all this time certainly accounted for much of the growth since 2004, the proliferation of RPSs cannot be ignored. RPSs enshrine renewable energy targets into law, thereby providing powerful drivers for growth.

Want to know how powerful? You can try come up with your own rough estimate for any state you're interested in. Take the EIA's most recent statistics on installed generation capacity by state (the most recent available year is 2006), grow the state's installed capacity at a rate you find reasonable (e.g. 2% annually or or use an existing forecast if you can find a good one) until the final year of the RPS, and simply apply the RPS target - which is typically expressed as percentage of total installed capacity by a target year - to your final figure. Multiply that amount by a safety margin of something like 0.7 just to be conservative, subtract what's already installed, and you may have a rough idea of how much incremental wind a state will install by it's RPS' deadline. Of course, certain states will favor solar for physical reasons, while others have technology targets (e.g. NJ wants 2.5% of solar as part of its 22.5% 2021 RPS). It's up to you to dig a bit deeper to ascertain the particularities of each RPS and what they mean for wind.

I conducted such a an analysis for all US states, and while I won't share my numbers because they are very rough estimates and I don't want them quoted, I can nonetheless say that some states will experience very solid growth over the next few years. One example is NY, which will install several thousand MW of wind between now and 2015 although it barely registers right now.

What's the takeaway from all this? There was a time during which the PTC drove the vast majority of wind development in the US, and if it went so did the industry. But over the past four years a growing number of states have adopted formal renewable power targets in the form of RPSs, and those will play an increasingly larger role in fostering growth, especially as wind becomes competitive without the PTC.

The Year Ahead

2009 could indeed be a bit rough for wind if the PTC isn't renewed prior to Dec. 31, 2008. Financing costs could become an issue in the midst of ongoing problems in capital markets, so no PTC could compound this. I don't think, however, that a short-lived slowdown would be a bad thing for the industry. The wind supply chain remains as tight as ever, and a slowing of demand while new manufacturing capacity continues to be added across the US could set the stage for a resumption of strong growth in 2010.

In fact, the current uptick in construction of wind manufacturing facilities in many parts of the US can probably be attributed to the proliferation of state RPSs, and is the strongest indicator yet that the industry sees a life for itself beyond the PTC.

Wind For US Investors

One of the main complaints US investors have with regards to wind is the lack of wind plays available on US exchanges. Like the industry's dependence on the PTC, this, too, is changing.

For one thing, two new wind ETFs have launched in the past few weeks: the First Trust ISE Global Wind Energy Index Fund (FAN) and the PowerShares Global Wind Energy Portfolio (PWND). ETFs are a good way to access a broad basket of pure-play stocks, and thus provide both focused exposure and some risk mitigation through diversification.

Moreover, a quick look through our Stocks page will yield several potential picks. A majority of Pink Sheets-listed stocks you will find there under the category Wind are stocks of global wind pure-plays with legitimate listings on exchanges in their home countries (mostly in Europe).

In the US, GE (NYSE:GE) retains the largest market share for wind turbines (although competition is stiffening to be sure), and GE Energy Financial Services is active in wind park ownership. FPL (NYSE:FPL), through its FPL Energy unit, is the second largest wind park owner in the world and another way to get exposure to US wind. In both cases, however, it also means you have to buy the rest of the business, which may or may not be of interest.

On the more speculative side, investor favorite American Superconductor (NASDAQ:AMSC) remains a play of choice for many, although valuation is a definite concern for me. Although top line has been expanding rapidly on the back of strong growth in China, I feel much of the stock's potential is already priced in.

My favorite way to play this would therefore be thorough one of the two ETFs, although I haven't looked at them in enough detail yet to say which I prefer (this is something I intend to write about soon).

Keep an eye out for what is happening on the PTC front, and for signs that the ETFs' prices are trending down as a result. When to pull the trigger is up to you, but based on what I wrote above you can rest assured that, PTC or not, US wind will continue to exhibit strong growth in the decade ahead, and the prices of stocks should follow earnings on the way up.

DISCLOSURE: The author does have not a position in any of the securities discussed in this article

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.

July 14, 2008

A Geospatial Wind Power Supply Curve

by Tom Konrad

David Kline, and his team at the National Renewable Energy Lab, wants to help China exceed its target of 30 GW of installed capacity by 2020 by miles.   How is he helping?  By developing a methodology to help the central planners find the "Geospatial Supply Curves"[.pdf] for wind within China's regions.  By a geospatial supply curve, he means the available sites for wind farms at each levelized cost of energy (LCOE,) associated with the geographical data as to where that capacity would be installed.

The team's technique combines geographical wind speed data with turbine performance data, any excluded zones, and potential turbine densities.  Steeper terrain forces down turbine densities. This is unfortunate because the best winds are usually found on ridges and mountainous regions.  The resulting supply curves will allow a central planner to see where wind farms will need to be built (and at what cost) in order to reach any target capacity for the region studied.  This will aid in the planning of roads, transmission, and other planning necessary in order to get the farms built.

Zhangbei Province Wind Supply Curve

Dr. Kline's NREL team demonstrated (with help from Chinese partners) their methodology by using it on a region of China's Heibei province, Zhangbei.  The picture below is one geographic representation of their results.

Lowest cost 2.4 GW of wind farms in Zhangbei region of Heibei provence.  Source: "A GIS Method of Developing Wind Supply Curves" David Kline, Donna Heimiller, and Shannon Cowlin, NREL.

Most striking to me was not the analysis itself, or its results, but the many weaknesses of the analysis caused by limited budgets and lack of basic information.  Dr. Kline cheerfully admits all these weaknesses, saying that he'd love to do the work in the detail it deserves... as soon as someone comes up with funding.  All of the following came up during a recent  presentation (pdf, 168 kb), or during the Q&A which followed.

  1. The team was unable to include transmission costs because they were unable to obtain Chinese transmission construction cost estimates.
  2. Only average wind speed data was used, resulting in the use of approximate wind speed profiles.
  3. No grid capacity or load data were available.
  4. The Chinese planners expressed a desire to include pumped storage an expanded model.
  5. No sensitivity analysis was done, either on uncertainties in wind regimes, construction costs, or other factors.

Model Limitations, but No Reason to be Smug

To me, the lack of fine transmission, load, and wind data are most troubling.  There is a complex interplay between the timing of wind supplies in different locations with the load which I expect would have a great impact on the value of different potential wind farms... planning without this analysis would be like building a house without first knowing what sort of ground lies under the foundation. 

China's drive for more renewable energy is commendable, and the NREL team's methodology will undoubtedly help in the placement of all those new wind farms, but even detailed wind and grid loading data are likely to remain unavailable even to the Chinese planners, which means that some wind power will not be able to get where it's needed, and not all the most useful wind turbines will be built first; some efforts will be wasted.  Nevertheless, the Chinese will likely forge ahead, which, in the end, is a lot better than analysis paralysis.

Before we Westerners chuckle at the lack of data (the Chinese grid does not even have a wholesale power market for price discovery) we should ask ourselves... how likely are we to reach 15% grid penetration of wind power by 2020?  If you live in the U.S., as I do, the answer is "low to nil, and a lot less than China's chance of getting there."

June 29, 2008

New Wind ETF FAN Cools Off Sunburned Portfolios

Update:You can find a comparison of FAN with PWND. a more recent wind ETF here.

Since I last covered clean energy mutual funds and ETFs, the sector has seen the launch of two solar ETFs (KWT the Market Vectors Solar Energy ETF from VanEck,  and TAN, the Claymore/MAC Global Solar Energy ETF.)   Continuing in the tradition of cute ticker symbols, First Trust's new global wind energy ETF is FAN.

I recommend that investors stay away from the (very expensive) green energy mutual funds, and invest either in one of the ETFs, or if they have a few tens of thousands of dollars to invest and are willing to roll up their sleeves a little, they buy a representative sample of the stocks (a "tracking portfolio") held by the mutual funds and ETFs, and save further on expenses.

The Problem with Tracking

The difficulty of tracking portfolios in clean energy for North American investors is that the wind sector is dominated by European companies, which can require considerable knowledge and cost to purchase.  This is why, in the past, I preferred GEX, the Market Vectors Global Alternative Energy ETF.  With the introduction of FAN, that problem is now solved.  The Fund's top three holdings, Vestas, REPower, and Gamesa are the world's leading wind turbine manufacturers, and between them control approximately half of the worldwide market for turbines.  Vestas alone has 23 percent of the worldwide market for wind turbines.  Wind power is the largest source of renewable electricity after hydropower, and also the fastest growing renewable electricity source.  It is also one of the most economical, producing power at a price comparable to the cost of generation from a newly built coal plant or natural gas turbine, and even cheaper in some locations.

The only major wind manufacturers in which a North American investor can easily buy are General Electric (GE) and Siemens (SI).  Since these are large conglomerates, wind turbines are only a small fraction of their business.  Both also have extensive exposure to other clean energy sectors, which is why they are included in the example portfolio below. 

Bright Contrast

In marked contrast, the new Solar ETFs do not greatly add to a retail investor's ability to invest in the solar space.  There are more public solar companies than I keep track of, so aside from speculating on short term movements of the solar sector, I see little reason to use the Solar ETFs.  Exposure to solar can be easily accomplished through individual stocks, or as part of the broader clean energy ETFs.  

I personally tend to underweight solar most of the time.  While I believe the solar sector will be a tremendous growth story, I also feel solar's potential is already well appreciated by investors.  This makes it difficult to find well valued solar companies.

A Model Portfolio

How would FAN be used as part of a larger clean energy portfolio?  If I had $20,000 to invest in clean energy companies today, for an investor with an above average risk tolerance, here's what it would look like (note, this portfolio is intended only as an educational example, not individual investment advice.  The particular companies chosen for each sector would also change due to changes in valuation, and a smaller (larger) portfolio or higher (lower) commissions would lead to fewer (more) companies being included.  

Transport $7,000
  Bus - New Flyer (NFYIF) $3,000
  Rail - Portec Rail Products (PRPX) $1,500
  Rail - Greenbreier (GBX) $1,500
  Batteries - Electro Energy (EEEI) $1,000
Power $8,000
  Wind - FAN $2,000
  Transmission&Wind - Composite Tech Corp (CPTC) $1,000
  Geothermal - Ormat (ORA) $1,000
  Inverters - SatCon (SATC) or Xantrex (XARXF) $1,000
  Storage - Active Power (ACPW) or Maxwell (MXWL) $1,000
  Efficiency - Cree, Inc (CREE) $1,000
  Efficiency - Waterfurnace (WFIFF) $1,000
Diversified (see note *) $5,000*
  Diversified - General Electric (GE) $1,000*
  Diversified - Sharp (SHCAY) $1,000*
  Diversified - ABB (ABB $1,000*
  Diversified - Johnson Controls (JCI) $1,000*
  Diversified - Owen Corning (OC) $1,000*

*Note: if I were investing as part of a larger portfolio, I would actually invest about $4,000 in each of the "diversified" companies (a total of $20,000 rather than $5,000), and reduce the broader portfolio's allocation to general large cap stocks by $15,000 to compensate for the limited exposure of these companies to clean energy.

This portfolio is not similar in composition to the existing ETFs... instead it heavily over weights my favorite sectors - efficient transport, and grid infrastructure, while almost ignoring popular sectors such as solar.  I do like wind, on the other hand, so FAN is a useful part of the portfolio, in addition to the wind exposures from CPTC, the inverter stock, and the diversified conglomerates.

DISCLOSURE: Tom Konrad and/or his clients have long positions in Gamesa, GE, SI, NFYIF, PRPX, GBX, EEEI, CPTC, ORA, STAC, XARXF, ACPW, MXWL, CREE, WFIFF, GE, SHCAY, ABB, JCI, OC.

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.

May 06, 2008

AAER & The Hydro-Quebec Tender: A Tale Of The Importance Of Risk Management

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.

UPDATE (May 7): As predicted, AAER's financing was re-negotiated and will take place at C$0.50/shr Vs. C$1.20/shr initially...ouch.

UPDATE (May 23): In the latest AMF bulletin (the AMF is Quebec's financial markets regulator), dated May 23rd, it came out that Lehman Brothers had divested about 39% of its position in AAER through 24 transactions between May 5 and 6. Lehman's holding now stands at 8.53 million shares, or ~10% of shares o/s. On the upside, the CEO, Dave Gagnon, purchased an extra 16,000 shares at C$0.45 on May 21. He currently holds about 11% of shares o/s.

DISCLOSURE: The author 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.

May 05, 2008

Wind-Rail Convergence?

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.

March 09, 2008

Is Composite Technology Corporation Still a Buy?

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.cptc.png

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.


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.

January 01, 2008

Ten Alternative Energy Speculations for 2008: Geothermal, Wind and Wave, and Thin Film Hype

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 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.

#2 Finavera Renewables (TSX:FVR or FNVRF.PK)

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.

December 27, 2007

Ten Alternative Energy Speculations for 2008: LEDs and Ultracaps

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.

[Note: Ticker has been changed to LSCG.OB with a 20 for 1 reverse stock split.]

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.

September 27, 2007

Two Canadian IPPs For Your Portfolio

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 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.

September 09, 2007

The Grid Impacts of Net Metering

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.


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.

August 23, 2007

Hither and Yon: Transmission and Biofuels

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.

August 07, 2007

Renewable Energy: a Better Bribe

Bribing and Pressuring Fissile Regimes

On July 25th, France offered to build a nuclear reactor for Libya to power a water desalinization plantRussia 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 CSPIran 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.  

SEGS availability.bmp

Power utility time of use for California CSP Plants.  Source: San Diego Renewable Energy Study Group, 2005 [.pdf, page 15.]koreaREU121006_228x295.jpg

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?

July 12, 2007

On The Economics Of Wind Power

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.

June 27, 2007

America Forecasted To Be Hit By Strong Winds

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.

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