Alternative Energy Stocks

Enerkem’s $125M IPO: The 10-Minute Version

Mon, 06 Feb 2012 16:05:31 -0500

Jim Lane

The second technology focused on unlocking value in municipal solid waste comes to the public markets.

Here’s our 10-minute version of the filing, with a translation of the risks into English.

In Canada, Enerkem has filed an F-1 registration statement for a proposed $125 million initial public offering. The number of shares to be offered in the proposed offering and the price range for the offering have not yet been determined. The lead book-running managers for the offering are Goldman Sachs, Credit Suisse and BMO Capital Markets.

The company is currently ranked #7 in the world in the 50 Hottest Companies in Bioenergy. The rankings recognize innovation and achievement in fuels and are based on votes from a panel of invited international selectors, and votes from Digest subscribers.

Enerkem, which in the first three quarters of 2011 lost $19.1 million while recording $887K in revenues (primarily government grants) becomes the 15th company to file for an IPO in the industrial biotech boom, which began with a successful listing on the NASDAQ by Codexis (CDXS) in 2010. IPOs by Amyris (AMRS), Gevo (GEVO), Solazyme (SZYM), and KiOR (KIOR) have followed. In recent months, Coskata, PetroAlgae (PALG.PK), Bioamber, Myriant, Ceres, Genomatica, Mascoma and Elevance Renewable Sciences and Fulcrum Bioenergy have also filed S-1 registrations for proposed IPOs.

Here’s the F-1 registration, in a conveniently downsized 10-minute Digest version – with some commentary along the way as to what is driving value in the Enerkem model, opportunities for the intrepid investor, and some risks which we have translated from the ancient and original SEC into modern English.

Company Overview

From the F-1: “We develop renewable biofuels and chemicals from waste using our proprietary thermochemical technology platform.

We intend to take advantage of the abundant supply of municipal solid waste, or MSW, which we expect to be paid to use as feedstock, to profitably produce cellulosic ethanol, a second-generation biofuel. We believe that our waste-based biofuels provide one of the most advanced solutions to the growing world demand for renewable sources of energy, while also addressing the challenges associated with waste disposal and greenhouse gas, or GHG, emissions.

Our pilot facility in Sherbrooke, Canada has been in operation since 2003 and has a throughput capacity of 4.8 metric tons per day. We have successfully increased, or scaled-up, our throughput capacity tenfold, or 10x, to 48 metric tons per day in our commercial demonstration facility in Westbury, Canada. The Westbury facility has a production capacity of 1.3 million gallons per year, or MMGPY.

Our first standard 10MMGPY commercial facility is currently under construction in Edmonton, Canada. We have developed a modular, copy-exact and scalable approach for equipment production and installation that we anticipate will allow us to have our systems manufactured by third parties as pre-fabricated, replicable modules under fixed-price contracts.

The Technology

From the F-1: “Our proprietary technology platform converts MSW and other heterogeneous waste feedstocks, consisting of mixed textiles, plastics, fibers, wood and various other forms of waste, into a pure, chemical-grade synthesis gas, or syngas. This syngas is then converted into biofuels and chemicals through well-established catalytic reactions.

Feedstock preparation. The MSW we plan to use as feedstock is first sorted, using equipment and processes used in existing sorting and recycling facilities in order to remove unusable materials. During this process, typically approximately 40% of the MSW is removed from the waste stream and approximately 60% of the MSW is shredded to be used as feedstock.

Gasification through a bubbling fluidized bed. Our proprietary bubbling fluidized bed gasification reactor breaks down the feedstock into its constituent parts or molecules, a process that is called thermal cracking. In the same reactor, these broken-down molecules are then blended with steam to produce syngas.

Syngas cleaning and conditioning. Our bubbling fluidized bed gasification process yields a crude syngas that is fed into our proprietary syngas cleaning and conditioning process. This process upgrades the crude syngas to a chemical-grade syngas that can be refined into liquid fuels and chemicals.

Catalytic conversion into final products. We typically start by reacting a portion of our syngas with a commercially available catalyst to produce methanol, which we can either sell as an end-product or use as an intermediate to make other products. To produce ethanol, we react methanol with carbon monoxide from our syngas with a commercially available catalyst to produce methyl acetate. The final conversion step in our ethanol production process entails splitting the methyl acetate by inserting a hydrogen molecule that is extracted from the produced syngas.”

The Market

MSW Market. The United States generated 435 million metric tons of MSW in 2009, of which approximately 289 million metric tons, or 66% was landfilled. The company projects that approximately 140 million metric tons is suitable for ethanol production through gasification, yielding up to 14 billion gallons of ethanol annually.

The remaining landfill capacity for MSW in the United States as of 2009 equates to approximately 19 years of remaining life at 2009 MSW disposal rates, down from 26 years in 1995. 30% of Canadian landfills reported having an expected remaining life of fewer than ten years.

Tipping fees. According to the Waste Business Journal, an industry publication, average tipping fees for landfills in the United States were $47 per metric ton in 2009. The company projects that every $10.00 dollars per metric ton of tipping fees that they receive will generate revenue of approximately $0.12 per gallon.

Global fuels market. According to the Energy Information Administration, or EIA, global crude oil and liquid fuel consumption of approximately 87 million barrels per day, or bbl/day, equates to approximately a $2.5 trillion market in 2010, at an average price of approximately $79 per barrel.

US Renewable Fuels Market. The U.S. Renewable Fuel Standard mandates 16 billion gallons per year of cellulosic biofuels, which include cellulosic ethanol, be blended by 2022. The company projects cellulosic ethanol in the United States at operating costs, before depreciation and amortization, of $1.50 to $1.70 per gallon in a 10MMGPY facility. They estimate that they can reduce costs to approximately $1.05 to $1.25 per gallon by building 40MMGPY facilities (four of our 10Mgy units).

Price floor. In the US, the EPA creates cellulosic biofuel waiver credits, or CWCs, for purchase for that year. The CWCs to be made available for sale to obligated parties in 2012 for the higher of (1) the amount by which $3.22 per gallon (in 2011 prices) exceeds the average wholesale price of a gallon of gasoline in the United States or (2) $0.27 per gallon (in 2011 prices).

Chemicals. Methanol can act as a building block for acrylic acid, with a market size of $3.1 billion in North America and $10.9 billion globally; n-Propanol, with a market size of approximately $1.5 billion in North America and $3.0 billion globally; and n-Butanol, with a market size of approximately $2.4 billion in North America and $7.5 billion globally.

The Risks, Translated from SEC-speak

Among the lowlights of reading S-1 registrations are the endless pages of risk disclosures couched in an alloy of SECspeak and legalese.

We offer these excerpts from the original S-1, and a translation into English, prepared by our Digest lexicologists.

In SECSpeak: We have not yet completed the manufacturing of our first standard 10MMGPY prefabricated module and design defects may occur in our equipment and/or modules, which may adversely affect our business and financial results.

In English: Oy vey, build-out, schmild-out, vat could be de problem?

In SECSpeak: Our, or any of our partners’, inability to obtain an adequate supply of MSW may adversely affect our business and financial results.

In English: “Waste is a Terrible Thing to Mind.”

In SECSpeak: Changes in government regulations, including mandates, tax credits, subsidies and other incentives, could have a material adverse effect on our business and results of operations.

In English: G-Man, give me some lovin’.

In SECSpeak: Infrastructure constraints pose uncertain market barriers for ethanol.

In English: “Alex, I’ll take ‘Blend Wall’ for five hundred, please.”

In SECSpeak: We may need substantial additional capital in the future in order to expand our business.

In English: That giant sucking sound you hear: that’s our CAPEX fund.

In SECSpeak: We have not produced ethanol at a scale needed for the development of our business or built the facilities needed for such production. Furthermore, the conversion of methanol into ethanol in large commercial volumes may prove to be more challenging than we anticipate and may not initially be possible in a cost-effective manner.

In English: Psst! The secret phrase is “Range Fuels.”

In SECSpeak: Our partners may not adequately operate the systems utilizing our proprietary technology platform or safeguard our intellectual property and confidential information, which may adversely affect our business.

In English: Dang it Zeke, how do you work this darn thing anyway? Is this right? Oops. Eew, that’s not right.

In SECSpeak: Our ability to compete may decline if we are required to enforce or defend our intellectual property rights through costly litigation or administrative proceedings.

In English: Psst! The secret phrase is “Butamax and Gevo.”

In SECSpeak: We rely in part on trade secrets to protect our technology, and our failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

In English: Psst! The secret phrase is “INEOS Bio and Coskata.”

The Strategy

From the F-1: “1. Build, own and operate new facilities.
2. Pursue development opportunities with select industry-leading companies.
3. Focus on reducing our costs.
4. Expand internationally.
5. Innovate and develop new products.”

The Commercialization Plan

From the F-1: 1. Westbury, Canada demonstration, 2009-2011.
We completed the installation of methanol production equipment in Westbury in 2011, and the facility commenced production of methanol in June 2011. We intend to add ethanol production equipment to the Westbury facility in 2012 to enable a production capacity of 1.3MMGPY.

2. Edmonton, Canada first commercial plant.
In 2010, we commenced construction of our first standard 10MMGPY commercial facility in Edmonton. We intend to build, own and operate this facility, which is located on a municipal landfill to provide us proximity to feedstock. We have secured a 25 year MSW feedstock supply agreement with the City of Edmonton. We expect to ready our Edmonton facility for methanol production in the first quarter of 2013.

3. Pontotoc, Mississippi second commercial plant.
We plan to commence construction of an additional 10MMGPY commercial facility in Pontotoc in the fourth quarter of 2012. The Pontotoc facility will be located on a landfill site and will be constructed by our wholly-owned subsidiary Enerkem Mississippi Biofuels LLC. We estimate that it will take approximately 18 months to build the facility.

In December 2009, we were awarded U.S. Department of Energy, or DOE, conditional financial assistance of $50.0 million under the American Recovery and Reinvestment Act of 2009 — Demonstration of Integrated Biorefinery Operations Program, for the development of the Pontotoc facility.

4. Varennes, Canada third commercial plant.
We also plan to commence construction of a 10MMGPY commercial facility in Varennes as early as the first quarter of 2013. We estimate that it will take approximately 18 months after commencement of construction to build the facility. This facility will be constructed by Varennes Cellulosic Ethanol L.P., a 50/50 joint venture with GreenField Ethanol Inc., one of the largest ethanol producers in Canada. The Varennes facility will be located on the site of GreenField’s grain ethanol facility in Varennes.

5. Waste Management and Valero
Our term sheet with an affiliate of Waste Management (WM) contemplates the sale of systems utilizing our proprietary technology platform for the potential development of up to six sites with a combined ethanol production capacity of 100-120MMGPY. With Valero, we have entered into a non-binding term sheet to sell our systems for the development of up to six stand-alone facilities with a combined ethanol production capacity of 80-250MMGPY and additional facilities to be co-located with existing Valero facilities. We expect that our arrangements with Waste Management and Valero would also provide us with an option to own up to 49.5% or 50.0% of these facilities, respectively.

6. Other Projects and Considerations
We have prioritized, based on specific selection criteria, 68 landfills in the United States as potential sites for development by us or our strategic partners. These locations represent a combined waste inflow of 40 million metric tons of unsorted MSW, which represents a potential production of 2 billion gallons of ethanol per year using approximately 200 of our standard 10MMGPY modules.

Enerkem as it sees itself: 6 Competitive Strengths

From the F-1: “Converting heterogeneous waste to biofuels and chemicals. We believe that we are the first company to produce a pure, chemical-grade syngas using heterogeneous waste in a commercial demonstration facility. Since 2003, we have tested and validated our technology with MSW from numerous municipalities, as well as a broad variety of other feedstock, at both our pilot and demonstration facilities.

Lowest scale-up among cellulosic ethanol producers. The scale-up from our commercial demonstration facility in Westbury to our planned standard 10MMGPY commercial facilities represents approximately a 2x scale-up in gasification and gas conditioning equipment size and approximately a 7x scale-up in throughput capacity.

Large market opportunities and an attractive cost structure. Our primary product focus is cellulosic ethanol, a significant market opportunity that is driven by a rapidly growing market demand for renewable biofuels, and is further bolstered by government mandates and incentives. In addition, we believe our cost structure benefits from the ability to locate our compact facilities on or near landfill sites, the abundant supply of negative cost MSW feedstock and our competitive production costs.

Tangible commercial pipeline. In addition to our first standard 10MMGPY commercial facility under construction in Edmonton, we have two 10MMGPY commercial facilities under development in Pontotoc and Varennes. Beyond these projects, we have prioritized 68 landfills in the United States as additional potential sites for development by us or our strategic partners, representing a potential production of 2 billion gallons of ethanol per year using 200 of our standard 10MMGPY modules.

Key strategic relationships with industry-leading partners. We have entered into a non-binding arrangement with an affiliate of Waste Management (WM) to sell systems using our proprietary technology platform for the potential development of up to six sites with a combined ethanol production capacity of 100-120MMGPY.

With Valero, we have entered into a non-binding term sheet to sell systems using our proprietary technology platform for the development of up to six stand-alone sites with a combined ethanol production capacity of 80-250MMGPY and additional facilities to be co-located with existing Valero facilities.

Experienced management team. Our executives and senior managers have built our business from the ground up and have extensive experience in research and development, business development, project financing, procurement and plant operations.”

Financing to date

Enerkem has incurred substantial net losses to date, losing $C5.9 million in 2008, $C3.7M in 2009, $11.8M in 2010 and 19.1M for the first nine months of 2011.

From the F-1: “On March 13, 2009, in connection with a $4,000,000 loan from Atel Ventures, Inc., we issued a warrant to Atel Ventures, Inc. pursuant to which it is entitled to purchase 9,682 Series 3 Class A preferred shares at an exercise price of C$46.00 per share.

“On January 27, 2010, we issued 828,667 Series 4 Class A preferred shares at C$46.00 per share, for an aggregate purchase price of C$38,118,896.

“On April 25, 2011, we issued 475,559 Series 1 Class B preferred shares at C$124.17 per share for an aggregate purchase price of C$59,050,161.

The bottom line

As essentially pre-revenue companies go, here’s a gem. The right partners, a low-cost, locked-in, always available, non-commodity feedstock. The upstream is gold. Downstream? Who better than Valero, which has been turning its own ethane production and distribution arm into a corporate shining star.

All of which brings us to the midstream. There are three and only two concerns, but they are, how do we put it, items to watch and note.

First, like so many others who have come to market in this IPO wave, Enerkem has not completed a commercial scale facility – so there is what is becoming “the usual” scale-up risk. In Enerkem’s case, it’s a 7X scale-up, far less than many others who have made it across the IPO chasm.

Second, bringing down the costs. Enerkem emphasizes its ability to manage down the operating costs – , absent an execution at scale, that will have to be taken on faith. Again, a common feature of the IPOs in this sector.

The third? Yikes, Enerkem hasn’t made ethanol yet at its demonstration plant. Now, methanol to ethanol is not exactly rocket science – the catalysts and technology have been around for some time. But, there it is – they haven’t made a drop of the intended product at the Westbury plant.

Ethanol is selling in the 2013 futures market for $2.11 per gallon, and there’s about $0.27 per gallon in cellulosic waiver credits available – that gives the company a target, today, of around $2.38 for its operating costs, capex and margin. Right now, it’s a light margin – but with some work down on cost through scale, the margins look sweet.

The complete S-1 registration statement.

All 250-or-so pages in all their glory. The complete F-1 registration statement is here.

Disclosure: None.

Jim Lane is editor and publisher** of Biofuels Digest where this*** article was originally published. Biofuels Digest is the most widely read Biofuels** daily read by 14,000+ organizations. Subscribe*** here.

Ten Clean Energy Stocks for 2012: 10% more than other top-10 lists

Sun, 05 Feb 2012 11:22:23 -0500

Tom Konrad. CFA

A "bonus" stock pick this year. Also, notes on New Flyer Industries and Finavera Wind Energy.

Maybe it was because Seeking Alpha did not carry my annual list of 10 Clean Energy Stocks for 2012 this year, but no one seems to have noticed that there were actually 11 stocks in the list. Call it the Spinal Tap of top-ten lists.

If anyone did notice the extra pick, they didn't leave a comment. What happened was that I have two number 8 stocks, but there is enough text between them that neither I nor most of my readers could see both 8's at once on the same screen. Oops!

I had 10 originally, but my messed up numbering led me to think I did not have enough, and so I went back and added Honeywell (HON) at the last minute, choosing to play it safe with a large cap energy efficiency company. So far this year, Honeywell has produced the expected safe results, but because clean energy stocks (especially solar) have been on a tear, Honeywell's 10.5% return has dragged down the portfolio's average a little. But who's complaining?

Performance

I'll be complaining if including Honeywell makes my list not beat PBW, my clean energy benchmark for the first time in 2012. As of February 3rd, PBW is up 20.7% and my broad market benchmark IWM is up 12.3%. Meanwhile, my (ahem) eleven stocks are up an average of 15.0%, with New Flyer's monthly dividend payment bringing the portfolio's total return to 15.1%. Readers who hedged their portfolios by buying a put on SPY as I suggested did worse (since the market was up in January), slightly under-performing even the broad benchmark with a total return of 12.0%. But the year is still young.

Solar

The main reason this portfolio has underperformed broader clean energy was my decision not to include any solar stocks. Solar stocks have been rapidly making large percentage gains from the miserable lows they hit at the end of last year. The Guggenheim Solar ETF TAN is up 32% so far this year, and solar stocks are prominent among PBW's holdings.

I toyed with including a solar stock or two in the list, for similar reasons to those I discussed last October, but I decided to hold off simply because I don't follow solar closely enough to make informed selections.

Finavera Wind Blows Back

In truth, the portfolio was doing considerably worse only a week ago, but recently got a boost from a couple stocks which had been lagging. First, Finavera Wind Energy (FNVRF.PK)
updated investors on progress towards environmental permitting of its projects, highlighting the fact that two of their projects are within months or receiving final permits:

Regularly published power industry data provides some context for the valuation of wind energy projects. The data illustrates the average multiples paid for projects in 2011. Early stage projects have sold for more than $60,000/MW. Projects that are fully permitted and have a power purchase agreement have sold for more than $500,000/MW. The jump in value from the early stage to the next stage is significant. Finavera currently finds itself at this inflection point. Our projects are being valued in the public markets as early stage, yet we are a few short months away from being fully permitted on our first two projects. We believe Finavera is on the cusp of a significant asset re-valuation.

At $0.43, Finavera is now up only 5% for the year, but if those permits are granted it has a lot farther to go. Investors who bought the stock last month when it was trading in the $0.25-$0.30 range are already feeling smug (I added to my positions, but mostly between $0.35 and $0.40.)

New Flyer Puts the Pedal to the Metal

Second, New Flyer Industries (NFYEF.PK/NFI.TO) stock has been accelerating since January 19th. The unusual action prompted regulators to ask New Flyer to disclose that New Flyer has been in discussions "regarding a potential commercial and strategic relationship." But company CEO Paul Soubry says there are no deals closing, and several analysts agree.

The stock has been incredibly under-priced since last summer. North American transit bus orders have been slow for the past two years, and New Flyer has been reducing its backlog as a result. But the flip side of the slow bus market has been a rapidly aging bus fleet and increasing pressure on transit operators to replace aging buses.

The share price run-up is most likely the result of investors realizing that this is a massively under-priced stock in a cyclical market which is about to enter an expansionary phase.

Conclusion

Although my stocks are suffering this year from my long-term decision to mostly avoid solar, I'm not complaining about the returns, and I'm very happy to see Clean Energy stocks finally heading in the right direction after a gruesome year in 2011.

DISCLOSURE: Long NFYEF, FNVRF, and puts on IWM and SPY.

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.

Lux Boosts Their Micro-Hybrid Vehicle Forecast to 39,000,000 Cars a Year By 2017

Fri, 03 Feb 2012 16:58:13 -0500

John Petersen

A couple days ago Lux Research published a new report titled “Every Last Drop: Micro‐ And Mild Hybrids Drive a Huge Market for Fuel‐Efficient Vehicles” that focuses on rapidly growing markets for micro-hybrid vehicles and their battery systems.

During 2011, automakers sold an estimated 5,000,000 micro-hybrids worldwide, mainly in Europe. By 2017, Lux forecasts global micro-hybrid sales of 39,000,000 cars a year and a $6.3 billion annual market for their battery systems, which represents an across the board average of $161 per vehicle compared to an auto industry average of less than $60 per vehicle in 2009. While most US investors aren't even aware that micro-hybrid technology exists, it's already crossed the chasm and become a mainstream automotive technology.

To put the micro-hybrid phenomenon into perspective, most auto industry observers believe combined global sales of HEVs, PHEVs and EVs will be lucky to reach the 2,000,000-vehicle a year mark by 2017. Electric drive technologies may become mainstream architectures for 2025 and beyond, but for the next six years there's no doubt that cheap and easily implemented micro-hybrid technologies for mass-market vehicles will be at the epicenter of battery industry growth and profitability.

The term micro-hybrid is used to describe idle elimination systems that reduce fuel consumption by turning the engine off when it's not being used to power the wheels. They typically replace both the starter motor and the alternator with a belt-driven starter-generator, or BSG, upgrade to a better battery and add required control electronics. No other changes are necessary. While a BSG will offer a couple horsepower of cranking and generate a couple kilowatts of electricity, BSG's are not robust enough to drive a vehicle's wheels. Nevertheless, they're simple to combine with existing engine architecture and very cheap to implement. Because of their mechanical simplicity, micro-hybrids only cost $400 to $1,000 more than a conventional vehicle, but promise fuel savings of 5 to 15 percent. Micro-hybrids are a baby step, but 39,000,000 baby steps a year can cover a lot of ground and save about 15 millions of barrels of oil per year.

In their latest report, Lux divides micro-hybrids into three distinct classes that require different types of batteries.

Light Micro-Hybrids are typically sub-compact and compact cars that offer limited stop-start functionality and don't have regenerative braking. The current batteries of choice for light micro-hybrids are enhanced flooded lead acid batteries. The global market for light micro-hybrids is expected to grow to 8.5 million vehicles per year by 2017.

Medium Micro-Hybrids range from sub-compact through full-size cars that offer greater stop-start functionality and may offer limited regenerative braking. The current batteries of choice for medium micro-hybrids are enhanced flooded lead acid batteries and advanced AGM batteries. The global market for medium micro-hybrids is expected to grow to 22.2 million vehicles per year by 2017.

Heavy Micro-Hybrids are typically mid-size and full-size cars that offer the highest level of stop-start functionality, take full advantage of regenerative braking and implement other fuel economy innovations. Because of their extreme power demands, heavy micro-hybrids need better performance than the best AGM batteries can offer. The global market for heavy micro-hybrids is expected to grow to 8 million vehicles per year by 2017.

The following graph from the latest Lux report shows how the market is expected to evolve over the next six years.

On a regional basis, Lux is forecasting that:

The European micro-hybrid market will grow from over 4 million units in 2011 to 12.6 million units by 2017.
The North American micro-hybrid market will grow from a standstill in 2011 to over 8 million units by 2017.
The Japanese micro-hybrid market will grow from about 400,000 units in 2011 to over 6 million units by 2017.
The Chinese micro-hybrid market will grow from under 300,000 units in 2011 to 8.9 million units by 2017.

Last November I used the following table to highlight the differences between the daily battery load in a normal car and the daily battery load in a micro-hybrid for a typical city driving commute with 15 engine-off opportunities per leg.

Power Event	Conventional	Stop-Start
Initial engine start	500 Amp Seconds	500 Amp Seconds
Engine-off accessory loads		45,000 Amp Seconds
Engine restart loads		4,500 Amp Seconds
One-way battery load	500 Amp Seconds	50,000 Amp Seconds
Round-trip battery load	1,000 Amp Seconds	100,000 Amp Seconds

We're all familiar with the flooded lead-acid batteries that have been standard automotive equipment for decades and I don't think anybody would suggest that they can do 100 times the work without quickly failing. The automakers know that better batteries are needed, but they all want to get by with the cheapest better battery they can find because every dollar of cost matters in mass-market products.

Some automakers are using enhanced flooded batteries for their light and medium micro-hybrids solely because of cost considerations. They reason that enhanced flooded batteries offer twice the lifetime energy throughput of their simpler siblings and twice the throughput is always a good thing. The problem, of course, is that the numbers don't balance if you double the throughput of the battery and expect it to do 100 times the work.

A similar, albeit less dramatic, dynamic exists for the automakers who are upgrading medium micro-hybrids to AGM batteries that cost twice as much as their more primitive cousins but offer ten times the lifetime energy throughput. After all, improving performance by an order of magnitude is huge – until you understand that they're increasing the required work by two orders of magnitude. The bottom line is that AGM batteries will be the best available technology for micro-hybrids until a significantly better solution emerges, proves its merit and becomes available at relevant scale. Once a better solution is widely available, the market must gravitate to better performance unless the incremental cost exceeds the value of the incremental fuel savings.

I follow two companies that will be the first big beneficiaries of the rapid global adoption of micro-hybrid technologies. Johnson Controls (JCI) and Exide Technologies (XIDE) both manufacture enhanced flooded batteries for micro-hybrids and are rapidly expanding their AGM battery manufacturing capacity in North America and Europe. They will clearly be preferred suppliers for light and medium micro-hybrids from American and European automakers for the foreseeable future. While enhanced flooded batteries won't have a huge impact on either revenues or profits, their rapidly expanding AGM battery sales will double their per vehicle revenue and triple their per vehicle margins. It truly is a manufacturer's dream scenario. As micro-hybrid production numbers ramp rapidly over the next few years I expect both companies to outperform the market's expectations by a wide margin.

From my perspective the most interesting segment is heavy micro-hybrids that demand more performance than AGM batteries can hope to deliver. These next generation systems will push the frontiers of micro-hybrid technology by maximizing regenerative braking and adding other nuanced features like passive boost, which disables the BSG during acceleration, opportunity charging, which increases power to the BSG when the vehicle is decelerating, and engine-off sailing, which turns the engine off while the vehicle is rolling to a stop. The heavy micro-hybrid market is the prime target for two advanced technology systems that are working their way through the development and commercialization process, and stand a good chance of becoming industry leaders over the next few years.

In the fall of 2010, Maxwell Technologies (MXWL) and Continental AG introduced a dual device system that matches a supercapacitor module from Maxwell with an AGM battery and control electronics from Continental. The first design win for the Maxwell-Continental system is diesel powered micro-hybrids from Peugeot-Citroën. A comparable system will be used by Mazda in it's iELOOP heavy micro-hybrid. Other automakers will almost certainly follow their lead in adopting dual device systems for heavy micro-hybrids.

A second advanced energy storage system for heavy micro-hybrids is the PbC battery from Axion Power International (AXPW.OB). The PbC is an integrated battery-supercapacitor hybrid that combines lead-based positive electrodes from a battery with carbon based negative electrodes from a supercapacitor in a single cell. While the PbC is not yet available as a commercial product for heavy micro-hybrids, it is two and a half years into evaluation by BMW and other leading automakers, and offers a performance profile that simply can't be matched by anything short of a lithium-ion battery pack. If Axion can clear the last testing and manufacturing hurdles, the PbC has the potential to be a game changer in the heavy micro-hybrid space because it offers 5X the capacitance of dual device systems and 5X to 20X times the dynamic charge acceptance after a few months in service.

Last week I spent some time with a former Enersys engineer who noted that there are only two components in a car that automakers refuse to put their brand on. The first is the tires and the second is the battery. If a consumer has problems with either of those components, the automakers say, "Take it up with the manufacturer" who frequently says, "You abused our product by pushing it beyond design limits."

While the traditional blame game has a long and storied history, it can't continue indefinitely because micro-hybrids are being sold by the automakers as fuel efficiency and emissions control systems. Over the short term, the automakers will continue to play the game of using cheap batteries that can't stand up to the duty cycle. Over the longer term, applicable regulations will change to require that the OEM battery installed in a micro-hybrid be designed to satisfy the requirements of the vehicle's electric load profile.

For investors who want to benefit from the micro-hybrid vehicle trend but don’t have the time or inclination to study the various energy storage technologies in depth, a balanced portfolio weighted in favor of the large established battery manufacturers makes the most sense. While I have a personal favorite, I expect all four companies to outperform over the next three to five years.

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

Controlling Feedstock Costs Creates Value in Biofuel Companies

Tue, 31 Jan 2012 11:20:38 -0500

Jim Lane

Companies creating opportunities in feedstocks are getting lots of love from investors, and giant downstream partners like BP and Shell.

What’s up in the new upstream?

It has not escaped the attention of investors that Renewable Energy Group’s (REGI) IPO resulted in a $262 million valuation for a company actively earning $2.11 per share through the sale of 200 million+ gallons of biodiesel, while Ceres recently increased the target for its IPO to a valuation above $500 million, despite being, in essence, a pre-revenue company.

What gives? The secret, it turns out, is in feedstock. In recent months and years, as more and more advanced biofuels processing technologies have made it through pilots and demonstrations of their technology and head for commercial-scale, investors have been focused on the fact that value-creation in biofuels has generally conferred an awful lot of dollars on feedstock growers, and not so much for the processing technologies and downstream marketers.

Controlling feedstock costs

For that reason, companies like BP Biofuels have been making control of the feedstock costs, through direct grower contracting, a central feature of their business models. And processing companies that have been getting significant traction towards commercialization, are generally those that have spent the most time and attention locking down the feedstock costs.

Examples? Well, there are plenty, such as POET’s Biomass Division, the technologies such as INEOS Bio, Fulcrum and Enerkem that have secured long term, zero-cost MSW supply contracts; companies like LanzaTech and Joule that utilize and have secured long-term supply of low cost, industrial off-gases such as carbon monoxide or carbon dioxide; or companies like Mascoma and ZeaChem that have establish long-term relations with forest biomass companies like JM Longyear and Greenwood Resources.

Over the past five years, there have been a raft of celebrated bankruptcies and shutdowns in the bioenergy sector – restructuring at Pacific Ethanol, Aventine Renewables, and VeraSun, as well as (at one time) the shut-down of huge percentage of global biodiesel capacity. Many of the companies and plants have revived and re-opened, but consider this: just one generation after the days of FarmAid, hardly a grower (of first generation feedstocks) has not enjoyed pretty good times, throughout the past five years.

Limits there are, as is widely understood, on the availability of first-generation feedstocks. In some cases, pricing pressure, as in the case of maize or soybeans. In other cases, regulatory pressure such as the EPA’s ruling that palm oil biodiesel has insufficiently low greenhouse gas emissions to qualify as an advanced biofuel.

Value creation, value unlocking, value add

In the Digest’s Feedstock Framework, we see three types of companies.

First, those that are chasing value creation – turning low-performing feedstocks into economic rock stars through yield intensification, often through hybridization and unlocking favorable traits that are hidden in the genome.

Second, companies involved in value unlocking. That is, taking next-gen feedstocks already available at scale – generally, residues, and finding processing or extractive technologies that tease out valuable material streams out of what, previously, was thought of as waste, fit only for dispersal and disposal.

Third, companies involved in value adding. That is, taking existing feedstocks already available at scale, and already providing material ROI to their growers and processors, and using synthetic biology to produce higher-value products from the feedback.

In some cases, these are processors, some cases seed developers, some cases developers of magic bugs. But all of them are working on the right side of the value equation in bioenergy and biomaterials – which may help explain why investors are giving them so much attention as they come to the markets for capital – whether it is financial investors, or serious strategic players working in the downstream markets, such as BP Biofuels, Shell, Valero or Tesoro.

A Feedstock Framework

Below, we have parsed the major feedstocks into the buckets of “value creation”, value unlocking and value add.

Note: The companies cited are for illustrative purposes – there are, for example, tons of companies working on micro algae and agricultural residues that we did not have space to mention – and no disrespect is intended if a favorite company of yours is not included. And, yes, some of these feedstocks (e.g. algae) fit to some extent in both the sugars and oils department. But you get the general idea.

Value creation (new feedstocks)

Oil crops
Microalgae	Sapphire Energy, Solazyme (SZYM), Phycal, Aurora Algae, many others
Jatropha	SG Biofuels
Carinata	Agrisoma
Camelina	Sustainable Oils, Green Plains (GPRE)

Sugars: cellulosic and otherwise
Macroalgae	Sea6/Novozymes(NVZMY.PK), BAL, Kumho
Miscanthus	Mendel
Switchgrass	Ceres
Woody biomass	ArborGen
Sorghum	Chromatin

Value unlocking (residues)
Bagasse	Codexis (CDXS)
Municipal solid waste	Enerkem, Fulcrum, Terrabon, BlueFire(BFRE.OB), INEOS Bio, Coskata
Animal fats & wastes	Dynamic Fuels, Neste Oil, Diamond Green Diesel
Wood residues	ZeaChem, Mascoma, Cobalt, KiOR(KIOR), American Process
Waste gases	Proterro, Joule, LanzaTech
Agricultural waste	POET/DSM, Abengoa(ABGOY.PK), Novozymes, Dupont (Genencor)

Value adding (existing feedstocks)
Corn starch	Gevo(GEVO), Butamax, Green Biologics, Genomatica
Cane syrup	Amyris(AMRS), LS9

Disclosure: None.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

Ten Reasons Why Electric Drive is Stranded on The Bleeding Edge of Transportation Technology

Sun, 29 Jan 2012 02:11:25 -0500

John Petersen

The first thing every securities lawyer learns is that technology is a two edged sword. On the leading edge, developers of cheap innovations that ramp rapidly over a few years build thriving businesses that deliver market beating returns for investors. On the bleeding edge, developers of expensive technologies that can't be implemented at relevant scale for years morph into financial black holes that suck the lifeblood out of portfolios and teach a new generation of investors about an insidious market phenomenon the Gartner Group refers to as the hype cycle.

The second thing every securities lawyer learns is that business risks are cumulative, and a lot like a leaky roof – unless you can locate and patch every hole, the ceiling will end up in your lap.

Hope is a timeless virtue, but it's a horrible investment strategy.

Last week I traveled to Stockholm and spoke at the Annual Partners Conference for CTEK Sweden, a global leader in smart battery chargers for conventional cars, trucks and motorcycles. It was a different kind of audience that wanted a better understanding of the path their business would take over the next few years. They wanted a high level overview instead of deathless analysis of techno-trivia. After making the presentation, it dawned on me that investors who want to build bullet proof portfolios for the next five years deserve nothing less. So instead of drilling down into the detail like I usually do, I'll focus today on ten fundamental business and economic forces that will leave electric drive stranded on the bleeding edge of transportation technology for decades.

The bottom line is the mainstream media, our fearless political leaders, rainbow legions of Eco-zealots and starry-eyed investment analysts all have it wrong when it comes to electric drive. No matter how badly we might want a clean green transportation alternative that frees us from the tyranny of imported oil, electric drive is hopelessly uneconomic and will continue to be a financial black hole until each and every one of the following problems are overcome.

Since many of these ideas have been discussed at length in other articles, the top ten list contains several links back into my author's archive.

#10. Rich vs Poor. For most of human history 90% of the world's population lived in crushing poverty and ignorance, but as long as the poor were kept ignorant, the other 10% could consume the lion's share of global economic output with impunity. Our last industrial revolution changed everything because cheap and ubiquitous communications taught the world's poor that there's more to life than deprivation. Now they all want a piece of the comfortable lifestyle that the 10% have always considered a God-given right. The only way that the 90% can have a place at the global economic table is if the 10% change their worst habits and make room for the new well-informed poor. Gluttony, over-indulgence to the point of waste, has long been viewed as a capital vice or cardinal sin. The idea that people in advanced economies can afford to waste anything is an inexcusable relic of a barbaric past that has no relevance to humanity's future.

#9. Electric drive is not truly clean or green. The amount of energy needed to move a given mass a given distance at a given speed is a constant. It makes no difference whether the energy comes from a gallon of gasoline or a lump of coal. In a country like the US where the substantial bulk of night-time power comes from coal-fired plants, EVs may be marginally cleaner than internal combustion engines but they're dirtier than HEVs that cost $12,000 less and conserve energy instead of simply substituting one dirty fuel for another dirty fuel. I've heard the fervent arguments that EVs can be powered from alternative energy sources, but the arguments all fail for one simple reason. The virtue of green electrons lies in their generation, not their use. Once green electrons exist, it makes no difference whether they're used to power an EV or a toaster oven. One will be cleaner and the other will be dirtier. There is no double credit.

#8. Energy resources are scarce, but non-ferrous metals are far scarcer. Last year the planet produced 1,920 kg of energy resources for every man, woman and child on the planet, but it only produced 8.4 kg of non-ferrous metals. Those metals are essential in most of the necessities and little luxuries of modern life. There are no spare metal supplies lying around looking for a user. For decades metal prices have been as volatile as energy prices, but most of us don't notice because we don't buy metals in minimally processed form. If we used all of the planet's metal production to build energy saving machines, we couldn't make a dent in energy consumption. Panacea solutions that can't be implemented at relevant scale are nothing more than a cruel hoax.

#7. Lithium-ion batteries are a recycling nightmare. At $500 per kWh and 125 wh/kg, automotive grade lithium-ion cells cost about $28.50 a pound to manufacture. Unless you're evaluating a cobalt based chemistry, the material values that can be recovered through recycling are less than $1.00 per pound. Since the recycling process uses a lot of energy, net disposal costs for lithium ion batteries are estimated at $0.75 per pound plus collection and transportation charges. There is no such thing as a cost effective recycling process for old lithium-ion batteries. They're a use it once and throw it away technology. Anybody who claims otherwise is lying. The media is full of optimistic stories about second-life uses for old EV batteries. Since there is no proof that those batteries will survive a 10-year first life, the stories are premature. Moreover, chemical systems deteriorate with age, so using new batteries to simulate the performance of old used batteries is little more than a side-show to deflect the attention from the wasteful single-use reality.

#6. The marginal returns from bigger batteries are terrible. The Prius from Toyota Motors (TM) uses a 1.5 kWh battery pack to save about 160 gallons of gasoline per year. In comparison, the Leaf from Nissan Motors (NSANF.PK) uses a 24 kWh battery pack to save about 400 gallons per year. While the Prius battery saves about 107 gallons of gas per year for each kWh of battery power, the Nissan Leaf only saves 17 gallons per kWh. This shocking example of the diminishing marginal utility of batteries is generous when you consider that Tesla Motors (TSLA) will only save 9.5 gallons of gasoline per kWh of batteries in its flagship Model S.

#5. The up-front cost of electric drive is roughly $200 per barrel of avoided oil consumption. Bernstein and Ricardo recently published a cost-walk analysis that pegged the cost premium of an electric vehicle at $19,800, or roughly $190 per barrel of avoided future oil consumption. You can get to a similar result with a simpler comparison. The Nissan Leaf costs $12,000 more than a Prius and it will save the equivalent of 60 more barrels of oil per vehicle over the span of a decade. The net premium per barrel of avoided future oil consumption is $200. If you work from the bottom up like Bernstein and Ricardo did, or work from the top down by comparing the difference between a Prius and a Leaf, you end up at the same place. Saving a $100 barrel of oil with an electric vehicle that costs $200 is a deal that can only appeal to the philosophically committed and mathematically challenged.

#4. Rapid advances in battery technology are unlikely. The phrase is an oxymoron. In 1883 Thomas Edison complained to a reporter, “The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers than that very selfsame thing. Just as soon as a man gets working on the secondary battery it brings out his latent capacity for lying." We were spoiled by the information and communications technology revolution where performance doubled every 18 to 24 months and costs plummeted. That phenomenon was unique in technological history because different science made it possible to do more work with fewer resources. That science is meaningless in the fields of transportation and chemistry. A hundred years ago Edison built batteries that had specific energy in the 30 wh/kg range. Today's best automotive battery packs can't top 150 wh/kg. In a century when electronic technology saw billion-fold gains, battery technology improved by a factor of five. Expecting that century old trend to change is irrational and ignorant, not reasonably optimistic.

#3. Electric drive technologies have already reaped their economies of scale. New industries and technologies often give rise to significant economies of scale as manufacturers improve production processes and supply chains become more mature and efficient. The battery industry has had decades to optimize its production processes and supply chains. The same is true for electric motors. There may be modest savings as production rates for a specific SKU ramp, but the underlying industries have already squeezed the economies of scale out of their products and the margin for additional improvement is negligible. This is not a case where flat panel TVs are replacing CRTs. It's more like an upgrade from a 30" flat panel to a 36" flat panel, or from a five pound box of laundry detergent to a ten pound box.

#2. Increasing fuel efficiency will make EV economics worse. The calculation that electric drive costs $200 per barrel of avoided future oil consumption is based on the 2012 CAFE standard of 29.7 mpg. Using the 2016 standard of 34.1 mpg the marginal cost of electric drive will be closer to $230 per barrel of avoided future oil consumption. If you push the analysis out to 2025 and use a targeted fuel efficiency of 55 mpg, the marginal cost per barrel of avoided oil consumption will be $360. As the world's automakers continue to improve their core vehicle technologies, the marginal cost of electric drive will become increasingly hard to justify.

#1. The green in consumers wallets is more important than the green in their cocktail conversations. Everyone wants to be clean and green, but they don't want to pay for it. Green products that offer comparable performance at a comparable price are usually a hit. Green products that command premium prices frequently fail. In the US auto market, 3% of the population has demonstrated a willingness to pay a premium price for ultra-high efficiency. That percentage has been stable since 2006 and shows no signs of changing. Nobody wants to suffer for the sake of saving the planet and the most fervent EVangelicals are those who think that buying a high-performance EV from Tesla is a capital idea. These are not useful products for adults, they're high-end toys for the self-absorbed who care nothing for the economy, the environment or common sense as long as they can spend somebody else's money on eco-extravagance. They don't understand the difference between buying a $200 Optimus Prime toy from Hasbro and buying a $70,000 Sub-optimus Prime toy from Tesla.

At heart I’m an incurable optimist who believes that “In America we get up in the morning, we go to work and we solve our problems.” But I know those problems cannot be solved by exotic electric drive constructs that are stranded on the bleeding edge and promise facile but economically impossible solutions to incredibly complex problems.

When I consider the number and variety of business risks that stand between electric dreams and commercial success I'm shocked at the market values of companies like Tesla Motors which is hemorrhaging cash while catering to the new eco-royalty. I see the odds of commercial success as remote beyond reckoning and believe the best historical analogs are companies like Ballard Power (BLDP) which lost over 99% of its peak market value when hydrogen fuel cells hit the skids, Pacific Ethanol (PEIX) which generated comparable losses in the ethanol space and Ener1 (HEVVQ.PK) which was a DOE favorite in 2009 but driven into bankruptcy by an ill-advised effort to revive the thrice-failed Th!nk Motors. The history of investor catastrophes that flowed from unworkable panacea energy policies is long and colorful. Investors who refuse to learn from the past are condemned to repeat it.

Will Rogers once observed, "There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest of them have to pee on the electric fence for themselves." If Will were alive today, he'd have a field day with electric drive.

Disclosure: None

Obama’s “All of the Below” Energy Strategy

Thu, 26 Jan 2012 10:01:36 -0500

Jim Lane

Obama unveils an “all-out, all of the above” energy strategy. But is it really “all of the below”? Just election talk? Is ginning up a bioeconomy shelved for a year, or just a week?

Meanwhile, hopeful news from Novozymes (NVZMY.PK) and the World Economic Forum.

In Washington, President Barack Obama gave his State of the Union speech, and dashed hopes and expectations of a revival strategy for US industry through encouraging growth of the bioeconomy. His annual presidential address became the first in a number of years to avoid any mention of biofuels, ethanol, the bioeconomy, or biotechnology.

In a speech which mentioned jobs 32 times, the high-export, high-productivity US agriculture sector also failed to score a single mention. The closest the president came to mentioning biofuels was in touting that US oil imports were at their lowest point in 16 years – without mentioning that the key factor in that import achievement was the rise in domestic biofuels production.

Instead, the president proceeded to embrace an “all out, all of the above” energy strategy – focusing on an intense increase in domestic oil and natural gas production, and borrowing the “all of the above” phrase which, until recently, was most closely associated with conservative Texas Republican, Gov. Rick Perry.

The centerpiece of his strategy? Natural gas. “We have a supply of natural gas that can last America nearly 100 years. And my administration will take every possible action to safely develop this energy. Experts believe this will support more than 600,000 jobs by the end of the decade,” the president said.

Clean energy? The president opted to give up on hopes for legislation (except for a one-line exhortation for Congress to renew the Section 1603 tax credits that are used for wind and solar development), and focused on authorizing permits for 10 GW of renewable power production on federal land – that’s equivalent to about 1% of US power production capacity.

The focus on oil & gas production was surprising as Obama Administration policy, but unsurprising as re-election strategy: removing a line of attack that the President’s opponents were planning for the 2012 election campaign.

Has the Obama Administration shifted from an “Action News” to an “All Talk” strategy – shifting from policy implementation to framing the election conversation? We think so. We expect to hear a lot more about Mitt Romney’s 14 percent tax rate this year, than about policies and programs to revive manufacturing, or deploy clean energy.

For now, whither goes biofuels? The word from Washington is that the President will unveil his Blueprint for a Bioeconomy next week – we’ll see then what the Administration has in mind for industrial biotechnology.

And now, a word from Davos: “Moving towards a next-generation ethanol economy”.

From Davos, where the World Economic Forum is gather this week, came something a little more weighty and specific than the State of the Union speech.

Bloomberg New Energy Finance launched its report “Moving towards a next-generation ethanol economy”. Commissioned by Novozymes (NVZMY.PK), the report estimates the socioeconomic prospects of deploying advanced biofuels in eight of the highest agricultural-producing regions in the world, i.e. Argentina, Australia, Brazil, China, EU-27, India, Mexico and the USA.

“An estimated 17.5 percent of the agricultural residue produced could be available today as feedstock for advanced biofuels. With this amount, enough advanced biofuels could be produced to replace over 50 percent of the forecasted 2030 gasoline demand,” said Steen Riisgaard, Novozymes’s CEO.

The report shows that the eight regions analyzed have the potential to diversify farmers’ income, generate revenues ranging from $1 trillion to $4.4 trillion between today and 2050 and create millions of jobs. Including 1.4 million jobs in the USA, according to the report.

Why the Obama shift in the State of the Union?

Why the shift towards fossil fuels? The President is aiming for re-election, by appealing to swing state voters with the hope of economic gains from increased domestic oil production. The focus of the President’s speech – which pinned hopes economic growth on a revival of American manufacturing and energy production – generally focused on reducing inequality between rich and poor through revision of the tax code.

The real all-of-the-above: advanced biofuels as it approaches commercial-scale

As an example of all-of-the-above energy development that works, look these eight projects we profiled recently in the Litmus Test. First commercial projects from newly-minted public companies Solazyme (SZYM), Gevo (GEVO) and KiOR (KIOR). Two trash-to-biofuels projects from INEOS Bio and Enerkem, located in Florida and Alberta. Europe’s largest biosuccinic acid project, scheduled to be opened by DSM in France. The world’s largest cellulosic ethanol project to date, being readied by Beta Renewables in Italy. And a large-scale renewable diesel project from the Darling (DAR)-Valero partnership that is expected to be ready just as 2013 gets underway.

Eight different technologies, a range of feedstocks, deployment around the globe. It’s a flowering of innovation.

State of America’s biofuels industry

For even more perspective, this week, leaders some of the top biofuels companies in the country are offering their thoughts on the state of the advanced biofuels industry, in a special episode of the Advanced Biofuels Association’s Better Fuels Moment online video series.

The episode features Joel Velasco, senior vice president of Amyris (AMRS); Jack Huttner, executive vice president, commercial and public affairs of Gevo; and Michael McAdams, president of the Advanced Biofuels Association, ABFA.

McAdams noted that the special episode emphasizes that, “Washington now has a real opportunity to invest in clean energy fuels, smarter investments based on performance, not a lifetime of subsidized handouts from Washington. This opportunity can strengthen America’s energy security while creating jobs here at home, today.”

The Bottom Line

The good news – the release of the “blueprint for a bioeconomy”, expected next week, may offer more substantiation of an “all of the above” strategy. And, for sure, commercialization is rapidly moving out of the realm of government support and towards the private sector. Note that both KiOR (KIOR) and POET-DSM dropped their DOE loan guarantees, saying they were unnecessary for their projects.

For industry – it is a reminder that Obama Administration is likely to support in the form of purchase rather than development – government-as-customer rather than government-as-investor. Those that get themselves off the government dope may well find themselves with a significant first-mover advantage, not to mention some hefty government contracts for drop-in diesel and renewable jet fuel.

Disclosure: None.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

Minimizing a Key Threat: State of the Union Address 2012

Thu, 26 Jan 2012 08:42:10 -0500

Garvin Jabusch

Americans, rightly, prefer specifics and plans, as opposed to rhetorical vision and platitudes, from their president in their State of the Union addresses. We couldn't agree more, so here are our thoughts about President Obama's 2012 address, with respect to our area, the next economy and investing therein.

President Barack Obama delivers the 2012 State of the Union Address (Image source: whitehouse.gov)

Two years ago, President Obama in his State of the Union Address said, "The nation that leads the clean energy economy will lead the global economy and America must be that nation." So how are we doing?

From a next economy point of view, the critical parts of last night's State of the Union Address were:

Oil and gas development are the centerpiece of the administration's energy plan
Natural gas is the primary to the 'clean energy' part of the energy plan
America is the leader in battery technologies
The president attempted to encourage more development in wind, solar, and other renewables by encouraging clean-energy tax breaks and the removal of subsidies to profitable oil companies
The president attempted to leverage American competitive spirit: "I will not cede the wind or solar or battery industry to China or Germany because we refuse to make the same commitment here."
"Differences in this chamber may be too deep right now to pass a comprehensive plan to fight climate change, but there’s no reason why Congress shouldn't at least create a clean energy standard." So,
Major new renewable standards by executive order were announced, three million homes' worth via government land and private development and 250,000 homes' worth per year to be purchased by the Navy
Efficiency and conservation were mentioned as easy and as job creators, so the president proposed incentives to businesses to become more efficient, and asked Congress for legislation to that effect

Unfortunately, a lot of these fall more on the rhetorical side, although we do welcome the few specifics that were offered. Unquestionably, it is a partial contrast with the rhetoric coming from Republicans' campaigns, which exclusively pander to big oil and Wall Street by pretending climate change and resource scarcity do not exist, so they can pursue their depletist, dangerous, destabilizing policies. But, sadly, it’s not nearly enough.

Here's what the president didn't say. He didn't say that the climatic and resource challenges facing America are the most long-term economically destabilizing risks that exist. He didn't say that three million homes' worth of renewable energy is a good start but tiny next to the progress required to avoid financially disastrous resource scarcity and climate change, and he didn't mention a time frame for that. He didn't acknowledge that the climate disinformation campaign causing all the disastrous pandering, policy stagnation and partisan gridlock is, in the words of NASA's James Hansen, America's foremost climate scientist, a "crime against humanity."

Since the possibility exists that this could be President Obama's last State of the Union Address, the president should want to make his most full, complete case for his legacy, for what he wants his administration to stand for. It's easy to see why he would fear taking on the most profitable companies in the history of humankind in a larger way than merely proposing taking away their tax welfare, but he should have wanted to make his strongest case on all fronts. We can only hope the economic realities of pursuing a clean efficient future will speak for themselves, because our policymakers, even the good ones, are way behind.

Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog “Green Alpha's Next Economy."

Dark Clouds Threaten German Clean Energy Ambitions

Wed, 25 Jan 2012 08:41:03 -0500

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.

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

The Hard Truth About Solar

Tue, 24 Jan 2012 11:36:43 -0500

By Jeff Siegel

Solar Competes With Natural Gas

From 2005 to 2008, I made an absolute fortune in solar.

And it was insanely easy, too.

Hell, back then you could pretty much just pick any random company with the word “solar” attached to it, and watch your money double, triple, even quadruple.

Yes, those were three great years. And I live very comfortably today because of those three years.

But the solar market isn't what it used to be.

Last year, solar stocks got slammed. And while most expect to see a recovery in the space this year, the sector remains as volatile as ever.

Now just a few weeks ago, solar stocks were soaring after some new data came out that indicated a rise in solar installations in Germany in Q4.

The result was a quick run on solar stocks, and certainly traders made out...

But then there were those poor souls who didn't read the fine print, ponied up a few thousand, and are now wondering what happened to the solar run all those analysts on television were talking about.

Yes, a few weeks ago there was some positive data, which apparently cast a shadow over the fact that cell and panel prices were still continuing to fall.

And it didn't take long for the sector to shed its recent gains, then fall even further after Germany's Energy Minister announced that the country's Feed-In Tariff should be adjusted every month instead of twice a year.

In a matter of minutes, we watched solar stocks fall off 10%, 15%, even 20%.

While I continue to remain bullish on the long-term growth picture for solar, unless you can stomach the risk and volatility, the solar space is no space to be right now.

Truth is until we see next quarter's forecasts, I'd be very hesitant about playing solar.

Natural Gas is Still King

There's no doubt that there's still plenty of money to be made in solar.

You just have to know where to look, and of course, not get caught up in all the hype generated by those know-nothing media buffoons who couldn't even tell you the difference between solar thermal and solar PV, much less know how to play the solar market...

Hell, these are the same guys who were telling us just a few years ago that natural gas would never fall below $5.00.

Last Friday, it fell below $2.30.

And now they're scrambling to dig up any bearish news they can find. But nothing they say can stop the natural gas boom.

I've said it a thousand times before, and I'll say it again: Natural gas is king.

And right now, it doesn't take much to make money from this sector. In fact, it reminds me a lot of the solar sector from 2005 to 2008. It's just so easy to make a killing.

Just ask my colleague Keith Kohl, who was touring today's biggest natural gas properties back when the word “hydrofracking” was a term only used by insiders and roughnecks.

This guy's made me — and his readers — some serious coin in the natural gas space...

Especially with his latest find at the Three Forks location in North Dakota. I know it may not look like much.

And I know it may not sound as sexy as solar...

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.

Understanding Manufacturing Economics for Grid-Scale Energy Storage

Mon, 23 Jan 2012 09:42:35 -0500

John Petersen

I have a new favorite word — AGGREGATION!

At the risk of sounding like a reporter, I’m going to summarize a pre-holiday news story you might have missed but need to know about.

In late November the PJM Interconnect, the largest of nine regional grid system operators in the US, announced that it had begun buying frequency regulation services from small-scale, behind the meter, demand response assets in Pennsylvania.

The first resources brought on-line by PJM were variable speed pumps at a water treatment plant and a 500 kW industrial battery array at a factory. Each of these resources has been configured to respond to PJM’s signals within four seconds and provide 100 kW of frequency regulation capacity.

In the water treatment plant, the operator will change pump speeds as necessary while keeping average throughput at 80% of nameplate capacity. For the industrial battery array, the operator will shift loads to the battery when the grid needs power and charge the battery when the grid has excess power.

The contract operators for both installations envision portfolios of flexible industrial loads that can be aggregated and operated as a distributed virtual utility that responds instantaneously to supply and demand conditions on the grid side of the meter. They’re literally turning grid loads into grid assets.

How cool is that?

I learned about the development because my old team at Axion Power International (AXPW.OB) built the battery array and is using its New Castle plant in Pennsylvania as the test-facility. But this was more than just an Axion event because it opens a world of opportunity for all manufacturers of industrial power quality and reliability systems.

Traditionally, the battery industry’s pitch on industrial energy storage systems focused on ensuring the highest possible level of power quality and reliability for industrial customers. More recently manufacturers have refined their pitch to include other behind the meter benefits like time of use and demand charge management.

This latest twist creates a whole new set of opportunities to reduce the net cost of a customer’s power quality assets by aggregating incremental revenue from grid-side ancillary services. The battery industry is at a tipping point because energy prices have finally reached a level where waste isn’t always cheaper than storage.

It’s still a tough cost-benefit equation because customers hate anything that eats into margins, but as energy storage system (ESS) developers find new ways to aggregate benefits and use their facilities more efficiently, the potential market grows exponentially.

Now it’s time to shuck the reporter’s fedora and give my horns a little room to breathe. Let’s drill deeper into the inherently confusing metrics ESS developers use to describe grid-scale storage systems.

In a recent report on grid-scale ESS costs, the DOE’s Sandia National Laboratories took a bifurcated approach to pricing that separated the costs of the power control subsystem from the costs of the energy storage subsystem. Their summary table of generic ESS costs using the principal battery chemistries breaks down like this.

The problem arises when battery manufacturers focus on a power metric in their public statements, instead of an energy metric, and fail to give readers any clues about who contributes what share of system value.

To highlight the problem I’ll use Sandia’s numbers to estimate the prices of Axion’s PowerCube and A123 Systems’ (AONE) Laurel Mountain wind farm project.

ESS buyers aren’t stupid. They won’t let battery manufacturers earn the same margin on the power control subsystem that they earn on the energy storage subsystem.

That leads to the inescapable conclusion that a $2 million ESS sale that’s 70% power control systems and 30% batteries is not the same as a $2 million battery sale. At some point the failure to clearly distinguish between purchased components and proprietary components will give rise to stakeholder confusion that could have been avoided. If market participants can’t find a way to effectively communicate the difference between power control subsystem sales and energy storage subsystem sales, they run an enormous risk that investors, analysts, bankers and other stakeholders will over-estimate the relative impact of ESS sales on the bottom line and then be disappointed when their inflated expectations aren’t met. Losing credibility with stakeholders is a luxury that no company can afford.

Life was simpler when UPS systems integrators built their products and bought batteries as necessary components. It gets far more difficult when battery manufacturers sell ESS products where the bulk of the added value comes from upstream component suppliers.

While my cup usually overflows with sage advice for anybody who’ll listen, I don’t see any easy answers to this conundrum. I suppose the industry could take the easy way out and claim that the batteries just keep the turbines turning when the wind dies down, but that’s really not an acceptable answer either.

NOTE: This article was first published in the Winter 2012 issue of Batteries International Magazine and I want to thank editor Michael Halls and cartoonist Jan Darasz for their contributions.

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

A123's Elegant Financing Transaction

Sat, 21 Jan 2012 03:53:54 -0500

John Petersen

On Friday A123 Systems (AONE) announced a direct registered offering that's an elegant example of a well-structured financing transaction in a difficult market. A123 had a solid financial base before the offering and the stock was starting to turn a critical corner into an upward trend. The new financing should add momentum to that trend.

The first stage deal terms are pretty straightforward. The investors will buy units consisting of one share of common stock and one common stock purchase warrant for $2.034 per unit, a 10% discount from the closing price of A123's common stock on Thursday. The warrants will be exercisable at $2.71 per share, a 20% premium to Thursday's close, during the 24-month period beginning six months after the closing date. The net proceeds will be approximately $23.5 million after costs and expenses.

An elegant second stage gives A123 the right to require the investors to buy up to 12.5 million additional shares next summer at a 10% discount to the 10-day average market price if A123 calls on the standby commitment and exercises what's effectively a put option. The only substantive limitation on A123's right to require the investors to buy additional shares is that they can't be required to invest more than $100 million, or $8 per share, in the second stage.

The thing I find most fascinating about the transaction is the tension between A123's current sacrifice and the investors' longer-term commitment.

Last April I wrote that the market over-reacted to an attractive financing transaction and A123's stock was undervalued in the $6 range. The market disagreed with my conclusion and over the next eight months A123's stock price crumbled to an all time low of $1.51 in mid-December before turning to the upside. At Thursday's close, A123 was trading at a 19% discount to its September 30th book value of $2.80 per share. That makes a sale of additional shares at a 10% discount to market painful because the new investors will enjoy a modest accretion to book value while the existing stockholders will suffer a slight dilution, as summarized in the following table.

Book value per share at September 30th	$2.80
Estimated fourth quarter loss	($0.46)
Estimated book value per share before offering	$2.34
Estimated book value per share after offering	$2.30
Accretion to new investors	$0.27
Dilution to existing stockholders	($0.04)

When you factor in 100% warrant coverage at a 20% premium to Thursday's close, the first stage terms are attractive for the new investors. The second stage terms, however, are very attractive for A123 because they give the company six months to execute on its business plan and require the investors to standby with up to $100 million of additional financing if A123 decides it wants the money. The standby commitment may not be needed, in which case A123 will have no duty to sell the additional shares, but it sure is nice to have a second stage transaction locked, loaded and ready to go if more money is needed.

Earlier this month I picked A123 as a break out stock for 2012. As the following graph shows, A123's 10- and 20-day moving averages have turned up nicely and a simple reversion to the 200-day moving average would suggest a value in the $4.25 range as the stock reverts to a mean.

Since stocks that are significantly undervalued tend to over-correct as they revert to the mean, I would not view a six- to twelve-month target in the $6 range as unreasonable.

Like all battery technology developers, A123 faces a myriad of execution, market acceptance and business risks that each investor will have to assess assess in light of his own expectations and risk tolerance. It is, however, the clear sector leader in the lithium-ion battery space and likely to significantly outperform the market this year.

Disclosure: None.

Renewable Energy Group Raises $72 Million in Biodiesel IPO

Thu, 19 Jan 2012 19:18:37 -0500

Jim Lane

In Iowa, the Renewable Energy Group IPO priced last night, and the company’s shares began trading Thursday on NASDAQ under the REGI symbol.

The company sold 7.2 million shares at $10 per share, well below its midpoint target of $14 per share announced last week, with total proceeds of up to $82.8 million if all over-allotments are covered by underwriters. Without over-allotment sales, the offering will raise $72 million.

UBS Securities LLC and Piper Jaffray & Co. are acting as joint book-running managers for the offering. Stifel, Nicolaus & Company, Incorporated and Canaccord Genuity Inc. are acting as co-managers.

Of the shares of common stock in the offering, Renewable Energy Group is offering 6,857,140 shares and selling stockholders are offering 342,860 shares. In addition, Renewable Energy Group has granted the underwriters a 30-day option to purchase up to 1,080,000 additional shares of common stock to cover over-allotments, if any.

Disclosure: None.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

Updating My Buy Exide and Short Tesla Paired Trade

Mon, 16 Jan 2012 04:14:47 -0500

John Petersen

On November 15th I suggested a paired trade where investors would buy 11.5 shares of Exide Technologies (XIDE) and short one share of Tesla Motors (TSLA). Over the last two months, investors who made the trade on November 15th would have realized the following gains.

	15-Nov-11	13-Jan-12	Net
	Entry	Exit	Gain
Buy 11.5 Exide	-$30.59	$36.69	$6.10
Sell one Tesla	$33.93	-$22.79	$11.14
Pair trade total	$3.34	$13.90	$17.24

A conservative trader might very well call it a day and close both positions at this juncture. A less conservative trader might be inclined to push his luck a little further. I'm squarely in the second camp.

Almost half of the gain on the Tesla short came on Friday afternoon when Tesla collapsed in the last 45 minutes of trading and closed at $22.79, down $5.46 from its Thursday close pf $28.25. The apparent reason for the collapse was the loss of two engineering executives over the last month. While no small company likes to lose important employees, I have a hard time imagining any circumstances where the loss of two employees would justify a $570 million market cap beat down. While I've never seen a company schedule an emergency conference call to discuss something this trivial, that's exactly what Tesla has done. The market reaction, or over-reaction if you prefer, coupled with management's extraordinary effort to calm the market strikes me as clear proof that Tesla's unrealistically high share price has become brittle. This is a stock that wants to fall and is looking for almost any excuse to do so. My tracking chart that plots 10-, 20-, 50- and 200-day volume weighted moving average prices is looking just plain ugly as the 10- and 20-day averages have plummeted down through the 200-day average.

Exide, in comparison, is looking stronger today than it did in mid-November. I've recently explained how the liquidation of a hedge fund that owned over 30% of Exide's stock in January 2009 has been a big contributor to market volatility over the last two years. I've also speculated that a final push to liquidate the hedge fund's position before year end was the primary reason for the fourth quarter price decline. At this point my tracking chart for Exide is looking very strong as the 10- and 20-day averages push up through the 50-day average.

With Tesla's stock price looking increasingly frangible and Exide's price looking increasingly firm, I'd be inclined to keep the pair trade open until we have a third-quarter earnings release from Exide.

Disclosure: None.

Tesla Stock Collapses But Looks Massively Oversold

Sun, 15 Jan 2012 18:26:34 -0500

by Clean Energy Intel

Image Source: Tesla Motors, with permission.

Having traded in a tight range for most of the day, Tesla Motors (TSLA) collapsed in the last 45 minutes of trading on Friday. The stock hit a low of 22.64 and closed at 22.79, down 19.3% from its previous close. Although it was reported to have bounced 7% in after hours trading, the price action remains a clear worry. More worryingly, the move took place on what became the third highest volume day of the last 52 weeks - with just over 5.5 million shares changing hands.

The stock indeed closed down 35% from the $35 high it saw twice in November and December of last year.

The move took place after Tesla confirmed that Chief engineer Peter Rawlinson and Nick Sampson, supervisor of vehicle and chassis engineering, had left the company.

Not much has been said publicly about the moves. However, in an emailed statement attributed to spokesman Ricardo Reyes, Tesla made the following comments to Investor's Business Daily -

"Having completed conceptual and design engineering work on Model S, Peter has decided to step away to tend to personal matters in the U.K.,..... Nick Sampson is no longer with Tesla. He had fully transitioned from any Model S activities by the time of his departure."

All of this would imply that the departure of these two players should have little effect on the launch of the Model S in the summer. However, the market may worry about this for a while longer- and that of course would be likely to be reflected in the price action.

Source: barchart

Nevertheless, from a big picture perspective, Tesla looks heavily oversold. As the chart above indicates, we are now in the rough $22 to $24 range that has seen good support in the past 52 week period. Moreover, Tesla has already announced the pricing and broad timely of it´s year´s launch of the model S - for more detail see here.

I already have a small position in Tesla, having recommended the stock on a few occasions last year. However, I intend to use the current weakness in the stock price to build a significant position ahead of what should in the end be a solid launch of the Model S.

Finally, you can read our bigger picture analysis on Tesla and the future of the electric car here.

Disclosure: I am long Tesla.

Clean Energy Intel is a free investment advisory service produced by a retired hedge fund strategist. You can read more at www.cleanenergyintel.com

The True Story of Clean Renewable Energy Bonds

Fri, 13 Jan 2012 09:17:59 -0500

Sean Kidney

Where did all the CREBs and QCEBs go? Mystery solved.

The US has for a long time used tax credits to promote the development of oil and gas and other industries. With tax credits the bond issuer still pays a coupon, but their payment is subsidized, effectively lowering the rate of interest paid.

The Obama administration brought in a big program of credits for renewable energy bonds. The plan was that States, large local governments, tribal governments and public power bodies would issue bonds to finance energy efficiency or renewable energy. The US Treasury states that some $5.6bn of allocations to over 1800 applicants have been made for these tax credits. This would seem to suggest that there were $5.6bn of bonds out there, but when we went looking we found we could only find out information about a few of them.

A report late last year by the US National Association of State Energy Officials has helped explain what’s happening. It seems that only a small part of the approved tax credits have actually led to a bond being issued.

The Government allocated $2.4bn for Clean Renewable Energy Bonds (CREBs) and $3.2bn for qualified energy conservation bonds (QECBs). After some investigation, Bloomberg New Energy Finance calculates public issuance at $646m, although they believe there is also a private placement market of up to $400m. That would bring total issuance up to around $1bn. I.e. bonds have been issued for less than 20% of allocated tax credits – that’s a severely under-utilized public finance mechanism!

Renewable energy financing consultant and former Ernst & Young senior partner, Jonathan Johns, has previously written for Climate Bonds Initiative on the benefits of tax-exempt bonds. I asked him what was going on.

First, he said that he’s “not that disappointed”. He says that “these are nudge rather than demand pull measures and require participants to pull schemes together and go through various procedural hurdles involved. In a way they illustrate the future challenges of the industry as it seeks new sources of capital from the bond markets.”

Jonathan says that nudge mechanisms are often undersubscribed. “It’s interesting to note that those states with a strong record in renewables, e.g. California have used very high percentages of their allocations (which are based on population) whereas some more equivocal states have not. For other states there will be a natural cap on appetite if there are state or local borrowing limits.”

“There are lessons to be learned for the US and other jurisdictions – future schemes need to be more streamlined and remove some of the barriers – and also be accompanied by focus on demand stimulation and distribution channels for the bonds themselves.”

“Tax exempt bonds are a cost effective form of support, as relief is limited to the interest on the capital and not based on the capital itself. There’s also a relatively high payback per job created, with that payback localised when there’s a strong energy efficiency component – that’s been the case in over 50% of QECBs issued.”

A relatively large number of bonds issued are for small schemes in the $1m to $5m range. In other jurisdictions this has been difficult to achieve, with bond issues confined to recycling of large scale project finance portfolios.

Johns thinks it’s important to build on the CREB/QECB story and take the bond market to its next stage of development through the Climate Bonds Initiative and other mechanisms. Positive thinking.

Sean Kidney is Chair of the Climate Bonds Initiative, an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy.