May 07, 2015

Amyris Reaches Positive Cash Flow

Jim Lane amyris logo

In California, Amyris announced positive cash flow of $1.7 million in the first quarter despite negative currency effect of $1.2 million. Overall, Amyris recorded Q1 2015 non-GAAP cash revenue inflows of $30.3 million, compared with $17.9 million for Q1 2014. Total Q1 2015 revenues were $7.9 million, an increase of 30% compared with same quarter last year. Cash, cash equivalents and short-term investments of $44.9 million at March 31, 2015, an increase from $43.4 million at December 31, 2014.

“We’re pleased with our continued execution toward diversifying and growing our revenue base through an expanding number of collaborations and product commercialization efforts,” said John Melo, Amyris President & CEO. “During the quarter – and, more recently – we announced several key examples of these efforts, including several market opportunities in the cosmetics, biopharma and performance materials areas of our business. We are also seeing signs of increased end-user demand pull through in cosmetics for our squalane product as customer demand reported from our formulation partners is exceeding expectations.”

Continued Melo, “We’re experiencing strong early response and acceptance of our new product introductions and expect a strong second half in product revenue and collaboration inflows with strong support for delivering on our 2015 cash revenue inflows target of between $100 million to $110 million.”

Pavel Molchanov, Raymond James

After a period of retooling while in the “overpromise and underdeliver” penalty box, 2013-2014 were Amyris’ first years with operations truly in commercial mode, and 1Q15 marked the first quarter in the company’s history with operating cash flow in positive territory. That said, historical reliance on partner-based R&D payments makes quarterly financials choppy. In fact, this is a notable milestone for the overall bioindustrial space, since just about all the pure-plays (public and private) have historically been in cash-burn mode.

In addition to updates on the production ramp-up at the Brotas plant, the market wants to see more clarity on the pace at which Total will be scaling up its fuels JV with Amyris – a questionable prospect in the context of the oil and gas industry’s current period of austerity. Guidance for 2015 remained at $100-110 million of total cash revenue inflows, fairly balanced between product sales and R&D revenue. We maintain our Market Perform rating with a a DCF value of $2.71/share.

Jeffrey Osborne, Cowen & Company

Revenue and GM is expected to improve in the 2Q15 & 2H15 with the launch of two new products, Biossance and Muck Daddy. We see these products as important milestones in Amyris’s continued journey to commercialize its science. Looking further into 2015, Amyris will focus on growing top line sales through the expansion of its product portfolio, with focus on developing products to access greater downstream value and expanding its existing portfolio to new markets. Management expects revenue to accelerate in the 2Q15 and beyond, in line with the launch of the Biossance and Muck Daddy product lines as well as forecast improvement in the diesel sector. Revenue was impacted by the continued sluggishness in the diesel business. Marklet Perform, Price Target: $2.50

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.

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May 06, 2015

Chinese Solar Companies Undermining EU Deal

Doug Young 

Bottom line: A deal designed to avoid punitive tariffs on Chinese solar panels exported to Europe is rapidly collapsing, with new anti-dumping tariffs likely to be imposed by the end of the year.

A looming clampdown on Chinese solar panels in Europe is rapidly accelerating, with word that the EU will review part of a landmark 2013 agreement that initially helped to prevent a trade war but is showing rapid signs of unraveling. The case centers on the prices of Chinese solar panels, which are typically much lower than their western counterparts due to a wide array of Beijing policies to support the sector.

The US levied punitive tariffs on Chinese panels to address the situation. The EU was set to do the same when several top politicians stepped in and pushed both sides to reach a compromise deal to avoid such action. That deal saw the Chinese manufacturers agree to raise their prices to levels comparable to products from the west. But no sooner did the deal take effect, then the Chinese companies began undermining the agreement by finding ways to secretly refund money to their European customers.

The European manufacturers saw what was happening, and have been complaining loudly to the European Commission to take action. The case now appears to be accelerating, and it looks likely that some kind of corrective action will be relaunched against the Chinese manufacturers in a matter of months.

The latest action looks a bit technical, and applies to a benchmark price for solar panels that is a key part of the agreement reached between the Chinese manufacturers and EU as part of their agreement to avoid punitive tariffs in 2013. Under that deal, the Chinese agreed to set their prices based on a benchmark that included panel prices from both Chinese and non-Chinese manufacturers.

But now the European panel makers are arguing that Chinese panel prices should be excluded from the benchmark calculation, because the Chinese products depress the benchmark to artificially low levels. (English article) The European Commission has agreed to review the case, meaning it could ultimately decide to exclude Chinese panel prices from the benchmark. That would almost certainly raise the benchmark, forcing Chinese panel makers to sell their products for higher prices.

This particular development is just the latest wrinkle in the protests from European manufacturers, who would really just prefer to see implementation of the originally proposed anti-dumping tariffs rather than this attempt to modify the earlier agreement. In a move in that direction, German panel maker Solarworld (SRWRF) last week filed a formal request for a probe into its Chinese rivals, saying they were violating the earlier agreement. (previous post)

I’ve personally heard and read about a number of methods the Chinese are using to undermine the agreement. Many involve finding ways to secretly rebate money to their customers, using vehicles like consulting fees to make such payments. This kind of behavior is relatively typical of Chinese companies, which often enter into agreements and then look for ways to undermine those same agreements in ways that will benefit themselves.

A changing of the benchmarking process won’t really address this central problem, namely that many of the Chinese companies will continue to look for ways to sell their panels at very low prices using tricks like backdoor rebates. When the EU comes to that realization, the result will almost certainly be a scrapping of the 2013 compromise deal, and I do expect we’ll see the original plan for punitive tariffs imposed by the end of this year.

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 03, 2015

Value Trapped: Ten Clean Energy Stocks For 2015, April Update

Tom Konrad CFA

 My Ten Clean Energy Stocks for 2015 model portfolio held on to first quarter gains in April, despite a 29% fall for one of the stocks.  (For details on that decline, see the Power REIT (NYSE:PW) section below.)  The portfolio as a whole was rescued by the recovering Canadian Dollar and Euro, as well as mild advances for most of the other stocks across the board.  That includes a 4.9% gain for TransAlta Renewables (TSX:RNW, OTC:TRSWF), and a 5.8% gain for FutureFuel (NYSE:FF) which I singled out as having "fallen too far" in last month's update.

As a whole, the model portfolio fell 0.7% in April and is up 4.9% for the year to April 30th.  This compares to a 2.6% April decline for its broad market benchmark, IWM, which is down 3.7% year to date (YTD).

Income and Value Divergence

However, the overall averages are a product of the excellent performance of the six income stocks masking the miserable performance of the four value and growth stocks.  The income group was up 4.2% for April, and is up 14.6% YTD.  This compares to a 1.9% monthly gain and 3.7% year to date loss for its benchmark, JXI.  The fossil fuel free income portfolio I manage with Green Alpha Advisors, GAGEIP, is also doing well, with a 3.1% gain in April, and a YTD 8.6% gain.

In contrast, the four growth and value stocks lost 8.0% for the month, and are down 9.7% for the year.  This compares to their clean energy ETF benchmark (PBW), which rose 3.0% for the month and is up 9.3% for the year.

The chart below (click for larger version) gives details of individual stock performance, followed by a discussion of April news for each stock.

10 for 15 Performance

The low and high targets given below are my estimates of the range within which I expected each stock to finish 2015 when I compiled the list at the end of 2014.

Income Stocks

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/31/2014 Price: $14.23.  Annual Dividend: $1.04.  Beta: 0.81.  Low Target: $13.50.  High Target: $17. 
4/30/2015 Price: $19.00. YTD Dividend: $0.26  YTD Total Return: 35.3%.

The stock of sustainable infrastructure financier and Real Estate Investment Trust Hannon Armstrong added to previous gains in April, despite a secondary share offering of 4 million shares priced at $18.50 a share.  The strength is most likely due to a well timed earnings guidance update for the first quarter released on April 28th.

2. General Cable Corp. (NYSE:BGC)
12/31/2014 Price: $14.90.  Annual Dividend: $0.72.  Beta: 1.54.  Low Target: $10.  High Target: $30. 
4/30/2015 Price: $16.31. YTD Dividend: $0.  YTD Total Return: 9.5%.

International manufacturer of electrical and fiber optic cable General Cable Corp. gave back some of its previous gains.  The gains come because of buyout rumors, discussed in the last update.  Although the reasons for a possible buyout are just as good as they were in March, this is typical performance for a stock after buyout rumors: The stock declines slowly as traders lose interest and move on to the next item in the news cycle.  The company will discuss first quarter earnings with analysts on May 7th.  Management is sure to be asked about the rumors at that time, although I doubt they will say anything to feed renewed speculative frenzy.

3. TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/2014 Price: C$11.48.  Annual Dividend: C$0.77.   Low Target: C$10.  High Target: C$15. 
4/30/2015 Price: C$12.47. YTD Dividend: C$0.26  YTD Total C$ Return: 10.9%. YTD Total US$ Return: 6.6%.

I highlighted Canadian yieldco TransAlta Renewables as a good short-term buy last month because of what I believe to be a temporary sell-off following the announcement of a secondary offering of stock priced at C$12.65.  The stock initially advanced, but then fell back when the deal closed.  After its normal monthly C$0.06416 dividend, the stock was flat in local currency terms, but up 4.9% in US$ terms because of the appreciating Canadian dollar. 

If anything, now is an even better time to buy TransAlta Renewables given that it has not advanced in local currency terms, and it will soon increase its monthly dividend to C$0.07.  Analysts seem to agree: TD Securities upgraded the stock from "hold" to "buy" and raised its price target from C$13.50 to C$15.50. Macquarie maintained a neutral rating, but increased its price target from C$13 to C$14.

4. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF).
12/31/2014 Price: C$3.20. 
Annual Dividend C$0.30.  Low Target: C$3.  High Target: C$5.  
4/30/2015 Price: C$3.70. YTD Dividend: C$0.075  YTD Total C$ Return: 18.0%.  YTD Total US$ Return: 13.5%.

Canadian power producer and developer (yieldco) Capstone Infrastructure revealed that Ontario Electricity Financial Corporation had appealed the March 12th decision from the Ontario Superior Court discussed in the last update.  If the ruling is upheld, it will result in a C$25 million (C$0.26) retroactive payment and an ongoing revenue increase at two of Capstones hydropower facilities.  The stock continued to recover from previous lows.

5. New Flyer Industries (TSX:NFI, OTC:NFYEF).
12/31/2014 Price:
C$13.48.  Annual Dividend: C$0.585.  Low Target: C$10.  High Target: C$20. 
4/30/2015 Price: C$14.32. YTD Dividend: C$0.20  YTD Total C$ Return: 7.7%.  YTD Total US$ Return: 3.6%.

Leading North American bus manufacturer New Flyer announced its new orders and backlog for the first quarter.  Order activity remains brisk.  Although New Flyer delivered 572 EUs in the quarter, compared to 494 new firm orders and exercised options, backlog including options increased from 2,469 to 29,30 EUs.  The company's aftermarket business continues to grow as well.

For investors new to New Flyer, Livio Filice gave a good overview on Seeking Alpha.

6. Accell Group (XAMS:ACCEL, OTC:ACGPF).
12/31/2014 Price: €13.60. 
Annual Dividend: €0.61.  Low Target: 12.  High Target: €20.
4/30/2015 Price: €16.84. YTD Dividend: 0.61  YTD Total Return: 28.3%.  YTD Total US$ Return: 18.9%.

Bicycle manufacturer Accell Group reported record revenue and profits for 2014, on strong electric and sport bike sales and favorable weather in Europe this past winter.  The company also reported that 2015 had gotten off to a favorable start, despite the volatility of the Euro.  Shareholders approved a €0.61 dividend, up from €0.55 last year.  The stock went ex-dividend on April 27th.

Value Stocks

7. Future Fuel Corp. (NYSE:FF)
12/31/2014 Price: $13.02.  Annual Dividend: $0.24.   Beta 0.36.  Low Target: $10.  High Target: $20.
4/30/2015 Price: $10.87 YTD Dividend: $0.06.  YTD Total Return: -16.1%.

Last month, I highlighted specialty chemicals and biodiesel producer FutureFuel as one of two short term buys based on undervaluation.  Like TransAlta Renewables, FutureFuel's return was not particularly impressive, but it did advance 5.8%.  The advance was helped by the EPA's agreement to finalize volumes for 2014 and 2015 under the Renewable Fuel Standard by November 30th.  The Agency also intends to finalize the rule for 2016 before the end of the year.  Uncertainty over the repeated delays of the EPAs rule making have been undermining the biofuels markets and FutureFuel's profits since the EPA missed its deadline for the 2014 rules in November 2013.

8. Power REIT (NYSE:PW).
12/31/2014 Price: $8.35
Annual Dividend: $0.  Beta: 0.52.  Low Target: $5.  High Target: $20.
4/30/2015 Price: $6.14. YTD Total Return: -26.5%.

As mentioned above, the judge ruled against Power REIT in summary judgement on April 24th.  I wrote about the ruling and my new valuation for Power REIT ($5 to $7) here.  The judge also called a status conference with both parties for April 29th.  My hope is that Power REIT decided not to appeal and its lessees dropped the remaining minor claims, but the company has not yet released any information regarding the outcome of the conference.

Although the judge ruled against Power REIT on every count, there were two bright spots in the ruling.  First, the company can now drop the case without the expense of a prolonged trial. It was due to this savings in legal expenses that my current valuation exceeds my previously estimate ($5) of Power REIT's value in the case of a total loss.

The other upside comes from Power REIT's preferred stock (PW-PA,) which I have previously described as a hedge against the possibility of a loss in the civil case.  Although the preferred sold off briefly in the wake of its ruling, calmer heads soon prevailed. Prior to the ruling, the preferred had been trading in the $25.50 to $26 range, but it is now trading around $27.  The increase is due to the fact that the preferred dividends (like dividends on the common) should now be treated for tax purposes as return of capital, rather than as ordinary income.

9. Ameresco, Inc. (NASD:AMRC).
12/31/2014 Price: $7.00
Annual Dividend: $0.  Beta: 1.36.  Low Target: $6.  High Target: $16.
4/30/2015 Price: $6.72. YTD Total Return: -4.0%.

Energy service contractor Ameresco continues to announce both solar and energy efficiency contracts, but has yet to catch investor attention.  The stock drifted down after some excitement last month over the Obama administration's renewed push for energy efficiency in Federal agencies.

Growth Stock

10. MiX Telematics Limited (NASD:MIXT).
12/31/2014 Price: $
6.50Annual Dividend: $0.  Beta:  0.78.  Low Target: $5.  High Target: $20.
4/30/2015 Price: $7.00. YTD Dividend: $0.  YTD Total South African Rand Return: 11.0%.  YTD Total US$ Return: 7.7%.

Vehicle and fleet management software-as-a-service provider MiX Telematics was mostly flat with a slight decline in South African rand terms offset by appreciation of the rand against the dollar.  I find the lack of movement puzzling, given the likelihood that the company is currently negotiating a sale.  Readers can find an excellent in-depth look at MiX's current undervaluation and prospects for a buy-out here.

Final Thoughts

With my growing focus on income stocks and the launch of the Green Alpha Global Equity Income Portfolio strategy late last year, I had seriously considered placing only income stocks on this list for 2015.  Unfortunately, a colleague talked me out of the idea, saying that readers expect a broader focus for my lists of "Ten Clean Energy Stocks," which I have been publishing since 2007. 

If this year's results are anything to go by, I'm a lot better at picking income stocks than I am at picking value and growth stock.  I also suspect that a systematic review of previous years would lead to the same conclusion. Many of my biggest winners have been income stocks, and many my biggest losers have been value or growth stocks. 

It's hard to be good at all things, but it is possible to know your strengths.  I'm tired of getting caught in value traps.  I'm re-considering making the tenth annual "10 Clean Energy Stocks" list into "10 Clean Energy Income Stocks for 2016."

On the subject of a much more recent tradition, I've managed to pick two or three winners from this list for the coming month for two months running.  For May, I'm going to stick with TransAlta Renewables and bring MiX Telematics back from March, for the reasons discussed above.

Disclosure: Long HASI, CSE/MCQPF, ACCEL/ACGPF, NFI/NFYEF, AMRC, MIXT, PW, PW-PA, FF, BGC, RNW/TRSWF.  I am the co-manager of the GAGEIP strategy.

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, 2015

Yingli Can Make Debt Payment, But It's Still Weak

Doug Young

Bottom line: Yingli appears to be in financial distress but will avoid defaulting on debt obligations coming due next week, while China’s broader solar panel sector is likely to face new anti-dumping tariffs in Europe later this year.

The solar panel sector has become quite a turbulent place these days, riding high one day on reports of major new plant construction, only to stumble the next on signs of conflict and financial distress. This kind of conflicting news reflects the fact that the industry is still in the midst of a major overhaul that could ultimately see a few more companies get closed down or purchased, leaving a smaller field of the biggest, best-run players to survive over the longer term.

The latest signs of distress are coming from Yingli Green Energy (NYSE: YGE), one of China’s largest players, which has just announced it has the necessary funds to pay off a bond that will mature next week. Some may see such an announcement as a sign of strength; but the fact that Yingli is taking the unusual step of making an announcement seems aimed at allaying market concerns that it might not make the payment. The other big distress sign is coming from reports that indicate Europe could soon re-launch an anti-dumping probe into Chinese solar panels, following complaints that the Chinese are violating an earlier agreement designed to avoid punitive import tariffs.

The field of remaining Chinese solar panel makers is rapidly dividing into 2 camps, one including names like Canadian Solar (Nasdaq: CSIQ) and Trina (NYSE: TSL), which are generally healthier and better run and thus more likely to emerge as future sector leaders. On the other side of the aisle are shakier companies like Yingli and ReneSola (NYSE: SOL), whose shares have both fallen into the $1 range amid concerns about their longer term prospects.

Yingli was almost certainly looking to allay some of those concerns with its new announcement that it has enough money to pay off 1.2 billion yuan ($200 million) in medium-term notes that will come due next week. (company announcement) Yingli added it has given the necessary funds to a third party as trustee, ensuring that the payment will be made on time.

Yingli’s move comes just a week after Tianwei, another solar products maker that is also from Yingli’s hometown of Baoding in northeast Hebei province, made an unprecedented default on an interest payment for a domestic bond. (English article) Last week, Yingli also announced that it sold some of its idle land in Baoding for 588 million yuan (company announcement), and I strongly suspect some or all of that money is now being used to pay off the bond that comes due next week.

Yingli’s stock was down 0.5 percent after its latest announcement this week, and now trades near a 52-week low that’s not much higher than the all-time lows it posted at the height of a major sector downturn 3 years ago. The company appears to have dodged a bullet for now, but its condition certainly doesn’t look that encouraging over the medium to longer term.

We’ll close out this post with a look at the bigger news that Germany’s Solarworld (SRWRF) has filed a formal request for a probe into Chinese panel makers, saying they are violating an earlier agreement aimed at ending a dispute over allegations of unfair state support. The 2 sides signed their landmark agreement in late 2013, with the Chinese panel makers agreeing to voluntarily raise prices in exchange for avoiding formal punitive tariffs.

Media first reported last month that many of the Chinese companies were violating the agreement by using a range of ways to negate their own price hikes (previous post), and Solarworld’s formal complaint means another formal probe is likely to follow soon. (English article) Solarworld is quite a powerful company, and was one of the main driving forces behind probes that ultimately saw the Chinese companies slapped with punitive tariffs in the US and face similar previous action in Europe. Accordingly, this latest complaint looks likely to launch a similar process that could ultimately see the Chinese manufacturers slapped with new punitive tariffs in Europe later this year.

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.

April 28, 2015

Electric Cars Will Bury Internal Combustion

By Jeff Siegel

Audi wants to save internal combustion from its ultimate demise.

This makes about as much sense as saving the typewriter.

Despite the fact that such a demise is likely many decades away anyway, the quest to “save the internal combustion engine” will ultimately result in a complete waste of time, effort and money.

But that's not stopping Audi.

Apparently, the German auto maker has been busy developing e-diesel, which is a transportation fuel that only requires two raw materials: water and carbon dioxide.

On the surface, this may sound promising. Especially after reading what Reiner Mangold, Head of Sustainable Production said regarding this new development …

In developing Audi e-diesel we are promoting another fuel based on CO2 that will allow long-distance mobility with virtually no impact on the climate.

An Exercise in Complacency

While I don't doubt Mangold's “eco” intentions, the undeniable fact is that the internal combustion engine is still an antiquated technology.

Sure, the thought of a transportation fuel that doesn't rely on oil sounds great. But the process of internal combustion itself is inferior to electric mobility.

Let us not forget that electric cars have fewer parts in comparison to internal combustion vehicles. Less “things” can break and require costly repairs. As well, there are no oil changes or regular engine maintenance required with electric cars. For the most part, it's just a battery and an electric motor. Pretty simple, really.

Of course, what I find most odd is that the process of making e-diesel seems to be much more complex, cumbersome, and costly compared to what it takes to produce electrons and use those electrons to “fuel” an electric car.

Take a look at this diagram that Audi produced to illustrate the production process …


How does that make sense when this is the future of "filling up" …


This is where Google (NASDAQ: GOOG) employees "fuel" their electric cars.  It should also be noted that this parking lot is powered by solar panels installed on the top of the carports.

Now in terms of efficiency, reliability, and design, this Tesla (NASDAQ: TSLA) electric motor ...


Is far superior to this Audi engine …


Audi should spend more time embracing the future instead of trying to hold on to it.

The truth is, we don't need better, cleaner fuels to power out internal combustion vehicles. We need to stop acting like we can't live without internal combustion. To accept such a thing is little more than an exercise in complacency and defeatism - neither of which enables pathways to prosperity.

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

April 27, 2015

Green Bond Market Heats Up After Slow Start To 2015

$7.2 billion of green bonds issued.  Market shows signs of maturity, including more currencies, and non-investment grade bonds.  Emerging market green bonds are ramping up, while green munis are booming.

by Tess Olsen-Rong, Climate Bonds Market Analyst

The first three months of 2015 (Q1) have seen 44 green bond deals totalling $7.2bn of issuance. After relatively low issuance in January the amount of green bonds issued has been climbing each month, with March three times bigger than January. This year will be the biggest year ever for green bonds: there’s a healthy pipeline of bonds in the works and we expect Q3 and Q4 in particular to be strong in the lead up to the UN COP.

From a slow Q1 2015 start green bond issuance is climbing

To grow a deep and liquid green bond market we need to not only scale issuance but we also need diversification of currency and ratings. This was starting to show in Q1 with 11 different currencies and ratings ranging from AAA to B-.

The big story in Q1 was the growing interest in green bonds in emerging markets shown by the increasing commentary on potential green bonds from the Middle East, China and South Asia. However, it was India who made the headlines, with the first Indian green bond issued in February.

The US municipal green bond market continued to grow with water and green buildings dominating the use of proceeds. One big difference between US municipal green bonds and other green bonds, however, is the low uptake in second opinions: none of the Q1 green muni issuances chose to get a second opinion.

Finally, if you think the role of the development banks in the green bonds is petering out, think again! In addition to contributing with benchmark issuances, many are increasingly supporting the green bond market through more specialised issuances in different currencies and structures, as well as on the investment side of the market.

Emerging markets: India’s first two green bonds, beating China to the punch

Low-carbon and climate resilient finance needs to grow fast in emerging markets with huge levels of investment required by 2050. The good news is that green bonds offer a potential solution. We had thought that China would be first of the largest emerging economies to enter the green bond market, but India beat them to the punch with a corporate green bond from Yes Bank. The INR 10bn ($161.5m) bond will finance renewable energy projects.

Hot on the heels of Yes Bank was the Export Import Bank of India, with a larger $500m green bond. The bond will finance renewable energy and low carbon transport projects – although not in India, but in neighbouring Bangladesh and Sri Lanka. Policy support for the low-carbon transition may have been influential in encouraging these Indian green bonds: India has a target of creating 165 gigawatts of new renewables by 2022. According to Yes Bank, $70bn of debt investment is required to achieve this goal – meaning ample opportunities for green bonds! After some lobbying, the Indian government has become supportive of the use of green bonds as a tool to meet India’s green financing needs; they have apparently been asking Indian Government agencies and development banks to start issuing green bonds. Expect to see more of green bonds out of India this year.

But let’s not forget about China. We now expect the first Chinese green bond mid-year, heralding a rush of green issuance.

Currency diversity allows more investors to gain exposure in green bonds

Green bonds need to be available in a range of currencies to give a wide range of investors the opportunity to invest. The bulk of green issuance continues to be in USD and EUR, but the development banks have been increasingly issuing smaller green bonds in a range of currencies including Turkish Lira, Brazilian Reals and Indian Rupees — in Q1 green bonds were issued in 11 different currencies. Australian investors were also able to buy the KfW’s Kangaroo green bond in local Aussie dollars, which proved incredibly popular. Outside of the development banks, some corporates also appealed to local investors, such as the Wallenstam and Vasakronan green bonds in Swedish Kronor. Creating a deep and liquid green bond market requires currency diversity and in the past three months we’ve started to see that.

Green bonds were issued across 11 different currencies in Q1 2015 showing the growing depth in the market – however the USD and EUR issuance continued to dominate

Non-investment grade: Greater diversity as green bonds move down the ratings

We’ve also seen more high-yield bonds in the market — another important indicator of depth. Two of the largest green bonds (Terraform’s and Paprec’s) in the first quarter were non-investment grade; and they came from different types of issuers, respectively a yieldco and a corporate.

Terraform Power Operating (BB-) yieldco hit the market early in January with a sizeable $800m green bond to finance the acquisition of renewable energy assets. The bond followed the successful yieldco green bonds last year from NRG Yield and Abengoa Greenfield. French recycling company Paprec then issued its inaugural bond; a whopping (EUR 480m) $523m bond split across two tranches of EUR 185m/$201m (B-) and EUR 295/$321 (B+).

US munis ramp up issuance, but stay clear of second opinions, leaving green credentials more difficult to determine

Four US states saw green bond issuance during Q1: Washington (Tacoma), Massachusetts, Arizona and Indiana. Proceeds from the green muni bonds are funding a wide range of projects, but are mainly centred on clean water and low-carbon buildings.

The State of Indiana joined Chicago and Iowa in issuing a green water bond; in fact, they did two separate green water bonds within a month. Now, the green credentials of a water bond can be a tricky subject: for example, if the investments funded involve long-term water infrastructure, has exposure to physical climate change impacts and the necessary adaptation measures been accounted for? What is the energy intensity, and therefore emissions impact, of the water infrastructure (this can be very high)? Clean water provision that involves building infrastructure that ignores expected changes to rainfall patterns and intensity is frankly foolish – yet still all-too common. Ditto investments that rely on increased energy when other options are available, like demand management.

To be confident a water investment will deliver positive environmental benefits, investors need to have access to this kind of information. We saw an important recognition of this issue in the recent update of the Green Bond Principles when the water category was changed from ‘clean and drinking’ water to ‘sustainable’ water. Now we need more detailed criteria and an independent review model breaking into the green water municipal markets.

There’s also a growing trend amongst US universities to follow in the footsteps of MIT in refinancing their low-carbon buildings through green bond issuance. This quarter, both the University of Virginia and Arizona State University jumped on the bandwagon with a $97.7m and $182m issuance, respectively. Great news – but similar to the green muni water bonds, we‘d like to see an independent review of these bonds or at least a commitment to improve and report on the buildings’ energy efficiency during the tenor of the bonds.

US munis have tended to avoid independent review, and their dominance in Q1, along with some un-reviewed Indian issuance, has meant more than half the Q1 bonds were un-reviewed

Development Banks: Playing from both sides by providing issuance and investment in green bonds, as well as pushing the envelope on reporting frameworks

Development banks have continued to hold their dominant market position in Q1 2015. They maintained a 46.2% share of total issuance - the same as their 2014 share. Development banks continue to be green bond pioneers, and are now finding ways to support the market other than simply issuing large USD denominated green bonds. For example, this quarter KfW – already a repeat green bond issuer - announced it would also participate in the market on the asset side of the business and invest in a broad range of green bonds through a EUR 1bn green bond portfolio. Similarly, IFC, the private sector arm of the World Bank, supported emerging market issuance by committing $50m of cornerstone investment to India’s first green bond from Yes Bank.

Q1 2015 green bonds have been issued by a variety of types of issuers

The development banks also continued to provide demonstration issuance and liquidity through benchmark-sized issuance. The World Bank issued both its largest-ever green bond of $600m and its longest dated green bond (40yr) in the same week, yet again proving its strength as a green bond powerhouse.

The development banks are pushing the envelope on green bond processes as well; for example, the EIB launched an upgraded green bond impact report in late March. Development bank reporting practices, however, are costly. Lower costs will be needed for the corporate green bond sector to grow, plus some levels of disclosure are difficult, such as when a bank is including in it’s green bond pool syndicated loans that are subject to confidentiality clauses in the syndication contracts. We believe that clear standards around green assets and around reporting methodologies, combined with audit-style certification, can keep the cost of verification suitably low while still providing confidence in the green credentials of a bond.

Energy and low-carbon buildings account for the largest share of use of proceeds of Q1 green bonds

To provide an indication of the types of projects to be financed by the Q1 2015 crop of green bonds we split the proceeds of each issuance into the declared eligible green project categories and pooled together. On first glance it shows that renewable energy is the biggest proportion, with the top three biggest bonds of the quarter — Terraform Power Operating, World Bank and Vestas — all financing renewables.

Proceeds from Q1 2015 green bond issuance have gone to a range of project types

Green buildings and water are the second and third biggest categories, largely through US green munis. Transport appeared largely because the EXIM of India bond finances rail and bus transport as well as renewable energy.

Investor interest in green bonds remains high, even as they become more vocal on expectations of green

It’s no surprise to close followers of the green bond market that the investor appetite for green bonds has continued in Q1 2015. This shows through in the upsizing of green bonds as a result of strong demand –the World Bank’s retail green bond in January, for example, was upsized from $15 to $91m; KfW’s kanga green bond intended to be AUD 300m ended up ballooning to AUD 600m; and Yes Bank doubled its green offering from INR 5bn to INR 10bn ($161.5m).

Another indicator is the continued high levels of oversubscription. An example from Q1 is the latest Kommunalbanken Norway’s (KBN) green bond issued in March, which received $700m orders for a $500m issue. Of course, oversubscription is a common feature of bond issuances generally in the current market environment; but green bonds seem to be seeing higher rates of oversubscription than non-green ones.

A more diverse set of investors are getting involved in the green bond market. There have been many public commitments over the quarter to invest in green bonds including €1bn from Deutsche Bank treasury – in addition to the mentioned EUR 1bn commitment from KfW. The number of green bond funds/mandates are also growing: during the first quarter Swedish insurance company SPP announced a green bond fund following in the footsteps of Nikko Asset Management, BlackRock, State Street, Calvert and Shelton Capital Management. Plus Norwegian investment powerhouse Norges Bank Investment Management (with over $800bn of assets under management) also disclosed it has established a green bonds mandate.

Investors are also becoming more involved in structuring green bond products to fit their specific requirements. For example, the World Bank issued a green bond with longer tenor of 30year ($34m) specifically for Zurich Insurance, who wanted to match long-term liabilities with a green bond. Partnerships such as this will be important as demonstration issuances to show off green bonds in new markets.

Another development is the launch of an investor statement of expectations for the green bond market from a group of key green bond investors, brought together by Ceres Investor Network on Climate Risk. The investors’ main ask is for greater transparency and reporting, especially quantitative reporting where possible, on the green credentials and impacts of green bonds. The report states: “this will minimise ‘greenwash’ concerns and reputation risk to issuers and investors”. The 26 signatory investors are: Addenda Capital, Allianz SE, AXA Group & AXA IM, BlackRock, Boston Common AM, Breckinridge, CalPERS, CalSTRS, Colonial First State, Community Capital Management, Connecticut Retirement Plans, Retirement System of the State of Rhode Island, Everence, Mirova, NY State Comptroller Thomas P. DiNapoli, North Carolina Retirement System, Pax World Investments, PIMCO, RBC Global Asset Management, Standish Mellon Asset Management, California State Treasurer John Chiang, Trillium Asset Management, UN Joint Staff Pension Fund, University of California, Walden Asset Management and Zurich Insurance.


So, interesting start to 2015 — slowish start but the market is now heating up, and growing both in size and diversity. We expect strong growth in Q2 and we’re not the only ones expecting 2015 to be a big year: In Q1 we have seen S&P forecasting $30bn of corporate issuance alone in 2015; SEB is predicting the total 2015 issuance to reach $70bn and Bloomberg’s Michael Liebreich said in New York last week they are expecting $80bn. The race is on!

There were $60bn of green bonds outstanding at the end of March 2015

——— Tess Olsen-Rong is a market analyst at 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. 

April 24, 2015

Alternative Energy Stock Returns, Past and Future

By Harris Roen

Alternative energy became a serious market player after the turn of the millennium. Since that time, solar, wind, smart grid and other alternative energy stocks have experienced both strong up and down trends. The forces at work driving these markets are complex, counterintuitive, and sometimes mysterious. This article looks at what has been driving the price of alternative energy markets, and as a result, alternative energy company stocks. Looking ahead, we will also consider what should affect the direction of alternative energy stock prices.

Past trends in Alternative Energy Stocks


The Wilder Hill New Global Index (NEX) is a fitting proxy to track overall alternative energy markets. This index contains companies that “focus on generation and use of cleaner energy, conservation and efficiency, and advancing renewable energy generally.” The chart at right shows some of the clear trends the alternative energy sector has had in the recent past.

The first down channel on the chart coincides with a general stock market slump. This drop started during the eight month recession which began in March 2001.

By 2003, alternative energy stocks started to turn around. This marked the beginning of a fantastic five year run, as investors started noticing wind power and photovoltaics were becoming economically viable alternatives to traditional electric generation. Annualized returns in this five year period averaged a remarkable 38%!

The Great Recession then hit in December 2007, just as alternative energy stocks appeared to be ascending into nosebleed territory. As a result, prices came crashing down a painful 71% in about a year. This outstripped the distressing declines the stock market in general had at that time.

After this crash, no clear trend emerged until the end of 2012, when the next up-channel started. At that time, investors felt that alternative energy stock prices better reflected the economic realities of the underlying business, and started buying again. There is likely another reason, though, that it took five years for alternative energy markets to recover. Psychologically, after getting severely burned in the crash of 2008, it took a long time for investors to feel comfortable dipping their toes back in the water.

Following the uptrend that went from 2012 to the beginning of 2014, there was a noteworthy giveback. The NEX fell 21% in about nine and a half months. Much of that giveback has been regained. It remains to be seen if the current trend will continue to be positive, or if we have entered into a sideways market.

Do Fossil Fuel Prices Drive Alternative Energy Markets?

Are fossil fuel prices the main driver of failure or success of green energy companies? Though this seems like a reasonable theory, the answer, in my analysis, is that it depends.

Alternative Energy versus Oil

oil_altenergyMost of the larger alternative energy stocks are multinational corporations that are part of an international economy. As a comparison, crude oil prices are good indicator of global fossil fuel values. Oil is a worldwide commodity that can more easily flow to markets than coal or natural gas. The latter two fossil fuels are subject to local supplies and disruptions, so prices can range widely by region.

The chart at right shows crude oil (Cushing OK spot) as compared to the NEX over two time periods. From 2001 to 2009, oil and alternative energy prices were very strongly linked. For you math wonks, the two had a correlation coefficient of 0.87, which is extremely significant. This makes sense, since a rise in oil prices would mean that other energy alternatives become more attractive. From 2010 to the present, the NEX had a slight negative correlation to oil prices. The two markets did not exactly go in opposite directions, but they had virtually no corresponding movement.

oil_S&P_02A further reason for the 2002-2009 correlation is that the economy was humming along very well at that time. This helped fuel investor optimism that the market would continue to grow for solar, wind, and the like. Similarly, oil became a strong proxy for the stock market at that time, as speculators started investing heavily in oil. They believed that as the global economy expanded, there would be more demand for oil, thus raising the prospects for oil prices. In essence, oil became a proxy for the stock market.

The correlation between oil and the stock market remained strong for a decade, but finally started to diverge at the end of 2013. Since then there has been a strong negative correlation.

oil_S&P_divergOil prices are now being affected more by supply and demand. Much of this has to do with the North American oil and natural gas boom, which is injecting an abundance of supply right where it is being used. This not only tips the supply/demand equation by reducing U.S. oil imports, but also mitigates the fear that oil prices will skyrocket when a crisis crops up in the Middle East. For this reason, I expect any rise in oil prices going forward will positively affect alternative energy stocks.

Alternative Energy versus Natural Gas


Often, the decline in alternative energy electricity generators such as wind and solar has been attributed a drop in natural gas prices. There is a correlation between the two, though it is not as strong as one might think.

The charts at right show natural gas (Henry Hub LA spot) compared to the NEX. There is a clearly a correlation between the two, though it is somewhat weak. It is also interesting to note that at starting around 2015, there was a divergence between natural gas prices and the NEX.

Prospects for Alternative Energy Stocks

Though no one can tell with certainty where alternative energy stocks will head in the future, there are factors that can shed some light on the long-term prospects for this sector. These include increased manufacturing efficiencies, financial innovations and energy policy.


Much of what many alternative energy companies do is similar to tech sector stocks. As product design and production engineering keeps improving, manufacturing efficiency can greatly help a company’s bottom line. Whether its photovoltaics, LED lighting or wind arrays, the cost of production continues to drop for green economy companies. This trend shows no signs of abating, which bodes well for alternative energy investors.

Financial Innovations

The alternative energy sector has profited greatly from new and innovative financial models. Companies like SolarCity (SCTY) and SunPower (SPWR) have benefited from various financial arrangements that allow consumers to install solar with no upfront costs. These include lease arrangements, power buyback agreements, and securitization of tax benefits.

Another innovative financial model to benefit alternative energy is the advent of renewable YieldCo’s. These are companies that bundle solar and wind generating assets into predictable cash flows that are paid out in dividends. This innovation allows green investors can choose from several companies with strong yield attributes.

Investors love dividends, especially in this low interest rate environment. Any added yield an investor can put in their portfolios is of great value. YieldCo’s should continue to attract investors and lead to higher stock prices.

These types of financial innovation reflect a maturing of the alternative energy sector, which I see as a good sign. As long as these products have strong fiscal underpinnings, the prospects for long-term growth remain healthy.

Energy Policy

Because of the public good that results from reduced fossil fuel use, alternative energy has benefitted from government policies supporting the industry. Indeed, targets and incentives remain strong internationally, particularly in Europe and Asia. These regions and others continue to be serious in their commitment to solar, wind, energy storage, efficiency and other alternative energy strategies. Domestically, there are two important policy developments to watch, one a carrot and one a stick.

The first important domestic incentive is the Business Energy Investment Tax Credit (ITC). The ITC rebates up to 30% for solar, fuel cells, wind, combined heat and power (CHP) and geothermal. This incentive is scheduled to sunset at the end of 2016. Whether it gets renewed or not will affect the rate at which renewable projects go forward. This will cause concern for investors.

The second policy development is the Clean Power Plan. These proposed rules from the EPA target pollution reduction from power plants, and will have a vast affect on how energy gets produced and consumed in the country. Essentially each state has an emission target, which will force it to find ways to reduce carbon emissions. There has been some strong pushback from many states, especially those heavily reliant on coal for production electricity. The rule making process will likely take a few years and several court cases to resolve, but if the Clean Power Plan remains mostly intact, it will accelerate renewable energy projects in a big way.


By keeping an eye to the ground on fossil fuel prices, energy policies and other factors, investors can go far to understanding prospects for alternative energy stocks. There will undoubtedly be up and down swings ahead, but there are enough positives underlying the sector that we remain bullish for the long-term.


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.

April 23, 2015

Power REIT Loses; What Now?

Tom Konrad CFA

On April 22nd, the court ruled against Power REIT (NYSE:PW) in the summary judgement phase of its litigation with Norfolk Southern Corp (NYSE:NSC) and Wheeling and Lake Erie Railroad (WLE).  At issue were if NSC and WLE were in default on a lease of 112 miles of track, and a number of claims surrounding the lease, and if they owed Power REIT's legal fees under the lease.

Had power REIT prevailed on any of a number of counts, it could have been worth as much as $15 dollars a share to Power REIT shareholders. 

As it is, Power REIT still has the option to appeal, and there are a couple of claims against Power REIT which will need to be decided in a status conference scheduled by the court on April 29th, or at trial.  These remaining claims regard whether Power REIT acted improperly when it reorganized itself into a holding company which owns its predecessor entity, the Pittsburgh & West Virginia Railway.  According to David Lesser, Power REIT's CEO, NSC and WLE have said in court that it is impossible to show financial harm because of these claims, and so I expect them to be settled or dropped at the at the status conference, unless Power REIT decides to appeal.

Grounds For Appeal?

I found the ruling shocking in that I did not expect much at all to be decided in summary judgement.  While I thought many of Power REITs claims were weak, I thought others (such as default under the books and records clause of the lease, and the payment of legal fees) were quite strong.  Another investor who has read the judgement told me he was "Truly shocked how one sided this went through, not that it matters but makes me wonder if [the] judge [was] corrupted or biased somehow."

To me, the ruling seemed very biased as well, and I'm sure it seemed so to Lesser, judging from a short conversation with him.  He felt the judge had gone far beyond the bounds of summary judgment, and was even creating new rights under the lease where none had existed before.

I don't know if any of this constitutes grounds for appeal, but I am confident that if PW were to appeal, NSC and WLE would again fight the appeal vigorously, and the company could easily be left to pay even more legal bills than it has to now.  Whatever the grounds, I don't think such an appeal would be a cost-effective way to create value for shareholders.

Valuing the Remains

Due to a very timely note from another investor who had seen the ruling before I did, I was able to sell all of the client holdings of PW in accounts I manage, but I did not have time to sell my own before the stock fell below $8 and began to plummet. Shortly thereafter, trading was halted, and Power REIT made a press regarding the ruling.

When the market opens Thursday, the only remaining questions  are if Power REIT will appeal, and what the stock worth now.  Since I don't think an appeal would be in shareholders' interests, and Lesser is the largest shareholder, an appeal seems unlikely.  Hence, I will focus on the remaining value.  This ruling means that the company will be able to write off (for tax purposes) the $16.6 million value of a "Settlement Account" under the lease because the account is essentially un-collectible.  This write-off allows the next $16.6 million worth of dividends on Power REIT's common and Preferred stock to be taxed as return of capital rather than income. 

The common stock does not currently pay a dividend, while the preferred stock pays a 7.75% annual dividend based on its $25 par value, or $1.875 per preferred share annually.  Power REIT's most recent shareholder update puts Funds From Operations (FFO) available to pay dividends on both classes of stock at $1.260 million annually (slide 18).  $260 thousand of this is needed to pay annual dividends on $3.5 million of preferred stock, with the remaining $1 million available to pay the legal expenses which are the majority of the accounts payable at $1.260 million.  Approximately five quarters of free cash flow will be needed for accounts payable before the dividend on the common stock can be resumed. 

There are currently 1.7 million shares outstanding, which will probably grow as the company continues to pay stock based compensation.  Let us assume conservatively that Power REIT resumes its dividend in late 2016, at which time it has 1.8 million common shares outstanding.  Then FFO per share would be $0.56, easily sufficient to resume its former $0.40 annual dividend, while retaining significant capital to fund future growth.  This dividend would now be categorized as return of capital, so shareholders would not have to pay taxes on it until they sold the stock, when it would be taxed as capital gains (usually at a much more favorable rate than income.)  PW could choose to pay a higher dividend, but given its plans to rapidly expand its renewable energy holdings, I would expect it to retain some capital for growth.  At any reasonable dividend rate, the tax write-off is large enough to ensure all dividends count as return of capital for well over a decade.

A 5-6% dividend yield seems reasonable for a tiny, but growing, REIT like PW, depending on how much investors value the tax advantages of the dividend and the growth prospects.  A 6% yield would put PW $6.67 per share in late 2016, a 5% dividend would put the stock at $8 per share.  Discounting that by 20% to account for the one to two year wait for the dividend to resume, I see the company's shares to be worth between $5.30 and $6.70 per share.


There are a number of possible upsides to this estimate.  On page 19 of the same investor presentation, the company valued its assets based on discount rates currently being paid on the open market for similar assets.  The jewel in the crown is the railroad lease, which has similar cash flow characteristics as a perpetual bond from NSC.  Valued at the 4% discount rate NSC pays on long term debt, the lease is worth $13.21 per share.  At a more conservative 6% which I think PW might be able to get if it sold the lease to the highest bidder, it's still worth $8.80 per share.  Such a sale would do a lot to increase the current stock price by allowing Power REIT to repay its most expensive debt and/or pay legal bills and resume the dividend sooner.

The end of the litigation might also solve the problem of expensive debt by making banks more willing to provide financing with the perceived risks of the lawsuit are gone.  Refinancing existing debt at a lower rate could immediately free up cash flow to reduce accounts payable and resume the dividend sooner, possibly at a higher rate.

Without the distraction of  the lawsuit, Power REIT could continue the process of turning itself into a yieldco by buying land under solar and wind parks with mostly debt financing.  Given the large tax advantages of its REIT structure combined with the return of capital treatment of its distributions for years to come, it might be able to resume and begin to grow its dividend much more quickly than I outlined above.


At $6.33 a share, where PW closed on the day of the summary judgment, the company falls within the range of fair value based on when I would expect it to resume its dividend.  As the market adjusts to the new reality, look for buying opportunities below $5, or chances to sell if it quickly advances above $7 without news (such as a refinancing of debt) which has the potential to increase cash flow.

To me, the preferred stock, PW-PA seems like a much more attractive proposition.  Power REIT has plenty of cash flow to continue paying the preferred dividend, and now that dividend will be categorized as return of capital for the foreseeable future.  Even if the preferred dividend were to be suspended, it would have to be paid in arrears before the common dividend was resumed.

 Disclosure: Long PW, PW.PR.A.

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, 2015

The Cost Of 'Free Solar'

by Paula Mints

Economic theory holds that when a good is provided it must be paid for and that the value for that good will be set by a dance between the sellers and buyers in a market. It is assumed that when the price is too high buyers will back away and the price will adjust. When the price is too low sellers will fail to make sufficient margin to continue producing the good and the price will adjust. And finally, when the price is just right, equilibrium will be achieved and buyers and sellers will be content. This economic theory has chugged along since way back to, and even before, Adam Smith wrote The Wealth of Nations.

The economic theories found in The Wealth of Nations, specifically the invisible hand theory, have been used and misused for decades to prove countless points. This has essentially resulted in breathtaking economic roller coasters that all assume some version of the-market-knows-best and that rational behavior will arise from what is a market free-for-all.    

In the PV industry, equilibrium price is not the goal.  Instead, prices for cells and modules are never low enough and the need for sellers to make a profit sufficient to support their business is often ignored. The global PV industry has long been haunted by expectations of rapid and consistent price declines as well as the belief that progress in terms of efficiency increases and stringent quality control can co-exist with low to negative margins. 

Misunderstandings concerning the variable nature of inputs (raw materials and consumables) as well as the cost of labor are the basis of most learning curves.  The celebration of low prices for cells, modules and systems are the basis of most company failures. The hourly cost of labor decreases only when you use less of it, while wages should and do rise so that the people producing and eventually buying products are afforded the opportunity to engage in the buying/selling dance.

Historically PV industry pricing has not been cost-based. In fact, there have been long stretches of PV industry history during which manufacturers priced technology at or below the cost of production. The current situation of low ASPs for PV technology is an example of aggressive pricing strategy, also serving as an example of how destructive this strategy can be when practiced in an industry where demand is incentive-driven.

Figure 1 details PV module costs, prices, shipments and the ASP/cost delta from 1974 through 2014.

PV 1974-1984.png 84-94 PV 1994-2004.png PV 2004-2014.png

Figure 1: PV Costs, ASPs and Shipments, 1974-2014.

With the considerable amount of confusing pricing information currently being repeated in the market, it is important to remember that prices for re-sold manufacturer- and demand-side inventory should not be confused with the average price of technology to the first buyer, nor should they be taken to represent progress. 

The secondary market is the buying and selling of PV modules through distributors and retailers. The distributors and retailers may buy at the large quantity rate and resell this product on the secondary market to smaller participants.  Distributors and retailers also resell inventory.  This group takes a margin based on the current market situation.

Figure 2 offers PV cell/module revenues and ASPs from 2002 through 2014.

revs v ASPs  

Figure 2: PV Cell/Module APS and Revenues 2002-2014

The Invasion of Free Solar

Marketing slogans — catch phrases developed to sieze the buying public’s imagination — should not be mistaken for truth, wisdom or anything other than the means to sell a product or service. 

Currently popular among residential solar lease providers, the term “free solar” refers to the ability to have a PV system installed at a homeowner’s domicile without the homeowner paying for the installation.  This means that the installation charge is avoided up front and applied to the back end.  That is, the installation cost is recouped over time by the lease provider via the monthly rental of the installation and the annual escalation of the initial monthly lease payment.  Typically ~3 percent, the escalation charge means that eventually the lifetime cost of leasing the PV system will be greater than the cost of buying the installation at a reasonable (and static) interest rate. 

All buyers of all economic strata seek the best deal and the best deal is free. That "free" is an illusion is not the point.  A free good can come at the cost of quality meaning that a poorly functioning free good will likely cost more in repairs and eventual replacement than a good that is acquired at a price that approaches its true value. A price set at free obscures the cost of developing the good or service and creates the illusion that the research, development, manufacturing and selling of the good was, in the worst case, free itself. 

An offer of free solar commoditizes the residential installation, shores up the assumption that the cost of manufacturing a PV panel is approaching zero and undermines the true value of owning a residential PV system.

The true value of owning a residential PV system, aside from the benefits to the environment, is energy independence on a personal level.  Never mind (for a moment) the ongoing attacks directed at net metering from utilities, an appropriately sized PV system gives the electricity consumer control over how much electricity is bought from the utility at retail rates.  Pardon the pun, but there is a power switch from the utility as electricity landlord to the end user — and this is where it should be. Leasing a residential PV system does not imbue the lessee with the same power; simply put, it means that the electricity lessee potentially serves two masters, the utility and the solar lease company.  

The true value of independence is obscured and the value of the product (PV generated electricity) is undervalued.  This is not what Adam Smith meant by the invisible hand.  In the case of the solar lease, the invisible hand would seem to be implying that the value of the PV installation is zero. 

The marketing phrase "free solar" undermines the true value of personal energy independence, obscures the true costs and benefits of PV system ownership, shores up false expectations of ever cheaper PV modules and installations, and undercuts the need of an innovative industry to continue innovating by eviscerating the revenue stream that pays for research and development, not to mention, strategic planning, marketing and sales.

Paula Mints is founder of SPV Market Research, a classic solar market research practice focused on gathering data through primary research and providing analyses of the global solar industry.  You can find her on Twitter @PaulaMints1 and read her blog here.
This article was originally published on, and is republished with permission.

April 21, 2015

Chinese Solar Blows Hot and Cold

Doug Young

Bottom line: Solar products maker Tianwei is likely to get a government bailout before it defaults on an upcoming bond payment, while a massive 2 GW solar farm being built by a new private equity fund is likely to get completed.

Two solar news items are drawing attention to both the opportunities and challenges facing this increasingly schizophrenic sector in China. A new mega-project is spotlighting the huge opportunities for new construction in the space, with word that a recently launched private equity fund plans to build a massive solar farm with a whopping 2 gigawatts of capacity. But big challenges are also apparent in another story, which says mid-sized player Baoding Tianwei is on the cusp of defaulting on a bond interest payment as it faces a cash crunch due to falling prices.

These 2 phenomena aren’t completely separate or contradictory, and in some ways even have their roots in a common origin. That origin dates back a decade ago when China embarked on a campaign to build up its solar panel manufacturing sector, in a bid to move up the value chain from its traditional strength in lower-tech products like textiles. But it created a huge oversupply of production capacity as a result of that push, and is now trying to absorb some of the excess output through a campaign to build new solar farms at home.

The massive overbuilding of manufacturing capacity sent the sector into a downturn that has dragged on for much of the last 3 years, and is directly responsible for the crisis now facing Baoding Tianwei, a maker of traditional transformers that more recently moved into the solar business. According to the latest reports, Tianwei has announced that due to huge losses from its solar business, it may not be able to make an interest payment that comes due this Tuesday on corporate debt issued in 2011. (Chinese article)

The company reported a massive loss of 10.14 billion yuan ($1.6 billion) last year, which makes it understandable why it might have other priorities besides making this particular interest payment. Its total debt at the end of last year stood at 21 billion yuan, far higher than its total assets of 13 billion yuan.

Companies like Tianwei flocked to solar manufacturing after Beijing made development of the sector a priority, and are now paying the price in the form of massive debt from big investments they made at that time. Another solar company, Chaori Solar, looked set to become the first solar player that might default on debt last year, but was bailed out at the last minute by state-run entities, almost certainly acting under government orders. (previous post)

Media are speculating that the government may be tiring of bailing out a growing number of debt-burden companies, and that Tianwei could stand at the forefront of a new wave of defaults for China’s corporate debt market. It may be too early yet to forecast such a default wave, and I expect we’ll probably see another bail-out for Tianwei even if it initially misses the interest payment. But eventually the debt load will become too much for Beijing to bail out, and we may see many of these mid-tier companies default.

Meantime, another media report is saying that China Minsheng Investment Corp (CMIC), a recently formed private equity firm backed by the entrepreneurial Minsheng Bank (HKEx: 1988; Shanghai: 600016), is preparing to build a massive 2 gigawatt solar farm with an investment of 15 billion yuan. (Chinese article) To put that in perspective, China was on track to build about 10 gigawatts of capacity last year, and was aiming to have 35 gigawatts by the end of this year — a goal that looks nearly impossible to reach.

If the project is really built, it would be the world’s largest solar farm in a single location, according to the reports. The plant would be built in interior Ningxia province, in a massive area being developed specifically for solar farms. CMIC was officially launched last August with initial capital of 50 billion yuan, and said at the time that solar power was going to be one of its main focuses. (previous post)

I have quite a bit of respect for CMIC, as many of its executives are entrepreneurs with strong track records and good financial sense. What’s more, this project is being built in an area specifically being developed for solar farms, meaning logistical issues like grid connections shouldn’t present major problems. Accordingly, I do expect this project will probably get built, though it’s unlikely to provide enough support to save struggling companies like Tianwei.

Doug Young has lived and worked in China for 16 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.

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.

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