Archive for the ‘Analysis’ Category

Renewable resources have been promoted in California since the early 1980s.  After the passage of PURPA and the advent of Qualifying Facilities, an number of hydro, wind, geothermal, and biomass projects were constructed in California.  Today, most of these projects have reached or are nearing the end of their original contracts.  And in many cases the only contract option available to these projects is a “QF legacy contact”.  Pay close attention, the bulk of the price paid under these legacy contracts is determine either directly by gas prices via a heatrate, or indirectly via the western US power market with is dominated by combined cycle generation.   Draw your own conclusions from the graph below on whether California is encouraging legacy renewables:

 

TIPS yields plunged to new record lows today.  The 5 year closed at -1.14% real return and the 10 year closed at -0.24%.  Just think, with virtually no risk you can lose 0.24% real for a full ten years.

Today’s records were set due to a small uptick in inflation expectations, not decreases in Treasury yields.   In an effort to stimulate the economy US policy makers continue to operate fixed income markets at an historic low yield point.  If the theory is that low cost money will stimulate borrowing and hence economic expansion, the evidence of the last few years is, IMO, weak.  If the theory is that low yields will make equities look more attractive leading to higher equity markets this seems to have happened post 2008 crash.   Does this cause me to change my key FI/Equity allocation? No.

The clean energy sector continues to be treacherous for investors.  In my last update I had four coverage termination, one on the NASDAQ (Beacon) and 3 on OTC/venture exchanges.   As I have previously commented, the OTC/venture exchanges remain very risky.   There are more terminations to come in my next update as well as some new IPOs I’ll be following.

company_name post
Clean Energy Combustion Systems, Inc. Last traded 4/17/2011, web site gone.
IdaTech plc Company is no longer listed.
AE Biofuels, Inc. Trading stopped and turned into a shell.
Beacon Power Corp Filed Chapter 11 Bankruptcy on 10/20/2011

Shale gas is moderating gas prices in the US and is likely to have a profound effect on a number of industries.    In the clean energy arena, the top three energy sources being utilized by sustainable energy companies are solar, wind, and electricity.    Here are some thoughts on the competitive position of these areas. 

Wind and Solar

 The wind companies compete almost exclusively in the utility-scale, grid-connected market.  In the solar market, cells are used both inside the fence and increasingly for grid-connected utility-scale projects.   For inside the fence solar, cheap natural gas shouldn’t have a big competitive impact, at least for a while.  Most inside the meter projects get to offset tariffs without any standby charges.   Since tariff rates are built up from transmission charges, distribution charges, and generation costs it will be some time before cheap natural gas plants make a dent in tariffed rates.

It’s a different story for the grid-connected wind and solar projects.   While many states have renewable mandates, these mandates will have to stand up to the competitive pressures created by shale gas.  When you couple $4/mmBtu gas to a 61% efficient, super clean combined cycle (CC) plant, all in electricity costs are low.  In December 2010 EIA estimated that advanced CC plants had a levelized cost of 6.3 cents/kWh.   The energy component, which many night-time producing wind project compete with, is currently in the 2.2 cent/kWh range (yes, 61% is a 5593 Btu/kWh heat rate and gas is about $4/Btu).  EIA’s next set of estimates may be lower.

Electricity Using Technology

The are plenty of exciting things happening with the use of electricity.  LEDs, batteries, power electronics, energy management, and advances in HVAC are some of the bigger areas.   I don’t see any significant effect on these activities due to shale gas, unless tariff rates change substantially, which I don’t expect.

Oil Displacement

President after president has targeted our “oil addiction” with efforts to improve our energy independence.   To limited effect.   Currently 78% of oil is used in transportation and this 78% represents 39% of all energy use in the country.  Over half of this oil is imported creating economic and geopolitical problems.   Unfortunately, substituting other energy sources for oil in transportation has been largely ineffective.   In 2009 electricity provided 0.1%  of transportation energy, biomass 3.4%, and natural gas 2.6%  (Lawrence Livermore National Lab, 2010, LLNL-MI-410527).

But shale gas may have decoupled natural gas and oil prices and increased the competitive advantage of natural gas.    As shown below, from the mid 1990’s until 2008, crude oil, on an energy basis, has been 1 – 2 times the price of natural gas.   But since 2008, when shale gas started having an increasing impact on markets, gas prices have stayed relatively stable while oil prices have risen.  The result is crude is now over 3 times the cost of gas.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

So the obvious question is will natural gas’s share of the transportation market increase now that it has a significantly improved economic position?   If so it should be visible in sales of natural gas fuel and equipment for transportation.   Clean Energy Fuels Corp [CLNE] claims to be the largest provider of vehicular natural gas (CNG and LNG) in North America.  If any company should see an uptick from having its underlying competitive advantage increase, CLNE is a good candidate.   In their latest 10-Q, CLNE reports products and service revenue for the 6 months ending June 30 at $134 million, a 61% increase over the six months ending June 30, 2010.   This is an impressive increase consistent with underlying  fuel price movements.

Unfortunately, shareholders are not seeing a similar increase.   Over the same two periods the company’s Net Income (loss) went from $ (14 million) to $(15 million) in the 6 months ending June 30, 2011.   In the graph below while the competitive advantage of gas has increased significantly since 2007, the share price of CLNE has not tracked this dramatic market dynamic.   That said, I think this is an interesting area where a material shift has taken place in economics and I expect to see increasing market activity as a result.

Share price vs energy ratio changes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

disclosures: none

 

The 5 year TIPS hit  a record low of -.54% on July 12 and 13 (http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield).

For individuals investing in fixed income in taxable accounts here is what I’m looking at when I face a decision to purchase a high quality bond  right now.  Let’s assume inflation is estimated by the breakeven inflation rate  which in the last few days has been running right around 2.0%.

If I  invest in a 5yr TIPs, and I’m paying AMT my after tax return  will be roughly (2% – 0.54%) * (1-.28) =1.05% or a -0.95% after tax return  real return. Note that I  neglect state income tax which is not levied on Federal bonds.

Another high quality alternative is a triple tax exempt  AAA rated muni bond.  These are available at roughly 1.3% yield to maturity  resulting in a -0.7% after tax return real return.  Better, but still dismal for  fixed income investors.

While I’m watching these yield curves hit bottom  I wasn’t surprised to see the Treasury is auctioning new TIPS this week.  My  only surprise was they are offering 10 year TIPSs that have a positive real  return.  As a tax payer I was hoping they would sell 5 yr TIPS at the absolute  best historic price ever.

Is the 25 basis point advantage of the muni enough to overcome the risk that inflation is greater than 2.0%  ?  To help answer this I computed that if inflation was 2.35% over the five year period the return on the muni and the TIPS would be equivalent.   Would I pay 25 bp to insure against inflation exceeding 2.35% …. probably a bargin.

While the first TIPs were issued by the Treasury in 1997 it wasn’t until 2003 that the Treasury Department started making available daily composite yields for TIPS.   Yesterday had the distinction of having the lowest yield in the 8 year history of the 5 year  TIPs at -.490853%.   With the 5 year Treasury at 1.55% the Breakeven Inflation (BEI) is 2.04% over the next 5 years, not a particularly high expectation after the past few months of media coverage of commodity price increases.

For US individual taxable investors fleeing to the safety of Treasuries and paying 28% AMT tax, they can expect to lose .9% per year against inflation as the price of safety.   This distorted fixed income market is tough to navigate and looks to continue for a while.   I wouldn’t be surprised to see more new TIPS issuances with the Treasury seeking to take advantage of the opportunity to pay back debt with cheaper dollars.

For those who are interested  here is a list of all mainland Chinese headquartered companies listed on US exchanges that are tracked in NEV’s database of sustainable companies:

Company ticker exchange IPO yr
China Ming Yang Wind Power Group Ltd. MY NYSE 2010
China Intelligent Lighting and Electronics, Inc. CIL AMEX 2010
Daqo New Eneryg DQ NYSE 2010
JinkoSolar Holding Company, Ltd. JKS NYSE 2010
China Hydroelectric Corporation CHC NYSE 2010
China Wind Systems, Inc. CWS NGM 2007
Gushan Environmental Energy Limited GU NYSE 2007
Yingli Green Energy YGE NYSE 2007
LDK Solar Co. LTD LDK NYSE 2007
China Sunergy Co. CSUN NasdaqNM 2007
China Clean Energy Inc. CCGY.OB OTC BB 2007
JA Solar Holdings Co., Ltd. JASO NasdaqNM 2007
Hanwha SolarOne Co., Ltd. HSOL NasdaqNM 2006
Trina Solar Limited TSL NYSE 2006
Canadian Solar Inc. CSIQ NasdaqNM 2006
Suntech Power Holdings Co. STP NYSE 2005
China BAK Battery Inc. CBAK NGM 2005
Advanced Battery Technologies, Inc. ABAT NCM 2004
Of the 340 sustainable energy companies I track,  64% of the market value is in the solar PV producers and the wind technologists and wind farm operators.  Everything else, from ethanol producers, LED technologist, to advanced battery makers accounts for 36% of the market.   Wind and solar compete in the electric generation market which is dominated by coal, nuclear and natural gas power stations.   Crude oil prices only indirectly affect the markets for wind and solar by dragging along natural gas prices and influencing policy makers to provide subsidies to wind, solar, and everything else “clean energy” when oil prices go up.   And these subsidies eventually set the stage for the entry of more public companies.

So what is happening recently?  Oil prices are on their way to setting an all-time record high on an annual basis.   A few years back this translated into IPOs but examining the chart below that’s not happening, at least so far, with this year’s run up in oil prices.
Solar and Wind IPOs by year

Solar and Wind IPOs by year

Collectively the lingering hang-over from the Panic of 2008, a maturing of the industry, and a decrease in subsidies in some markets has clearly reduced the opportunities for companies to enter the public markets.    That said, the existing companies seem to have gotten stronger compared to a few years back and if they are able to maintain the favorable governmental treatment they should continue to increase their market share.

A few things have changed in the EV market, some good, some bad.   Here is the good news first.

In western US night time wholesale electricity rates continue to be very depressed.  This is a result of a combination of low cost natural gas (thanks to shale gas) and an extremely efficient generating fleet comprised of modern combined cycle plants which set electric prices almost all the time in the west.  The latest forecast for off peak prices in northern California (courtesy of www.weccterm.com)  is:

Quarterly forecast prepared5/3/2011, Off-peak prices
period        NP15 (Northern California)
2011-2      2.3 cents/kWh
2011-3      3.9 cents/kWh
2011-4      3.8 cents/kWh
2012-1      4.1 cents/kWh

With this low cost backdrop, the Sacramento Municipal Utility District (SMUD) has adopted a special PV rate schedule that has nighttime charging rates of 8.4 cents/kWh in the summer and 7.54 cents/kWh in the winter.  While I would like to see SMUD flow through the wholesale rates, their PV rate is below the national average electric rate and is supportive of PV economics.   Since each of these rates is available 6 months of the year I’ve used the average, 8.0 cents/kWh.

PV are also looking better due to higher gasoline prices..   As of now, the absolute cheapest regular gasoline available in the Sacramento area is $4.05 / gallon and the average is around $4.15 / gallon.    In my last analysis I was using $3.50 / gallon …. given the current situation of a declining US dollar and strong demand in emerging economies I think $4.15 / gallon is a reasonable benchmark for comparison.

Finally, as I reported earlier we are now seeing some larger players enter the charger market with GE claiming they will be able to offer a charger for around $1,000.   So I think a little decline in charger costs, to $1,750 is warranted.

Combining these changes I updated the comparison of the Toyota Camry and the Nissan Leaf.  For a 12,000 mile per year driver, the Leaf owner can recoup their higher initial cost in 4.1 years and if the owner drives the car 96,000 miles over 8 years the return on the initial higher cost is a solid 18%.

I like these numbers and the hedge the EV provides against gasoline prices.  Electric prices in the US have nothing to due with the price of crude oil…..hence the hedge.

Here is where the bad news comes in.  I talked to my local Nissan [NSANY.PK]  dealer and found the they were still working on delivering the intial 20,000 Leafs allocated to the US.  Apparently the best I can do is to register on the Nissan site to get notified when I can reserve a 2012 model and get delivery sometime in 2012.   So there may be a horse race betweenwhen the Ford Focus EV [FORD] and the Toyota RAV EV [TM] are released and when Nissan is able to actually deliver.  Nissan’s slow delivery make me wonder if there is a technology problem with the system or the batteries?

 

In my previous post I wrote that we will use EVs like we use cell phones.   After driving our cool EV in the day, we’ll plug it in at night and charge it up for the next day.   Put yourself in the EV seat and this seems a workable scenario.    I really don’t see how I would use public charging very much or, frankly, ever change out a battery.

Apparently other players are coming to the same conclusion.   On Feb 24, the WSJ reported that GE, Siemens, and Eaton all believe that EV owners will soon be buying chargers for their homes.    GE says it is planning to sell it’s home charger for about $1,000 which will help EV economics.  I my previous analyses I’ve assumed an installed cost of  $2,000 and I may now be able to lower this a bit.  With low cost nighttime electricity and higher gasoline costs EVs are looking a little better.

What isn’t looking better is public EV charging stations.  Apparently NRG Energy Inc. is planning to spend $10 million to install 100 chargers in Houston by 2011.  Let see, that’s $100,000 per charging station?   If they announce any more of these programs sell NRG Energy  [NRG].