NEVs blog

On Thursday I attended the User Group meeting of Plexos Solutions LLC, a boutique firm providing software and consulting to the rapidly changing California electric market.   One of the presentations covered issues surrounding integration of renewable energy resources into the California Independent System Operator (CAISO).  This is important to sustainable energy investors because virtually all the growth in generating capacity is forecast to come from renewable resources. While the fundamentals of this market have been overwhelmed by broader market conditions this last month, over time the fundamentals provide the tailwind that will lift stocks.  And the growth expectations for renewables are very high in the California market.

Over the period 2007 – 2012 the CAISO is planning for increases over existing capacity of:

• 5,053 MW of wind, a 187% increase,
• 1,064 MW of geothermal, a 68% increase,
• 946 MW of concentrating solar, a 203% increase,
• 508 MW of utility scale PV solar, a 2,032% increase, and
• 221 MW of biomass, a 28% increase

These are huge numbers representing billions of dollars of projects and electric revenues.  Striking are the growth expectations for the two main solar approaches. 

In the concentrating solar sector, the state currently has 354 MW of large projects operating with the last one completed in 1990, 18 years ago. Most of this capacity is owned by FPL Energy, part of a large regulated utility.  So the new capacity has to come from a sector that hasn’t, in California at least, been able to construct a project for many years.  Equally noticeable it the paucity of publicly traded companies in the concentrating solar sector.   Solar Millennium (S2M.DE) is one the few with significant concentrating solar activity.

The state currently has 8 projects with 3,689 MW of large concentrating solar projects in the permitting pipeline.  But these numbers are deceptive.  Of the 8, two projects are actually “solar/thermal” hybrids like the existing operating projects.  These two projects represent 1,180 MW of capacity with 112 MW attributable to solar.  The remaining 6 projects are a gamut of technologies ranging from troughs, reflectors, towers, and Sterling engines. These projects are all owned by private companies or municipal utilities and currently don’t present an opportunity for public market investors. 

The PV solar sector provides more avenues for public investors to participate via investment in the PV supply chain.  If the numbers work out the utility market represents a multi-year, very large opportunity.   Let’s take a look.

As of the end of 2007 California had an estimated 279 MW of installed PV in homes and businesses and 25 MW of utility scale projects.  This makes sense since the home and business markets are net metering against retail rates whereas utility scale projects have to compete against wholesale markets.  So the premise is that PV solar is now becoming sufficiently competitive at the wholesale level to install over 500 MW in the next 5 years. 

One of the first test cases was recently announced.  On July 10, 2008 the California Public Utilities Commission approved a 7.5 MW contract between First Solar’s (FSLR) FSE Blythe project and Southern California Edision.  Unfortunately much of the economic information was not disclosed but some key data can be gleaned from the record.  First, the company is projecting an excellent 27% capacity factor for the project, significantly higher than typical estimates for PV projects.  But equally important is the company is pursing the development receiving a price at or below the “market reference price” which is based on a highly efficient modern thermal plant.  After accounting for some messy seasonal and time-of-use factors I calculate the project will receive approximately USD 0.14/kWh on average plus a 30% tax credit now that the Emergency Economic Stabilization Act of 2008 passed.  If FirstSolar can make money at this project then they are very near the holy grail of grid parity (at least until the credit expires December 31, 2016).  And the utility systems can, according to the CAISO, absorb large amounts of solar power for years to come.  Game on.

I don’t know whether we are close to the bottom but October has reduced the market value of the sustainable energy sector by about one-third.  

This is somewhat worse than broader markets and sustainable energy has lost ground against the value of Exxon Mobil (XOM).  To gage the scale of the sustainable energy business I frequently stack up the value of the companies in Camino’s database against Exxon Mobil.  As recently as September 24th at the Clean Energy Showcase in Sacramento I was able to report the 363 sustainable energy companies I track represented 67% of the value of Exxon Mobil.  Today it’s down to 50%.  

For investors in this sector who have suffered significant losses this year, the real question is is there hope for better-than-market returns in the coming months and years?  Or should you go back to cash or  to indexing exclusively?   I think the answer is maybe. 

In Solar there are competing forces which can send the industry on two different tragectories.   US presidential candidates are saying they prioritize alternative energy very highly.  But they, and politicians around the world, are going to face serious financial pressures driven by market forces.  Will they maintain subsidy policies for solar in the face of large budget deficits and potentially continued sub $100 oil?   Without the subsidies investors may be faced with a sector growing much slower then in the last few years. 

Renewable Electricity doesn’t rely to as great an extent on subsidies.  But it does rely heavily on continued access to monopoly electric markets, access driven by global warming and security concerns.   I think the good news for investors is governments can continue strong support for Renewable Electricity without having to deal with significant budget problems.  

LED and Lighting is today driven almost entirely by market forces.   While the sector needs continued cost reductions to increase its market share, silicon technology has proven it can follow a cost reduction path as volumes increase.   With technological advances I think there is the possibility of better than market returns here, particularly with the huge declines the sector has already recorded this year.  Since we formed the LED and Lighting index on 4/1 it’s down 59.8%. 

Biofuels will continue to present challenges to investors.  The promise, of course, is Biofuels is one of the strategies available to reduce oil consumption.  But the sector is resource contrained,  needs significant technology advances, has its margins pressured by declines in oil prices, and has had a number of problems with hedging strategies (VSE and BIOF). 

Fuel Cells are still searching for the niches where they can economically complete and start to produce profits.  Investing in public companies that are still in the development stage presents a high level of challenge. 

Two previous oil price shocks spawned alternative energy companies.  Subsequent declines in oil prices pruned the field but did leave behind a viable independent electric producing sector.   This sector has continued to grow, is now armed with dramaticly better wind technology, and doesn’t need to impact national budget deficits.    I expect Renewable Electricity companies to survive this correction and continue to expand their share of the electric generation market.  This should, over time, produce better than market returns.    

Mark doe not have a position in any companies mentioned in this article.

Once high flying BluePoint Energy (CPEU.OB) has run into funding problems.   In the month prior to their CEO’s departure on August 26th the company lost 2/3 of its value.  Since then the company has lost an addition 2/3 of its value and had difficulty completing a stock sale on Sept 24.  Undoubtly the purchasers were unhappy having to purchase shares at USD 0.36 per share when the closing price on the 22nd was USD 0.09 per share.

BluePoint’s original stategy was to install ultra clean internal combustion engines as BluePoint owned CHP units in customer premises.  This isn’t a new strategy and many others have had difficulty economically operating this technology on a small scale in continuous operation.   Apparently BluePoint recognized this and switched strategy about a year ago to become a “demand response” aggregator.  

While we do have some examples of companies expanding in this area, success for investors is still elusive.  Comverge (COMV) recently announced a significant increase in its MW under contract.  Unforturnately for investors the company is expect to continue losing money and its stock has lost  85% of its value this year.   EnerNoc (ENOC) is a similar story.  The company’s solution worked in a recent call in Ontario but its investors have lost 78% of their value this year and are looking forward to continued losses.   Even managing 2,200 MW in the Comverge’s case doesn’t seem sufficient to drive profitablity. 

Given these more established competitors are still losing money, BluePoint’s strategy switch, and limited capital, may be insufficient for its investors.

Not all the declines in sustainable stocks are macro-driven.  For the second time in the last month hedging strategies resulted in stunning losses for biofuels companies.  Predictably the loss triggers a precipitous decline in the company’s stock price.   On August 18th we reported on BioFuel Energy’s (BIOF) problems with hedging  caused a 64% decline in the company’s price.

This time, Verasun (VSE) struck.  In an SEC filing related to a stock issuance, the company described its difficulty purchasing corn in a volatile market and the resulting quarterly loss of USD 63 – 103 million.  In the face of this week’s market turmoil, Verasun lost 73% of its value or roughly one-half billion USD of shareholder value.

It’s time biofuels companies become proficient in managing the very basic price risk in their business.   At this point it won’t be a shock to see another huge loss.  Management needs to build investor confidence by demonstrating through convincing communications and risk management policies that they are competent in this important area.   Other industries have had problems with risk management and in some cases, such as the electric sector, have improved their performance.

Author: Gary Simon

It appears the world has its first profitable fuel cell company. Smart Fuel Cell in Germany (F3C.DE) basically reached breakeven in Q2 08 and as revenues grow should show positive earnings in Q3 and Q4. Smart makes a direct methanol fuel cell, using a similar PEM membrane as the hydrogen-only fuel cells. Smart has reported its fuel cells are only 11% efficient, but are improving. How much they are improving has not been mentioned. Smart shows a trailing 12 month revenue of $23 million—not bad at all. Their results seem to show that indeed customers like a fuel cell with an easy-to-carry, compact and relatively easy-to-find liquid fuel, even if the efficiency is low. This stands in contrast to the hydrogen-fueled PEMs where finding the fuel is still a chore. Once a company in a new technology area begins generating positive cash flow, it has a war chest to erect barriers preventing others from entering its market. It will be interesting to see how Smart does on this score.

There are several direct methanol fuel cell companies with more efficient, maybe even better, technology. The question will be whether that matters in the face of a blocking move from a profitable competitor. Oorja Protonics (private) unveiled its direct methanol kw-class power pack for forklifts in the past quarter, and Mechanical Technology (MKTY) continues progress on its small methanol unit for portable devices. CMR Fuel Cells (CMF.L) in the UK similarly is continuing work on its 25 watt methanol unit.

A good example of a profitable business will likely lift the fortunes of other fuel cell companies and that could improve valuations. However, nothing will improve valuations like a good exit—early investors getting extravagantly rewarded through a popular public share or acquisition. The bubble in 2000 made some fuel cell company investors immediately wealthy, but that opportunity came crashing down when reality came no where near the hype. If there is to be another surge, it will have to be based on real results—from at least some companies. Hydrogenics (HYGS) and private company Altergy may be coming close to profitability soon. Altergy (hydrogen PEM fuel cells for telecom backup) is rumored to be preparing for an IPO next year. Maybe they will provide that big exit that will attract attention.

Unfortunately, another dramatic milestone was reached in Q2 08: The cumulative (multi-year) losses from the public fuel cell companies exceeded $4 billion. All the usual suspects continue to bleed cash—Fuel Cell Energy (FCEL), Ballard Power (BLDP) and Plug Power (PLUG). Those losses continue to put a damper on investor interest in the sector. FCEL’s results for Q2 08 were worse than expected, with a loss of $26 million and more importantly a ratio of cost to sale price of 1.68, actually up from 1.61 in Q1. Recall that a big question looming for FCEL is whether its success in sales (revenues doubled over last year) will bring them closer to or farther from breakeven. This quarter’s results showed worse than expected margins on increased sales.

It is still very likely there will be a significant shake-out in the next year. There are seven public and private companies currently officially in collapse—some through Chapter 11, some through liquidation, some through sale. Perhaps the most surprising to some was the announcement by Siemens-Westinghouse that its solid oxide fuel cell business was for sale. S-W probably spent hundreds of millions to develop this technology and probably the US Department of Energy tossed in hundreds more. This follows the move in the Spring of 2007 by General Electric to shutter its major solid oxide fuel cell shop in Torrance, California. While GE continues some technology research at its corporate R&D center in New York, it backed away from creating a commercial product. Maybe all this says is that the big-company approach to fuel cells isn’t working so well. Start-ups like Smart Fuel Cells show there is another way, especially by starting small with its 50 to 250 watt size systems.

United Technologies through its UTC Power unit is still one big company pursuing large fuel cells. It recently announced an award to supply 12 fuel cells of 400 kW each for the World Trade Center in Manhattan. This is the new unit slated to replace the 200 kW PC 25. UTC has sold over 270 of the PC 25 units to date, probably the most kWs of fuel cells sold in the world. However, UTC has not reported that the fuel cell division is profitable. The conventional wisdom is that the new 400 kW unit is UTC’s move to try to bring the division to profitability. That creates an interesting contrast to the “small is better” approach.

Gary Simon is a venture partner with Velocity Venture Capital in Folsom, CA. He is the CEO of Acumentrics and a board member of Jadoo Power. Both companies are deeply involved in commercializing fuel cells. Gary is also an advisor to Camino Energy.

By Gary Simon

Three months ago, I offered some thoughts on this industry as an insider.  Let’s look at how those observations held up.

1.  The fuel cell sector has been underperforming on investors expectations for some time.  This trend continues.  A new threshold was passed as Ballard Power became the first fuel cell company to report an aggregate total loss since inception of over $1 billion.  The top four in sales (FCEL, BLDP, HYGS and PLUG) are also the top four in annual losses.  These three account for the majority of all fuel cell revenue, a total of $191 million in the last twelve months a figure which is still growing.  The total fuel cell sales per year are up to about $300 million including private and public companies, a new record. Yet, there is still no profitable public fuel cell company.  These four leaders spent about $448 million to sell that $191 million.

2.  There may be a substantial market for PEM fuel cells in portable power applications.  MCEL and MKTY are bellwethers in this space.  The past quarter was not kind to these two and most others like them.  MCEL terminated all officers and employees on May 12, indicating it had run out of cash.  NASDAQ suspended trading in its stock May 27, seeking more information on the company’s plans.  MCEL has not filed for bankruptcy yet, but may. 

MKTY did an 8-for-1 consolidation of its shares (a reverse split) to boost its price back above the $1 minimum price required for a NASDAQ listing, but has less than one year’s cash on hand at the current burn rate.  Their auditors gave them a negative opinion on whether the business could remain a going concern.  They clearly need to do something to raise cash or cut back their cash use. 

A similar portable power company in the UK, Voller Energy on the London market (VLR.L), is also in the throes of a possible sale or liquidation with a share price below 6 pence.

Medis Technologies (MDTL) has yet to show any significant sales of its 2 watt power pack for one-time cellphone and laptop recharging.  It has a mass production line ready to meet a huge demand, but so far meaningful demand has not materialized.  The unit faces serious competition from a simple and cheap emergency recharger that uses AA batteries.  The company showed losses of $48 million in the last twelve months, and $19 million cash on hand.  Its share price recently hit a new 52-week low.

On a more positive note, portable fuel cell maker Protonex (PTX.L) has a nice pile of cash (about $30 million) that it is using slowly. 

So the score at this point is four in trouble, one doing reasonably well in the portable space.

3.  The main competitor to the PEM is the solid oxide or ceramic fuel cell.  Several companies have made advances faster than expected. Ceres Power (CWR.L) and Ceramic Fuel Cells Ltd. (CFU.L) are the bellwethers so far in this race. Both have seen a significant drop in their share prices.  CFU.L dropped 26% from 27 pence on the London market to 20 pence.  CWR.L dropped 32% from 220 pence to 150 pence.  Both bounced back a bit.  However, most of the solid oxide fuel cell companies are still private and their performance is yet to be seen.

4.  FCEL stands out with its large fuel cells and needs volume to get to breakeven, with 2008-2010  a very telling period.  FCEL is the leader in backlog for fuel cells, with now $134.7 million on the books.  However, its selling price per unit is still 40% below its costs, so volume only deepens its losses.  The hope is that with volume costs will decline.  The company has about 4 quarters of cash on hand, and it is likely it will need to raise more in order to make it to profitability.  That creates a race to get more cash before it is all gone. It has already lost $482 million getting this far. 

5.  There is at least an equal number of small private fuel cell companies [to the 23 public companies] churning away, hoping one day to make it to the public market [and become the market leaders].  Still true and the ray of hope in this industry.  Expect to see at least two IPOs of fuel cell companies in 2009.

Gary Simon is a venture partner with Velocity Venture Capital in Folsom, CA (www.velocityvc.com) .  He  is the CEO of Acumentrics and a board member of Jadoo Power.  Both companies are deeply involved in commercializing fuel cells.  Gary is also an advisor to Camino Energy.

One of the basic premises of Camino is to improve investment decisions by identifying sustainable energy strategies, tracking their performance, and sifting out the winners. Last year I identified Solar and the huge Renewable Electricity strategy.  In Feb 08 I upgraded my view of the fuels market to encompass all Biofuels.  The indices for these strategies include 72 PurePlay companies with market cap of USD 215 billion representing 65% of Camino’s entire database.

Two key insights…..

Since the beginning of the year I have been working to identify other strategies that are developing.  Two key themes keep recurring.  First, the sustainable energy business is primarily about the renewable generation of electricity – inside the meter in the case of Solar, and outside the meter for Renewable Electricity.  Second, improved utilization of electricity is a major, but fragmented trend that has now given rise to our newest strategy, LED and Lighting.

Get used to lumens 
 
In the “old” days I used to measure light in watts, after all, almost all residential lighting was incandescent and of equal, if dismal (about 2%), efficiency.  Now we measure lighting efficiency as lumens/watt.  Flourescent tubes have long been used because of their efficiency (7 – 15%)  but the incandescent bulb hung on in many applications.  Compact florescence lights (CFLs) have such a big increase in efficiency, from about 16 lumens/watt for incandecents to between 45 and 70 lumens/watt, that they have really started to penetrate the market.  This happened despite their initially crummy color spectrum and form factor.  While CFL makers have been improving both of these items they are still fragile and they still have mercury in them.

Enter LEDs…

You can now get a standard LED with a reasonable 54 lumens/watt from Cree and there are research products in the 115 – 150 lumen/watt range.  LEDs have a number of other advantages over CFLs including ruggedness, spectrum, dimming, and longevity.  Unfortunately they cost a LOT more.  Even so, LEDs are becoming a significant factor in streetlights, flashlights, autos, and architectural lighting. Given some time I expect the research efficiencies to reach the market and costs to drop thereby opening up a bigger markets for LEDs. 
 
In fact LEDs and other efficient lighting have succeeded enough to where we now have 9 companies that pass all our index screens with a market cap of USD 10 billion.  This is bigger than Camino’s Biofuel index and the largest of the electricity utilization activities. I now feel the strategy is of sufficient importance to cover.  Hence the LED & Lighting index which Camino has computed since March 31. 

Changes to the site..
 
The Camino company research database and return computations continue to be available to users for free.  It’s a great way to browse the business using some key company attributes. 
 
The research tools and index tracking on Camino have allowed me to take profitable positions in 16 Renewable Electricity companies since October 2007.  The tools also allow me to write my “Week in Sustainable Energy” review.  Because of the growing investment in these tools, and my desire to increase this investment, Camino now makes its core index tracking and risk analytics available for a small fee.  Check out a sample of our new index report for the LED index, or test the site with a free trial.

By Gary Simon

The fuel cell sector has been underperforming on investors expectations for some time.  The basic picture is this:  In the last ten years, 32 public fuel companies in North America and Europe have raised $4.2 billion in equity, lost all but $840 million of it, sold about $1 billion worth of fuel cells, and spent about $3 billion received in government grants and contracts. So far not a single fuel cell company has shown profits.

Given this history, the question is whether there is anything which will brighten this picture.  It may be good news/bad news story.  The initial wave of fuel cell investment went into a technology called proton exchange membrane or PEM fuel cells.  That technology is not looking so good today.  While it is lightweight, inexpensive to build, and compact, it requires pure hydrogen to work.  The hydrogen economy is simply not showing any signs of life.  This is a serious setback for the PEM companies, since no one is making hydrogen easily available or inexpensive enough for the PEM fuel cells to have much of a market.  That’s the bad news.  Will that change?  The big signposts to watch are the fortunes of Ballard (BLDP) and Plug Power (PLUG) as the leaders of this pack.  In fact their stock prices have plunged over 90% from their peaks, so  “leader” is a term used advisedly.  But together they have about $66 million in annual revenue.  There also may be a substantial market for PEM fuel cells in portable power applications.  MCEL and MKTY are bellwethers in this space.

The main competitor to the PEM is the solid oxide fuel cell or sometimes called a ceramic fuel cell.  It does not need hydrogen, but can run directly on a variety of conventional light fuels such as natural gas and propane.  While it had been dismissed as a technology for the far future, several companies have made advances faster than expected.  That’s the good news.  Ceres Power (CWR.L) and Ceramic Fuel Cells Ltd. (CFU.L) are the bellwethers so far in this race.

Standing alone with an entirely different approach to all others is Fuel Cell Energy (FCEL) with its molten carbonate system.  It so far has been the leader in annual losses, with $70 million lost in the last 12 months.  It needs volume to get to breakeven, and 2008 through 2010 will be very telling years for progress on profitability as FCEL has gotten more orders than ever before.

But as much as one can find about the 32 public fuel cell companies, it only begins to paint the complete picture of what is happening in this industry.  There is at least an equal number of small private fuel cell companies churning away, hoping one day to make it to the public market.  It would not come as a complete shock if one of these upstarts overtakes the current leaders and sets the new standard for market performance.  Several of these went the IPO route in the last two years (Protonex PTX.L, Smart Fuel Cells F3C.F, Neah Power NPWS.OB, IdaTech IDA.L).  None have yet shown any breakout performance, so the question is whether they hurt or help those remaining private companies with public market ambitions.

The fuel cell industry is not for the faint of heart, and there is no way to say that a general turnaround is in sight.  More than likely, the good news will be coming from some small innovative companies that have not yet gotten much recognition.

Gary Simon is a venture partner with Velocity Venture Capital in Folsom, CA (http://www.velocityvc.com) .  He is the CEO of Acumentrics and a board member of Jadoo Power.  Both companies are deeply involved in commercializing fuel cells.  Gary is also an advisor to Camino Energy.

by Mark Henwood 

Since its peak on December 27, 2007 the solar index has dropped a massive 37% . 

To shed some light on whether this correction is sufficient to wring any excess out of valuations I took a look at the PEG ratio for the index.  Assuming margins remain fairly constant for the companies in 2008, I used sales growth forecasts as a proxy for EPS growth.  On December 12 the PEG Ratio using current earnings and sales growth was 1.35.  After the correction in the index and assuming sales forecasts haven’t changed much, the current PEG Ratio is .93.  Granted the ratio is just a rule of thumb for valuation, and that values of around one for growth companies are generally considered “fair value”,  it looks like the correction in solar is at or nearing the bottom.

Our fuel cell index kept pace with the broad S&P 500 index this year.   With no significant new entrants the same seven companies passed all our screens and remain in index and the index was rebalanced January 1, 2008.   We exclude Hoku Scientific due to their rapidly declining fuel cell business (six months revenue ending 9/30/07 was off 57% according to their Nov 07 10-Q), their hydrogen based technology, and their continued push into the polysilicon supply business.  

Companies using hydrogen as a fuel source continue their decline in market cap share.  We discussed this trend with Haitham Haddadin of Reuters on August 31, 2007 and Bob Keefe of Cox News on September 9, 2007 and we see no abatement as shown below: 

Source:  Camino Energy

What is the future of the fuel cell segement?  With Ballard’s exit from the auto market  it doesn’t appear to be the major transportation market.  In our view the longer term promise lies with companies using readily available fuels, such as natural gas, but the promise requires significant cost reductions and improvements in reliability.  If these happen, fuel cell’s inherent efficiencies, quiet operation, low emissions, and potential for heat recapture will help the technology find broader markets.