NEVs blog

Since the last update to our main database on December 12, 2010 we’ve seen two companies, Pure Biofuels [PBOF.PK] and Clean Power Technology [CPWE.PK],  listed in the US move from the OTC BB to the Pink Sheets.  This is rarely a good sign, particularly after a year in which clean energy companies generally lagged the broader markets.

EVs are getting interesting.  With the Nissan Leaf this year, Ford planning to release its Focus EV in 2011, and the Honda Fit EV scheduled for 2012, the 100 mile range EV class will provide consumers with several choices within a couple of years.

So it’s time to take a look at whether EVs are a good deal for consumers.   It took a bit work to analyze but the results were worth it.  The initial step is to review the key drivers affecting consumer economics.

First is upfront cost for the EV, the charging station, and the incentives being offered.  The EV costs more, even after vehicle and charging station incentives.  I estimate the additional cost at $7,334 for a Nissan Leaf versus a basic Toyota Camry.

Second is annual cost.  A Camry gets 24.5 EPA miles per gallon.  A Nissan Leaf, by my estimate, will get about 3 miles per kWh.  So what matters is how much a driver drives and the cost of electricity.  The average driver drives 15,000 miles per year, or 41 miles per day, which should be reasonably feasible in an EV.

Electric costs are a big factor.  Retail rates nationwide are something like 11 cents/kWh.  In high cost states like California, without time-of-use metering, costs are 15 cents/kWh and higher.  I’m a SMUD customer with an old meter.  I’m into Tier 2 consumption and if I charged up tonight it would cost me 17.55 cent per kWh.   But wholesale, nighttime rates are dramatically lower.   One wholesale electric price forecasting company that serves electric traders shared their outlook for the next 12 months with me:

Quarterly forecast prepared 12/3/2010, Off-peak prices

period        NP15 (Northern California)
2010-4      3.3 cents/kWh
2011-1      2.7 cents/kWh
2011-2      2.2 cents/kWh
2011-3      3.3 cents/kWh

These prices may seem amazingly low but they are, in fact, realistic.  Thanks to the shale boom natural gas is being delivered to  power plants for $4.40 per mmBtu.  And the power plants setting prices throughout the western US are modern combined cycle units with heatrates around 7,200 Btu/kWh. (4.40 * 7200 / 1000 = 3.2 cent/kWh).  In Northern California alone on Dec 3 there are over 4,000 unload MW of these plants.  That’s enough to charge 1.3 million EVs consuming 3 kW each.

Tying the analysis together I computed the IRR of owning an EV under three scenarios.

• In scenario 1 my utility is serious about promoting EVs and they flow cheap nighttime power to me at a 5 cent/kWh rate.  They can do this with their new smart meters; at night they have plenty of distribution capacity; and they would make some money.
• In Scenario 2 I pay roughly the national average for power, say 11 cents/kWh.
• In Scenario 3 my utility does nothing and I have to pay Tier 2 rates — 17.55 cents/kWh.

I computed when I break-even, or when my fuel savings equal the extra cost of the EV, and my IRR, or the return on my initial investment after I’ve driven 105,000 miles (this is 7 years at 15,000 miles per year).  The results are presented below:

Scenario                 Break-even years      IRR at 105,000 miles
1  (5 cent/kWh)                 3.9                                 17 %
2  (11 cent/kWh)               4.8                                 11%
3  (17.6 cent/kWh)            6.2                                  3%

At a 17% return the EV option is pretty compelling and my local utility can make it happen, if they really want clean energy technology.

At the national average rate 11% isn’t bad, and early adopters may find EVs attactive.

And under my current personal rate schedule, EVs aren’t interesting.

That said, with a bit of creative utility rates, and leveraging the big smart meter investments being made, EV can be a hit.  And if they are a hit car companies with early products, like Nissan, GM, and Ford can pick up market share.

At the national level this makes great sense.  Every EV driven will displace over 600 gallons of gasoline per year, virtually all of which is produced from imported oil.  This reduces our balance of payments and trade deficits and improves our security situation.  Maybe a higher federal incentive would be cost effective and should be pursued?

Disclosures: none
Credits:  Price forecast and electric data courtesy of Plexos Solutions LLC and its weccterm forecast.

One of the potential game changers, electric vehicles, has been getting some negative press recently.  It’s too expensive, the range is too short, there aren’t any recharging stations are some of the obstacles frequently cited.

In my view, it really comes down to the economics individual decisionmakers face.  Economics matter, really a lot. Remember $4 gas wiped out investors in Chrysler and GM.   So I posed myself the question…is there anyway to make EVs the right economic choice?   True, even after the federal tax credit they cost more, but can this extra cost can be overcome by lower fuel expenses?

Having been around the utility industry for a while, and also helping develop a price forecasting service for wholesale electricity, I’m aware that there are some big changes in the wholesale electric markets.  These changes are the result of the rise of numerous super-efficient combined cycle power plants and the price dampening effect of lots of shale gas.  This is translating into off-peak electric prices in the western US in the 4 cent/kWh range.    So what would happen if a progressive utility that was getting tons of federal money to install smart meters decided to put the smart meters to work by flowing off-peak electricity to electric cars at wholesale prices?

But even before looking at the economics of cheap electricity, is it practical to provide cheap off-peak power?  I think the answer is yes.  The smart meters are supposed to provide utilities with two way communication and multiple meter channels.   So it should be possible to set up an outlet that only functions during off-peak hours and is separately metered.  Also, adding some load during the nighttime shouldn’t be too big an issue…this is when load is already the lowest and the transmission and distribution system should work fine, at least for a while.  Finding wholesale power shouldn’t be much of an issue either, the utility can either generate it or buy it on the market from a variety of suppliers.   Operationally the utility may need to  manage the morning and evening ramp ups and downs differently but after looking at wind integration I think this can be made to work.

For an economic comparison I chose a Nissan Leaf which is now appearing at auto shows, and a Toyota Camry.  I looked up mileage rates, ranges, charge sizes, tax credits, and basic manufacturers suggested prices.   I expect the average driver, who puts on 41 miles a day,  should be able to handle the 100 range of the Nissan Leaf.   Putting this all together I developed the following chart showing the time to payback the higher initial cost of the Leaf, after tax credits, as a function of miles driven and electric pricing.

Time to EV breakeven

The bottom line is with cheap off-peak energy the Leaf can payoff in as little as 3 years.  Not bad.  This is less than the term of some auto loans so a buyer would acutally see, after loan and fuel costs, a lower cost for the Leaf than a Camry.  And after the loan is paid off the owner would continue to enjoy the fuel savings for the life of the vehicle.  The progressive utility, it seems, can make a difference and use its new smart grid technology in the bargain.

Switching to the investment side of clean energy, 2010 has been disappointing.  While all broad market indices that I track are positive for the year, only one of the fifteen clean energy ETFs and mutual funds I track are positive YTD and many of these investments are very negative.   To review these investment results go to our Returns page.

The best, and only positive return in clean energy is the PowerShares Global Progressive Transportation (PTRP) ETF, up 7.15% YTD.   Unfortunately for investors, this fund has only been able to attract $5.8 million USD in investments in its two years, due in part to the lousy timing of opening in September 2008.   The upshot is PowerShares is closing PTRP as of December 14, 2010 and investors will have no easy instrument to invest in clean tech transportation.

Disclosures: none

It’s understandable there are a lot of players active in the small California residential / commercial (R/C)solar market.  The California Energy Commission (CEC) dataset has over 80 names.  From 2007 until 2010 year-to-date, the  CEC reports $3.0 billion in installations and $604 million in incentive payments.  Costs may be drifing down but are still a lofty $8,217/kW for the average 5.0 kW install.

So far in 2010 cells from the top eight companies have been placed in over 75% of the installs.  The market leader, SunPower (SPWRA), is now closely followed by Sharp with both companies having approximately 19% of the market.  The next six companies, Suntech (STP), Evergreen (ESLR), Kyocera, BP Solar, Sanyo, and REC (REC.OL) are closely grouped with 6-8% market share.

But even with the California R/C market topping 61,000 kW in 2009, this only represents a small fraction of the 12,300 MW produced worldwide in 2009.  If the five key market conditions I previously identified, namely:

1. continuation of federal and state  incentives which drive down the cost of installs significantly (California incentives will grow to around $600 million per year in California by 2015, this is real money) ,
2. continuation of current tariff practices that allow offsetting average rates, net metering, and exemption from standby charges,
3. continued high energy costs allocated to the residential sector in the California IOUs
4. no run up, and potential drops, in the cost of solar, and
5. no major increases in financing costs for solar systems,

continue, it looks like there is plenty of production capacity worldwide to supply any level of growth in California’s small systems market.

Disclosurer:  the author doesn’t own shares in any of the companies mentioned in this post (except in index funds).

I like the growth rate in solar installations in California.   If it continues for another 5 years residential solar will have come of age.

Let’s look at the numbers (based on my analysis of data supplied by the California Solar Initiative):

If the industry is able to continue with a 35% growth rate, 5 years from now we’ll be seeing about 375 MW being installed per year with a market value of around $3 billion !

What are the conditions needed to support that level of activity? I see five main requirements:

1. continuation of federal and state  incentives which drive down the cost of installs significantly (California incentives will grow to around $600 million per year in California by 2015, this is real money) ,
2. continuation of current tariff practices that allow offsetting average rates, net metering, and exemption from standby charges,
3. continued high energy costs allocated to the residential sector in the California IOUs
4. no run up, and potential drops, in the cost of solar, and
5. no major increases in financing costs for solar systems.

Right now its not too hard to believe these conditions will continue for a five year period.  But at some point the penetration of solar will become large enough to pressure both budgets (via tax credit costs and direct incentive payments) and utility tariffs which must collect transmission and distribution cost.

So, with California being one of the promising markets for solar developers, which manufacturers are enjoying  success in the market?  In my next post I’ll answer that question.

There is no denying the political pull of green.   Tax credits for renewable electricty projects, efficient car incentives, building efficiency stimulus, renewable portfolio standards, fuel blending requirements and associated protective tariffs, smart grid funding, and favorable net metering are in place seeking to accelerate the adoption of clean energy.

But clean energy is really just another way of doing what people are already doing with energy.  Since price matters (it really really does…remember $4 gas?), and clean energy can be expensive, the incentives are policy tools to try to induce people to do the right thing.  So how is this translating into the world of publicly traded clean energy companies?

First, investors can research and buy individual companies.  I track 335 companies that have significant exposure to clean energy.  Of the 335, about 200 are large enough (ie market cap greater than USD 50 million) and are traded on reasonably accessible exchanges to be candidates for individual investors.

Clean energy investors also now have 16 fund choices in the US.    I view these vehicles in three heaps:  ETFs that track broad based clean energy investmetns, ETF “verticals” that track specific clean energy technologies/strategies, and actively managed mutual funds that invest in clean energy.  I’ve taken  a bit of time and summarized these investments broken out this way.  I have also shown their year-to-date returns (10/5/2010) ex dividends so I can compare them with other alternative investments.

The six broad based ETFs are:

The six ETFs tracking clean energy verticals are:

And finally, the mutual funds are:

For comparison, I’ve computed the returns for some broad market indices which are easily accessable to investors via any US brokerage:

These are a lot of numbers but a couple of observations jump out:

• Only one clean energy ETF out of the 16,  with the smallest market capitalization, has managed a positive return.  In comparison, all the broad market indices are positive.  Government support for clean energy hasn’t translated into positive returns, at least this year.   Without policy support, results would in all likelihood be worse.    Any waivering in govenmental policy is definitely a sell signal.
• The sector is starting to attract sufficient investment for ETF and mutual fund sponsors to stick around.  Whether the breakeven market cap for an ETF is $50 or $100 million,  over half the ETFs are big enough to reward the ETF sponsor.
• Two of the mutual funds are large enough to be sustainable.  Firsthand, with only $5.4 million in assets, will either grow or shut down.  With it’s 1.85% expense ratio on $44.4 million in assets ($0.8 million in fees) GAAEX may be large enough to be an ongoing proposition.
• On the active versus index comparison, I’m not seeing much value added by the active managers when compared to the broad based ETFs.
• There is clearly a first mover advantage in the ETF business.  Powershares was first to market with Wilder and currently has the three largest broadbased ETFs.   Claymore was first to market with a vertical and currently has the largest vertical fund.

Effective Sept 1, 2010 our equal weight fuel cell index was updated.  The index still has the same six companies with aggregate market cap of about USD 500 million.   The sector continues to have trouble in public markets.  On June 21, 2010 Protonex Technology Corp (PTX.L) was delisted from the London AIM market.

E5G.DE and KHD.TO were removed from their respective indices following their acquisitions and the SOLAR and RELEC indices were rebalanced.   The RELEC index currently has 19 companies, just sufficient to meet limit requirements (i.e individual companies representing over 5% of the index will in the aggregate will not exceed 45% of the index) on modified market cap indices.

The RELEC index is comprised of wholesale producers of electricity, and their equipment suppliers, using renewable energy sources, currently bio-waste, biomass, geothermal, hydro, ocean, and wind.  We do not include diversified utilities that have some renewable generation portfolio and as a result the universe of eligible companies is smaller that those used to comprise the FAN and PWND ETFs.   We made this choice to have a clearer focus on the business of renewable energy.   We’ll keep looking to see if we can expand the companies incuded in the index.

The current market concerns over European debt have hit clean energy hard.  YTD and over the last 365 days returns for all elements of the clean energy segment, with one exception, have been poor.  Excess returns (i.e. alpha) have been negative across the spectrum except for the LED technologists.  

I identified a group of companies in 2008 that were pursing LEDs as their primary business.   Their businesses seem to be growing and of all the clean energy sector I track they are the only ones with positive excess return over the S&P 500. 

Despite popular conceptions that LEDs are significanly more efficient then CFLs, their form factor, ruggedness, and longevity are translating into successfull products.  And successful products are what create value for longterm investors.   Just look at Apple where the iPhone is now over 40% of their business in just a few years!   I don’t think there is a breakthrough like that in the LED business but there is a pathway (efficiency improvement and cost reductions) that can make this lighting solution compelling.

In one word, returns.   For three years the main Camino Energy site has been computing returns for:

• Camino’s  five indices,
• Market Comparables (that would be used in a diversified portfolio),
• Sustainable ETFs, and
• actively managed Sustainable Mutual funds.

Suprisingly, the page with this data is  infrequently visited so I have relocated the page to the highest level menu, Market Returns, to create greater visibility to the investment community.  I’ve also expanded the coverage to include a couple of additional ETFs and the nuclear ETFs.

A quick perusal of this year’s returns shows a rocky start for the sustainable business.  While the market comparables (ex commodities) are all positive YTD, the Sustainable Mutual funds and the Wind/Solar ETFs are all negative.  A couple of the broader based ETFs are positive, most notably the PowerShares Global Progressive Transportation (PTRP) ETF is up 7.3% through April 23rd….interesting.