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.

Toting up the results of the last amazing seven trading days, board markets and commodities are all down. 

Not surprisingly, the high growth sustainable energy sector declined even more with all indices falling sharply with losers outnumbering gainer by 10 to 1.   With their stock prices highly leveraged based on growth expectations, these stocks are experiencing their own type of “de-leveraging”.  

Over the last 300 days the Solar index beta vs S&P 500 has been has been 1.0.  In the last 30 days beta has increased to 1.2 as the index is increasing driven by broader market concerns.   Until broad market volatility subsides, I expect the larger sustainable energy strategies to be strongly influenced by the overall financial picture.  This means big swings in individual stocks and related indices.

Alcar Chemical listed on the Pink Sheets March 15, 2006.  The company was formed to manufacture plastics and polymer raw materiasl from organic waste.   Pink OTC Markets has discontinued the display of quotes on pinksheets.com for this security because it has been labeled Caveat Emptor due to a lack of current information.  The company has also been removed from Camino’s database.

Camino’s indices ended the week mixed amid highly volitile trading. 

In Biofuels, we again saw the potential for huge losses driven by poor risk management practices applied to hedging strategies. Read more here. Veresun (VSE) dragged the Biofuels strategy down for the week with a 67 % decline. This is after a a 50% bounce the stock received following it’s announcement it was reviewing “strategic alternatives” in the wake of its hedging loss.

On the up side LED-Lighting’s Cree (CREE) capped its strong week with an upgrade. Oppenheimer’s analyst apparently thinks light-emitting diodes are being adopted as a mainstream lighting product. This is a continuing demonstation of the influence of analysts.

I like LEDs. They last a long time (5x a CFL), they have a cool form factor, they don’t use mercury, they are rugged, they are dimmable, and they produce very nice light. Unfortunately, commercial LED products are no more efficient then CFLs and currently cost 20 times as much. Their long life doesn’t yet offset this high cost. Given time I expect them to penetrate more lighting applications but we are not there just yet for mainstream use. I’ll get excited when their cost start to fall significantly and approach no more the 5x the cost of a CFL.

Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks.

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.

Broader markets were mixed for the week.   The S&P 500  (+0.8%), US REITs (+2.7%),  and EAFA (+1.6%) all rose.   Emerging markets fell (-1.1%) and as did the basket of commodities we monitor (DJP -2.0%) 

Sustainable energy stocks weren’t mixed and fell sharply across the five strategies we track.  

Camino Energy indices

Coupled with the sharp drop we reported for week ending 9/5,  these strategies have declined between 13% and 18% (in USD terms) for the month of September.

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In our view sustainable energy stocks are suffering declines driven, in the most part, by macro factors and not by individual company performance.  In the case of Solar, 32% of the index market cap is from companies headquartered in China.  In September the Shanghai Composite index has declined 13.3%    Another 43% of the Solar index is from companies headquartered in the Euro zone which has currencies declining against the dollar and is facing concerns about an economic slow down.   Add to the European angst the concerns regarding the US financial sector and we expect a reduction in the flow of funds into hedge funds and hence growth companies.  

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The decline is commodities is also changing the perceived risk/reward perspective for investing in sustainable energy companies.   Analysts like Caylon’s  George Kotzias are saying “We believe a change in the perception of the current energy markets brought on by falling oil prices has led investors to believe that there is less of a need for solar energy”.   And the decline in commodities prices isn’t a result of a sudden spurt in new supplies but rather results from declining demand resulting from slowing economic activity. 

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Slowing economic growth, concerns about the ongoing rational for sustainable energy, and weak financial markets seem to be selectively impacting the high growth, energy price driven sustainable energy strategies.  The result last week was 66 stocks declining and only 22 stocks advancing.   Until these underlying large scale factors turn, it looks like these stock may continue to languish.   

  

The company (0757.HK) disclosed that its subsidiary, Wealthy Rise is required to pay Hoku Scientific (HOKU) a deposit in the amount of US$68 commencing this year relating to future deliveries of silicon.   The amount triggered a manditory announcement pursuant to the listing rules of the Hong Kong exchange.   Subsequent to the Company’s disclosure trading resumed on Sep 12th.

Since last Thursday 34 of the 36 companies in our Solar index have declined driving the index down 11.5%.   One exception, with no price changes, was Solargiga (0757.HK) which requested trading in its share be suspended starting at 9:30 AM on Friday, September 5th pending  “the release of an announcement relating to a major transaction”.   Solargiga is engaged in the manufacturing of monocrystaline silicon and in reclaiming and upgrading silicon.   The company is acting fast with a “major transaction” coming just 6 months after their IPO debut on March 31, 2008

The only company advancing, albiet a modest 1.6%, since Friday is Solar-Fabrick AG (SFX.F).  Solar-Fabrick manufactures modules and is also in the reclaiming business through its July 2005 acquisition of Global Expertise Wafer Division Ltd., a wafer trader and recycler of semiconductor silicon.