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Recently in General Category
The other day I was in a supermarket and was shocked to find a portable CD player on sale for £6 / $12 and not really any better than the one I bought 7 years ago for £150 / $300. We all know the first part of the story as to why this happened; scaled-up low cost Chinese manufacturing. The second reason for these fast-falling costs, the hardware refresh rate, needs further exploration. The hardware refresh rate is all about how often a given product is replaced. I'm only a very occasional music listener, but I've had two mp3 players since then, so I have in the course of 7 years, refreshed the hardware twice. That's typical with consumer goods, the hardware refresh rate tends to be far quicker than the lifetime of the product itself. Perhaps the ultimate example is the mobile telephone - probably about once a year or certainly every two.
So what does this have to do with alternative energy technologies? I think the rollout and development of alternative energy technologies needs to be thought of not just in terms of increased production yielding lower costs, but in the rate of hardware refresh rates. For background, read this usefully sceptical piece about plans to switch Israel to all electric road transport in 10 years. So here are the hardware refresh rates and an important reason why they're won't be a Moore's law for solar, wind, fuel cells or anything else in the near future; Conventional road vehicle - 15 years Conventional power plant (coal, gas, nuclear) - 40 years Solar PV - 30 years Wind turbine - 15 years Fuel cell - maybe 15 years? The one hardware refresh rate bright spot I would suggest is energy storage because conventional lithium ion batteries have a limited number of charge/recharge cycles - about 500 before they are finished. That has led to plenty of research which is quick to market in extending battery life.
The latest Economist magazine seems to think so - as it says;
"The multi-billion dollar question is whether the skills that make somebody a successful executive, entrepreneur or investor in digital technology also work with green technology" I agree that there's perhaps too much focus on the numbers and the underlying technologies. What's all too often underrated, is how good or bad is the management. That's why I launched the AEI CEO Interview series, to add a qualitative, vital intangible angle to any given company and an insight into the people behind the firms and how they see their industry panning out. Now back to the geeks, who are more often than not, the investors rather than the entrepreneurs in this scenario. And what's interesting is that they tend to be more involved in the riskier venture capital part of the alternative energy marketplace - people like Vinod Kholsa - rather than where AEI steps in, the public markets. The exception of course is Bill Gates and Pacific Ethanol - a far from successful investment .
There have been a spate of alt e companies lately, announcing what I would call "growing pains". Basically, the investment curves are not up to speed with the projected expansion plans and/or there are some general unanticipated delays occurring downstream, eating into profitability. Well, as the likes of Renewable Energy Corporation have discovered, it's not going down too well in the marketplace, which has been very jittery of late.
Latest in the list is Nordex AG, a leading developer and manufacturer of wind turbines. According to this report in Reuters; "the CEO said he still expected Nordex to grow at a rate of 50 percent this year. Nordex, which failed to meet its own targets last year due to project delays, is aiming to reach sales of 1 billion euros ($1.45 billion) in 2008 and expects profitability to improve. By 2011, Nordex plans for sales to reach up to 4 billion euros and for the operating margin to rise to up to 12 percent". On the face of it, how could a 50% growth in sales in 2008 and a quadrupling in those sales by 2011, with higher margins, be bad news? Well, no one seems that impressed - as you'll see from the 1 year chart, the stock has dropped off considerably from just under 40 euros per share in early November, to just over 25 today, although it has not moved greatly in the last week. It does seem that investors are taking for granted the exceptional growth rates of the alternative energy companies or they simply see them as fairly priced. Similarly, maybe management should have a bias in setting targets that they are more likely to outperform rather than fail to meet. Still, how many other sectors are projecting sales growth like this?
A very informative piece here on alternative energy in Greece, by Thrasy Petropoulos in Spero News.
I was staggered to learn that windfarm applications in Greece amount to an enormous 34,000 MW - almost 3 times the installed total capacity of existing electricity capacity - some 12,500 MW - of Europe's oldest nation. Obviously, they're not going to get that far - developers must be factoring in a high failure rate in planning applications, although getting past the bureaucrats has apparently got easier; 36 permits used to be required to site and connect a wind park, now it's only 9. One of our wind stocks by the way, is Greek - C. Rokas SA. A similar story with solar power - the existing target / project for 600MW, including 100MW on Crete is 6 times oversubscribed. I was recently in Athens and was struck by how many solar thermal units I saw on roofs. I was more struck though by the apparent wealth that did not exist there until recently. The economy was last recorded as growing at a very healthy 3.8% per annum (annualised Q3 2007) and Greece has become a kind of gateway to the Balkans for foreign investors. A fast-growing, energy hungry economy makes the shift to alternative energy a lot easier. Given all of these, Greece deserves much more attention.
Ok, a lousy day on the markets, well probably much worse than that actually, let's call it abysmal. Nevertheless, it has been an opportunity for me to catch up on adding new stocks and an index as informed by one of you, a loyal follower of this blog.
So here they all are; Terna Energy - wind and hydropower, based in Greece - very like . . . Innergex Renewable Energy - also wind and hydro, based in Canada Then I've added; Acucar Guarani - a brazilian firm which purchases, cultivates and crushes sugarcane to produce sugar, ethanol and electricity. Arise Technologies Corp - a Canadian solar firm (odd how a semi-arctic nation develops a niche in solar, a bit like Renewable Energy Corp in Norway) Wacker Chemie AG - a chemical company who has a major silicon feedstock production operation for the solar industry Finally, many thanks to a gentleman from Thailand who emailed me about a new index not included here. I've just added the HSBC Global Low Carbon Production Index to my list of Global Alternative Energy Indices. From my past experience, I can tell that the data behind most indices constitute an expensive, high margin business to the consumer. That's why - unlike stocks - there's not much more I can tell you about them at this stage other than they exist and list them all in one place. My general view is that for an index to succeed and be widely known, especially in a new sector, you have to make the data free and easily available. Surely this is what has given the Wilder Hill Clean Energy Index the renown it has, way ahead of many Blue Chip bank equivalents.
Technically, a bear market kicks in when a given market falls below 20% from its high. So depending on which index you look at, we're already there. As of last night, the Dow Jones is down 14.5%, the Russell 2000 index down 20% and the Nasdaq, 10% off the beginning of the year.
The question for us is, where are we with alternative energy stocks? Here's my existing list of Global Alternative Energy Indices - which I suspect is not complete. Email me if you have some others you think I should know about . . . I do read and act on them (thanks by the way, to the person who told me about Arise Technologies Corporation - stock now being added). Well, I'm going to start with an American index, the Wilder Hill Clean Energy Index, because it's still the best known. It's down 24.57% since it's peak on December 26th last year, or about where it was a month earlier in November. So that suggest for its own components, a bear market. Now back to the global indices. They are quite hard to get data on, as it's usually a premium paid-for service, but here are the ones I have from freely available data. The Dax Global Alternative Energy Index - see here - again, it peaked in late December at 218.25 and closed last night at 186.44 - so it's down 14.58%. No bear market here then. The Renixx Renewable Energy Industrial Index World - see here - hard to read, but the chart suggests a fall from over 1900 to 1400, that's a pretty severe pasting, at least 25% off it's peak. So I hope that puts you a little bit more in the picture as several newspapers and websites in recent days have been running stories about alternative energy stocks showing big falls. Let's put this in context. The important point about the alternative energy sector is that it has not been driven by Greenspan's cheap credit boom. The drivers to date have been the high price of oil, government regulations and targets, concerns over energy security and the environment and improving technology. And as far as I can see, none of these have changed in the last month and nor are they about to. But the caveat is that you would have to expect market inflows to drop off substantially during this period of uncertainty for the world economy, because there's less investment money to go around.
Canada, a nation long-overshadowed by its mighty southern neighbour can look forward to some very good years ahead. That Canada has enormous amounts of natural resources that the rest of the world wants; uranium, oil, minerals etc. is widely known and underscored by the Canadian Dollar reaching parity with the greenback late last year. Much less appreciated though is Canada's quiet but no less significant expansion into alternative energy.
Today's article in Renewable Energy Access "A Snapshot of Canadian Green Power 2007/2008" ought to be a wakeup call to the investment world. The truth is however that Canada's Stock Exchanges have long been successful in attracting quite a few listings by alternative energy companies both from Canada and abroad. So I've decided to list them all here, in no particular order; Canadian Firms listing in Canada VRB Power Systems Xantrex Technology Sustainable Energy Technologies Boralex Dynetek Industries Western Geopower Plutonic Power Carmanah Solar Technologies Western Wind Energy Run of River Power Canadian Hydro Developers Canadian Companies listed outside of Canada Ballard Power Systems Canadian Solar Inc Foreign Firms listed on Canadian Exchanges Nevada Geothermal Finavera Renewables Have I missed any out? Please email me if you know some that should be included and I will load them up on AEI. For Hydro and Wind power potential, it doesn't really get any better than Canada. Vast tracts of largely unpopulated land and water and a relatively low cost of doing business. There has to be a strong bullish case for Canada and its currency over the next decade. And no question, a niche worth watching has to be Canadian alternative energy firms.
About every two to three weeks now, I get a showstopper of a story, that invites a lot more opinion than most and I'd suggest this is one of them. According to Reuters (albeit, via my Google news aggregator!) . . .
 Google is lauching a project called "Renewable Energy Cheaper Than Coal" aimed at producing 1 gigawatt of renewable energy capacity. (Well capacity is an easier target to beat in cost terms than load factor and you could probably do that now with onshore wind - more below). Apparently, The project, known as Renewable Energy Cheaper Than Coal, is " . . .hiring engineers and targeting investment financing at advanced solar thermal power, wind power technologies, enhanced geothermal systems and other new technologies" and " . . . working with its philanthropic arm Google.org, the company said it plans to spend tens of millions of dollars in 2008 on research and development and related efforts in renewable energy". So here are a few observations; i) As I wrote earlier in the year here, Google's founders, Sergey Brin and Larry Page's much heralded investment in Nanosolar two years ago is not anything like the success hoped for. Nanosolar must be pretty annoyed not to be included - anywhere - in this latest press release. I think that speaks volumes about the lessons learnt and the desire to diversify out of the non-falling costs of advanced solar pv story. ii) Spending "Tens of millions of dollars in 2008" is not very much and will be way, way, short of the money they will need to spend on a gigawatt of off the shelf renewable electricity capacity - which would cost by my estimate; $1.2 billion for onshore wind $2 billion for offshore wind $3 billion for geothermal $5 billion for photovoltaic solar $4 billion on concentrated solar power $3 billion on hydropower iii) Even then, that's nothing like enough money to change the dynamics or to "google" alternative energy. The metrics for the financial success of this ambitious project are just three; a) the installed cost per watt b) the levelized cost of those power stations output over 15 years (the typical length of a power purchase agreement) c) the payback period in years As I said earlier, the capacity cost of onshore wind is almost certainly cheaper than coal. But the real test is over a given period of time. That's why they need to think of it as a forward purchase of electricity in total gigawatt hours - relative to US coal. Frankly, a tough order, compared to fully amortised coal. Which makes me think Google might be looking for a spectacular breakthrough, rather than the lowest cost application of the lowest cost renewable energy technology. If that's the case then Google must absolutely stay way clear of anyone who says something like " . . . just invest enough in my technology to generate a big enough production run and I will easily reduce costs" which has been the graveyard of many investors. Ok, I've said enough. Except that the odds of Google creating 1 gigawatt of "baseload" renewable electricity ideal for Google's server farms, rather than just setting up a low output gigawatt of intermittent power at lower cost are very slim for the next few years. And we are a long way from this 9 minute, entertaining and rather preposterous film on on youtube - Googlezon ! Received opinion seems to think so. Take a look at this piece on CNN yesterday "Sector Snap: Solar Stocks Rise" which said; "Shares of alternative energy companies tend to rise when oil and gasoline prices climb, as investors seek to invest in companies which will benefit from government interest in other energy sources". I think rushing into alternative energy when oil prices go up is just a bit too simplistic. Instead I would pay attention to some other metrics, each of which are quite sector-specific. Here are some of them listed below;
Of course, in a very broad sense, it's not wrong to say that if the price of oil goes up then interest and investment dollars will flow to alternative energy. Certainly, if the price of oil was where it was in 1999, just $10 a barrel, it's hard to see that we would not have had the boom we have been having in recent years. All the same, I think it's more important to pay closer attention to the direct material and other cost inputs that are so important to the finished alternative energy production price. Like anything else, if you want the truth, there's no alternative to a greater depth in knowledge. In other words, it always pays to delve a little bit deeper. One of a handful of giant Western Oil Majors - BP - (and still a mere fraction of the size and reserves of Saudi Aramco) is taking a punt on biofuels, in a new joint venture with D1 Oils. According to their website, D1 Oils, sees itself emerging as a biodiesel leader in; * Agronomy - the science, planting and production of inedible vegetable oils. * Refining - the designing, building, owning, operating and marketing of biodiesel refineries. * Trading - the sourcing, transport and trading of seeds and seedlings, seedcake, crude vegetable oils and biodiesel. I've thought for some time that as biofuels became a bigger and more profitable player, "Big Oil" would start to take an interest to hedge their bets against the risk of volatile oil prices and of course, their declining reserves. It seems that now this is starting to happen. BP like many traditional oil firms, was embarking on a path to get rid of the excess petrodollar cash in dividends. I sense though that in this period of sustained higher oil prices, this will not continue ad infinitum - the urge to hold onto the cash and diversify out of the core business is just too great. As I wrote here, this problem for shareholders, known as "free cash flow dispersion" can and does create other headaches. All the same, BP could claim to be a pioneering oil firm in investing in alternative energy. They after all got heavily into the solar business some years ago and more recently in 2006 with Clipper Windpower. Would that Saudi Aramco ever do the same ! |
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