Aspire Week in Review - Week Ended December 12, 2008
Dec 12, 2008
Author: Administrator
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Alt Energy and Clean Tech Markets
2008 Year in Review and Looking Forward to 2009
Exiting 2008 and looking forward to 2009, we reached out to several of the alternative energy and clean tech industry's leading experts and executives to provide us with insight into developments in key sectors, as well as a sense of where things are heading. We received such a strong response from those we asked to participate that we have broken up our interviews into a series.
This week, we focused on the capital markets with Greg Curhan, President of the Investment Bank, Head of Clean Tech Banking at Merriman, Curhan Ford (Nasdaq:MERR); energy efficiency with Steve Strasser, Chairman and CEO of Power Efficiency (OTCBB:PEFF); the smart grid and demand side management with Paul Heitman, Senior Program Engineer of Comverge Technologies (Nasdaq:COMV) and Ken Huber, Manager, Advanced Technology of PJM Interconnection Board; and solar with Daryl Nakamoto, CFO of Hoku Scientific (Nasdaq:HOKU).
Over the coming weeks, we will get more insight into the capital markets, geothermal, wind, solar and clean tech industries for several other industry leaders.
Aspire: What surprised you about the renewable energy/clean tech markets in 2008? Were there any significant developments (political, technological, consumer-driven and/or industry-driven) that occurred which you weren't anticipating? Please briefly explain.
Curhan: The speed with which oil rocketed up to $150 and then back down to $50. The volatility in itself is daunting. It makes it almost impossible to plan longer term projects in that environment.
Nakamoto: We were pleasantly surprised by the extension of the Federal Renewable Energy ITC. We did not foresee its inclusion in the legislation aimed at stabilizing the credit markets.
In our local market, we were also very pleased by the progress represented by the Hawaii Clean Energy Initiative, which lays out a specific plan of action for the broad and rapid deployment of renewable technology throughout the state.
Huber: A lot of new emerging technology found its way into the queues of grid integration, including flywheels, battery systems and even discussion about altering the temperature in freezers in response to energy signals and doing this with respect to large industrials. There was also talk about air compression storage.
Wind energy at PJM is pretty much all off-peak, but storage systems that can provide that energy back into the system definitely has become an emphasis.
Heitman: The other part of that is that the gating factor is the efficiency of conversion. Below a certain level it is a waste and it won't pay for itself. A surprise to me was the retreat in energy prices, especially natural gas. This has moved the breakeven point out significantly for efficiency technology and renewable energy sources. In addition, with the challenging economic environment, and the heavy lifting that the Obama is going to have to do to address it, this may push the breakeven point (and commitment) for efficiency, demand side energy management and renewable energies out further. But on the other side, the extension of the renewable tax credit should help.
Strasser: I was surprised by the renewal of the tax credits. In addition, we have a new administration and leadership in Congress that will make a greater effort to promote this industry, and energy efficiency in particular.
What I am seeing with energy efficiency is that people and businesses have always been very interested in energy efficiency but the problem from an economic standpoint for businesses, as new technologies are evolving and being introduced to the markets, is that they weren't providing a strict 2-year payback. But in the past year, I have seen companies increasing focused on the marketing and branding virtues of alternative energy and energy efficiency. They are making more of their investment decisions for energy efficiency technologies factoring in this marketing and branding element, which is making it a bit less critical that the technology offers a strict 2-year payback. The rate-of-return still needs to be compelling though. It is just that the issue of payback is relaxing a bit as energy efficiency becomes more of a corporate strategy.
For example, go to KONE's website. It is focused more than ever on being perceived energy efficient. We are seeing this more and more.
Finally, we are seeing the utilities getting more interested in energy efficiency for industrial and not just residential.
Aspire: Obama's administration has set a target of 10% of electricity coming from renewable sources by 2012, and 25% by 2025. Do you think the 10% target is realistic by 2012 given the current global financial crisis?
Curhan: Yes, but it will require government subsidies to take some of the economic risk away so that investors and companies can fund the capex needed.
Aspire: And where do you see the biggest contribution to reaching this target in terms of renewable energy sources?
Curhan: Solar is the most likely source. With the ITC extended to 2016 the backdrop is there.
Finance & M&A
Cleantech reported that $2.6 billion was invested in renewable energy and clean-tech companies in the third quarter this year (U.S. firms received $1.75 billion), bringing the year-to-date total to $6.6 billion, which eclipsed the entire 2007 year. Cleantech's Senior Director of Research Brian Fan projects investment in the sector to reach $7.5 to $8 billion this year, which would be as much as 25% more than last year.
Despite the economic crisis, Cleantech reported that investment this quarter was 37% greater than the same period last year. But Fan does expect investment to slow down in the next few quarters to reflect the current macroeconomic environment.
Cleantech reported that IPOs in the Q3 slowed considerably over Q2, with only four companies raising $587.1 million, while Q2 saw six companies raising $4.4 billion. On the other hand, M&A activity has picked up, with 138 deals getting done.
Aspire: What are you seeing in terms of investments and project financing? Are deals still getting done? Are the current economic conditions creating any changes in terms of the structure of deals getting done? If so, how?
Curhan: It is very hard to get deals done. The most recent deal we got done was in October. Investors put a premium on liquidity. If you don't have at least $1million per day in trading volume, it will be very hard to get an equity deal done. Investors are more interested in structured deals, i.e. convertible debt or debt with warrants.
Aspire: Are there any groups (e.g., wind, solar, geothermal, etc.) which are more attractive from a financing perspective than others?
Curhan: Any group that has the opportunity to generate profits is attractive. The more renewable, probably the better.
Aspire: What recommendations would you make to executives and business managers that are seeking to raise capital through equity, debt or project financing in 2009?
Curhan: Have a very specific use of proceeds in mind. Investors want to fund specific projects or milestones. They do not want to simply fund working capital deficits. Know specifically how far the raise will get you in terms of either a project or progress to profitability, etc. Also, if you can, cut back on your losses. Survival is key. If you can extend your runway, do it.
Aspire: In terms of public company valuations, and industry groups - we have seen valuations pull back to, and below book value in many instances. We know this is a case by case basis, but given the outlook for growth over the long-term, and the positive secular trends across almost all industry groups, do you think that the risk has been priced into stocks at current levels? And how are you approaching valuations in the current environment? Where do you see "fair value."
Curhan: I don't believe book value is a relevant measure. I think it will ultimately depend on earnings and cash flow. The book value may represent money spent on building plant, but what good is the plant if what it produces can't produce a profit (i.e. biofuels, solar). The multiple on earnings (either current of DCF) should be at a premium or discount based on growth prospects for the individual company.
Aspire: Are there any industry groups and/or companies that you are particularly bullish on in the current environment, and why?
Curhan: I'm most bullish on companies within the cleantech sector that are not capital intensive. That would include efficiency, smart grid, demand response, etc. Capital will be hard to come by for the foreseeable future and these companies can execute growth without raising capital. Using the internet as an analogy, the companies that "sold electrons", i.e. EBay, Google, Yahoo, were most successful than the companies that sold "things" i.e. pets.com, Amazon. I believe the same holds true in cleantech - software with high margins (efficiency, D/R) vs. commodities with low margins (Biofuels, etc.)
Energy Efficiency
Aspire: Why do you think energy efficiency has taken a back seat on Wall Street, and in terms of government investment to new power generation as a solution to global warming?
Strasser: This is an interesting question. So many people have been swept away by the solar and wind opportunities, which have shown really strong growth. These technologies show tremendous promise and will certainly be a huge impact over the long-term to our energy consumption.
But there also remain substantial technical and cost related challenges which they need to overcome before we see them adopted on a mass scale. Transmission is a huge and costly issue while neither wind nor solar are base load energy sources, which cause further imbalances to the grid.
Utilities, which are increasingly mandated to use a percentage of renewable energy as a result of portfolio standards, are forced to make huge investments into upgrading transmission capabilities. What we are seeing, is that more attention is being paid to the notion of energy efficiency, where these technologies have less cap expense up front, and also provide more of an immediate impact.
That being said, a key reason that energy efficiency is getting less attention on Wall Street, I think, is that there are very few 'pure play' energy efficiency companies. Energy efficiency and progress in technologies that are more energy efficient, and create energy efficiency to the consumer, are often folded into the portfolios of larger controls companies. But we have seen an uptick in sales of energy efficient motors, for example, from companies that haven't publicized it because it is only part of a larger offering for them.
Power Efficiency is one of the few pure play technology companies, in addition to lighting companies. But I think this will change in the next year, and more companies will come to the forefront that are specifically developing solutions to create more energy efficiency in the residential, commercial, industrial and transportation sectors.
In addition, there are currently only 4 states which allow energy efficiency to be a credit against a renewable energy portfolio (Nevada is one of them). I think this will change, and will encourage more concentration on energy efficiency.
Aspire: Which areas to you see the best opportunity to reduce energy consumption in the U.S., and what technologies have you seen developed that are most effectively handling that load?
Strasser: I think that energy efficiency and demand response are the way to have an immediate impact. And there needs to be smart meters - real-time metering.
Aspire: Obama has said that energy efficiency is the "cheapest, quickest, fastest way to meet our energy demand and to tackle climate issues." What do you think the Obama administration can do in his first few months in office to make energy efficiency a centerpiece of his energy policy?
Strasser: They should add mechanisms to encourage energy efficiency. The manufacturing industry needs an incentive to make more energy efficient equipment, in the form of tax credits and incentives. Also, in cases where the benefit is for many years, there needs to be an economic framework that helps to finance the energy efficiency component for consumers and purchasers. There can be loans for this type of purpose. The difference here is that if someone continues to use less energy, this cash-flow is real. Also you are decreasing carbon emissions and you will also create jobs. Government incentives are long term.
Taking a long term view - the government should incent and amortize investment in energy efficient technologies over time. One of the things we are trying to do is to talk with members of Congress and tell them to look at energy efficiency the same way they are looking at solar and impact, and it is cheaper, with an immediate impact.
Aspire: What are you seeing on the state level, in terms of energy efficiency legislative support?
Strasser: The most important thing is to equate energy efficiency with renewable portfolios on a dollar for dollar basis. There should be a law mandating a minimal percent for the utility. Utilities should finance the efficiency products, and there should be an equal rate of return on energy efficiency as there would be in a power plant. You will save a huge amount of transmission and shave a lot of peak.
Aspire: What opportunities exist in the stimulus package for energy efficiency?
Strasser: If they do the things I mentioned - for example, the guy selling the granulator can make his equipment efficient or not. His customer will want it, but if it too much of a hassle or his customer wont' pay for it, it won't happen. You need to provide the manufacturer with incentives to build it.
An interesting point about energy efficiency, is that there isn't any specific representative on behalf of the energy efficiency industry to congress like there is with solar, wind and geothermal (SEIA, AWEA and GEA). Companies selling energy efficiency products are typically already well established and profitable - the others are all startups and their industries need to rely on lobby and advocacy in a much stronger way than companies developing energy efficient products.
But there needs to some education and buy-in at the government level for technologies which result in even 5% greater efficiency should be supported. Just consider the electric motor market. On a case by case basis, 5% greater efficiency for an electric motor might not be enough of an economic incentive for someone to invest in it. But think about 5% energy savings over all of the electric motors in the market, and a 5% reduction of energy across the board. This would make a huge impact on the grid and on carbon emissions. But it won't happen on an individual basis, and you need to have a framework to mandate and support it.
One of the things energy efficiency does is that it doesn't force utilities to go through all of this transmission business. And energy efficiency only has positive environmental impact. We are talking with Senator Reid. There is going to be a number of energy bills - we are really working on convincing them that energy efficiency is a big deal. We have also been talking with representatives on the Ways and Means Committee.
Demand Side Management and the Smart Grid
Aspire: Where do you think "smart grid" technologies made the biggest advance in 2008, and what do think we can expect in 2009?
Huber: My view on this is that there has been excellent work in Home Automation Network (HAN) standards, which has been industry driven by key players getting together (e.g., ZigBee Alliance) to really vet and approve use cases for how a Smart Home would work - how things will be authenticated, the services that will be provided, etc. And then some viable target architectures have been gaining some consensus. The HAN set the stage for applications that a vendor or utility can build out and overlay on that to work effectively. In 2009, the hope is for implementation of this in pilot and broader programs which will lead to greater use of third-party programs and applications. Comverge is always helping on the demand response side, because it offers a lot of paybacks.
And my favorite is the plug-in hybrid smart charging, which is another application that can be quickly deployed.
Huber: 2008 was a year of standards coordination, use cases, demo systems where that was needed, but I want to see this all turned into real standards that can be implemented. Certainly Paul pointed out HAN standards have emerged. It is now time to start making some decisions.
Aspire: This discussion has focused totally on residential. What are you seeing in commercial and industrial?
Huber: I am seeing much more activity in residential.
Heitman: I would say that generally, commercial and industrial have already got dedicated energy management systems in place. But on the residential side, there is so much ignorance of how to really be efficient.
Aspire: How will this get rolled out, will it be the utility managing the process?
Heitman: In terms of tracking and managing the rollout, the utilities will manage the process. They own the end customer. And very few utilities are taking a wait and see approach. Most of them have active applications under review. The applications that will overlay on the standardized framework are still TBD.
Huber: Yes, the utilities own the customer so it is in their interest to manage as much of the rollout process as possible. From an AMI (advanced metering) point of view, and how it priced, etc., the utility will have a lot of influence.
Do you think the global recession, which is clearly creating lowered expectations about oil demand, is having any similar impact on expected energy/electricity consumption? How close to you think we currently are to not having enough capacity?
Huber: Certainly the global recession is ending up reducing consumption and we are actually seeing some of our members go into a period of lower/negative load growth, so certainly that isn't putting any more pressure or creating problems with capacity on the grid. But the transmission expansion process is still progressing here at PJM so from that point of view the major utility builds and commitments, I am not seeing any impact.
Heitman: A question for Ken is also, with the states generally committing to RPS's, particularly for wind, in the case of PJM, what is happening there?
Huber: Some of these (wind) projects are getting delayed and we are seeing a slowdown in our queues for evaluations of wind farms. There is probably some delays in more of the emerging tech projects that I follow.
Heitman: But there are several drivers from a legislative perspective, and as the government takes more responsibility it will be harder to distinguish. Another thing I have noticed is that FERC (Federal Energy Regulatory Commission) has recently modified its approval cycle to fast track some of these (renewable) projects.
Aspire: How do you see the interplay between energy efficiency and demand side solutions?
Huber: The one comment I would make, knowing it is against the grain a bit, is that the danger now with the stimulus packages and getting the workforce involved in deploying efficiency programs, is that it can potentially take attention away from demand response. Energy efficiency is permanent demand reduction, which is good. But there will always be a need as well, for managing peak loads and that is the really expensive thing. It is far more effective to have technology that shaves or shifts the peak, which is not efficiency it is demand response.
Demand response has been around for decades, but has, until recently been pretty crude from an implementation standpoint. What is happening today is that you can do this in a much more sophisticated way - hence "smart grids."
The other factor is that we shouldn't wait until the smart grid is fully built until you deploy these more sophisticated demand response solutions and their related programs and applications. You want to have some bridge technology that will future-proof this transition. The idea is to re-use simple assets (like air conditioners) in as many ways as possible.
For example, Comverge is working on RRTP programs, which enable customers to know the real price of electricity and the timing (see The Watt Spot) which lets customers set a point where customers have more control over their electricity consumption. These programs notify customers when prices are expected to reach or exceed a certain rate per kWh, and will cut the application for the appliance when the price is hit or exceeded. This is a bridge technology where you don't have to have full deployment of a smart grid to roll it out, and you can do it one house at a time. And as HAN technology rolls out, other appliances will be able to start to include low cost communication technology that will make them "smart" as well.
Aspire: Detroit is under more pressure than ever to accelerate its electric and PHEV programs. Do you think the current grid can handle a scaling commercial market for EV and PHEVs? What changes and enhancements need to be made?
Heitman: The Electric Power Research Institute and Department of Energy (PNNL and ORNL) have performed excellent assessment studies that indicate the potential for some grid impact once the vehicles are deployed in volume. This will likely not reach significant penetration until 2015+, but it does indicate the need for standards and programs to be developed now which will address these issues. In parallel with the commercial deployment of EVs many states have meaningful RPS targets, which brings with it intermittency in the overall power supply. Developing energy management platforms that integrate these components (i.e., cars, solar, wind) directly or indirectly will be key to maximizing the overall efficiency of clean energy generation and utilization.
Auto OEMs are concerned that the batteries may become costly warranty claims, especially if they are charged or discharged outside of the vehicle's BMS (battery management system). This makes it difficult to develop the more innovative levels of integration with the electric grid. One solution that is under consideration is seeking government risk management support that will lessen this concern and thus reduce the reluctance for this area of innovation. Once the batteries are fully available for grid support, a more optimized "Smart Charging" regime can be developed, which ultimately extends to full V2G interoperation.
Aspire: Can you talk about the Mid Atlantic Grid - Interactive Car (MAGIC) program, and how you see this impacting the smart grid?
Heitman: The MAGICC (Mid Atlantic Grid-Interactive Car Consortium) has recently published an excellent summary from the testing that has been performed on load following capabilities of EVs engaged in the Ancillary Services market. Ongoing studies related to battery degradation impacts will provide critical information that the vehicle OEMs, Charger manufacturers, and Utility companies will need to successfully market the types
The grid desperately needs the buffering effect of cost effective storage for improved reliability. Communication and computing technology has matured to the point of making a logical aggregation of these assets possible, and connecting them to Pricing or Regulation signals from the RTO/ISO.
What is the promise of V2Grid technology? What are the current challenges?
Heitman: This is an ultimate chicken-egg paradox. The promise of V2G is that significant energy storage capacity within PHEV and BEV assets will essentially sit unused 95% of any given day. The grid desperately needs the buffering effect of cost effective storage for improved reliability. Communication and computing technology has matured to the point of making a logical aggregation of these assets possible, and connecting them to Pricing or Regulation signals from the RTO/ISO.
Smart Charging infrastructure is key to making this easy and simple to access, and release economic benefit to vehicle owners as incentive to participate.
Aspire: What do you see in Obama's energy plan for demand side energy solutions and V2Grid technology? And how critical is legislative support to bringing these technologies to a commercial scale that becomes noticeable?
Heitman: There has been a noticeable shift in focus as the economic crisis has worsened. Last year, with the elevated energy prices, and the looming carbon legislation, the EV story was all about meeting these priorities. As job preservation and economic stimulus has eclipsed these issues, incenting energy management infrastructure build out such as Demand Response and Smart Charging in place in 2009 has become an urgent focus which will provide critical jobs now while laying the foundation for improved adoption of EVs in larger market volumes after 2010. It all works together, and maintains the same thread of benefit for the long run. Legislative awareness of this is high and support is critical to signaling the market that this will be strongly supported for the long haul.
As one indication of this, Congress seems to be supporting replenishment of the 136 loan program to support manufacturing of charging infrastructure. An interesting thing to observe may be the selection of the new FERC Commission Chair, as there exists some very strong awareness of the synergies between the Electric Vehicle, Renewable Energy, and the Transmission Grid. This could lead to a more proactive and accelerated regulatory environment that puts support in place for rapidly deploying these innovations, and bringing important support to things such as Residential Variable Pricing and Net Metering programs.
Aspire: What do you think about the progress that Shai Agassi's Better Place project is making? What are its key challenges, in your opinion?
Heitman: I look at it with a little skepticism, amazement and awe. It has made excellent progress in building awareness of and experience with a radical business model with all EVs, taking into account challenges like range anxiety. The second thing is that teaming with Renault and Nissan - they are already getting a jump on a mass marketed all-EV deployment. This could help to form a global platform. Some of the challenges will be battery costs and longevity. Others, which are more unique to the Better Place model are the economic viability of maintaining the assets and infrastructure. I also want to make the point that standards-based fast-charging will be really important to the adoption of this technology.
Huber: Yes, but the engineer in me and the question of whether people will want vehicles they don't own and batteries they will have to replace makes me skeptical as well. An issue Paul also talked about was fast charging, or Level 3 charging. Level 1 and 2 are well within current workable conditions but utilities will have to be careful to evaluate rapid charging levels, which can create technical challenges.
Solar
Aspire: Solar/PV energy costs between 21 and 38 cents per kWh to produce. We are still a ways off from reaching grid parity. When do you think that happens? And do you think this will be the key inflection point that will need to be reached to see solar production and consumption become a more significant part of the U.S. (and global) energy pie? What are other key factors?
Nakamoto: By virtue of geography, Hoku Solar, our PV integration and installation business in Hawaii, is already operating in a near-grid-parity environment. (Grid electricity costs in Hawaii range from $0.20 per kWh to more than $0.40 per kWh in some areas.) This effective price parity certainly helps drive demand, but from our perspective, it seems that prices must still continue to come down before the PV market reaches a true inflection point.
For example, even with high electricity prices in Hawaii, we find that the market still requires government intervention to drive growth in PV consumption. Both State and Federal tax credits continue to provide a meaningful incentive for individuals and corporations to invest directly in their own PV systems.
However, it is also worth mentioning that the tax credits do not seem to have inspired a corresponding amount of third-party investment into PV generation capacity. Based on the results achieved in other markets, it seems that a feed-in tariff may create the most favorable conditions for PV investment financing. To this end, we are again encouraged by the Hawaii Clean Energy Initiative, which includes a provision for a clean energy feed-in tariff.
Aspire: Conventional views in the industry expect polysilicon prices to plunge this next year with all of the new production coming online which will help supplies double while demand is only expected to increase about 30% to 40%. As a result, manufacturers of poly will see margins erode. Meanwhile, expectations are also for module oversupply to create ASP erosion in the midstream channel. At some point, shouldn't all of this price erosion ultimately benefit the end consumer and stimulate demand? From a manufacturer's perspective, what is your outlook on this dynamic, and what measures can you (and other manufacturers) take to adjust and protect your margins? Do efficiencies created by newer technologies at the poly plant level help compensate for erosion in poly prices?
Nakamoto: We anticipate prolonged and extensive downward pressure on pricing (and margins) throughout the PV value chain. Notwithstanding current market externalities, the falling prices should eventually help stimulate market demand. And, considering the heavily fragmented nature of the solar manufacturing marketplace, this pressure could also create a compelling case for consolidation and vertical integration throughout the industry.
In any case, we believe that companies who have good controls and stabilized COGS will succeed in passing cost efficiencies along to their customers while still maintaining healthy margins. The recent volatility in polysilicon pricing poses a severe challenge to producers whose businesses were focused on spot market sales. This, in turn, could cause some new market entrants to delay initial production and create a situation where much of the planned new capacity is unlikely to come online when promised, if at all.
Aspire: Some industry experts and analysts have lowered their expectations for solar growth in 2009 based on lower demand as a result of less government support in Europe. How big of an impact do you think that will have on overall growth, and to what extent do you think renewed support in Japan, as well as increasing legislative support in the U.S. will offset the situation in Europe?
Nakamoto: We believe demand in the U.S. remains relatively untapped, and are optimistic that continued emerging domestic demand will offset potential reductions abroad.
Aspire: What are the key issues, challenges and opportunities that you see storage playing in the progression of solar energy as a more meaningful energy source in the overall energy ecosystem?
Nakamoto: While distributed generation and storage will continue to play an increasingly important role in defining firm and resilient renewable power grids, near term strategies include the removal of net energy metering (NEM) limitations and/or the introduction of feed-in tariffs, like the ones contemplated by the Hawaii Clean Energy Initiative. Taking the cap off NEM addresses the local storage issue by allowing property owners to sell extra power back to the grid. At scale, this is useful - particularly on a grid with low-renewable penetration - because it encouraging the installation of large-scale PV systems at suitable locations and guarantees corresponding savings to the property owners in the form of credits for power fed back to the grid.
Over time, as utilities approach RPS goals and the grid penetration of distributed renewable generation systems increases, more sophisticated distributed storage systems may be required to firm up the clean power during the peak/off-peak cycle.
Aspire: What is your broader outlook on the solar industry in 2009 and for the next few years? Navigant Consulting, in a research report it provided the SEIA, said it expects that the 8-year extension of the ITC could "unleash $325 billion in private investment in the solar industry" over that time frame. To be sure, this would bode well for the industry's growth - but do you think that we should temper expectations based on the current financial crisis, and if so, how much?
Nakamoto: We concur with many analysts who believe the fundamentals for the industry are intact and that the demand for clean, renewable energy will continue growing in 2009 and beyond.
We expect the extension of the ITC will help inspire this continued growth, and that the impact of the current credit market constraints may be too slow, but not stop, market expansion.
Research & Reports
Technologies available today, and those expected to become competitive over the next decade, will permit a rapid decarbonization of the global energy economy. New renewable energy technologies, combined with a broad suite of energy-efficiency advances, will allow global energy needs to be met without fossil fuels and by adding only minimally to the cost of energy services. Excerpt from Executive Summary. Worldwatch Institute, December, 2008.
Aspire Clean Tech Group Indices for Week Ended December 12, 2008
In addition to fundamental challenges facing the biofuels sector, including costs of feedstock, less access to capital and project financing, critics continue to beat the drum against mandates for increased blending both here in the U.S. and abroad, arguing that the impact on food supply as well as the environment outweigh the benefits.
New Zealand made headlines this week, scrapping its mandate for oil companies to sell a share of products blended with biofuel (2.5% by 2012) and is opting instead to offer tax breaks on fuels coming from proven sustainable sources. But we are also seeing increasing support in other regions around the world, including Rajasthsan's government which has signed commitments for new biomass plants this week, Malaysia, which is pushing its palm oil biofuels market, and the Philippines, which is setting higher goals for biofuels investments. This morning, Alberta announced mandates for blending 5% ethanol and 2% renewable diesel by 2010, and earmarked $239 million to support the expanded production of biofuels.
And then Brazil continues to be the poster child for successful ethanol markets. Brazil's BNDES bank approved 1.8bn reais ($695 million) in financing for construction of five new sugar and ethanol units. ETH Bioenergia will receive 1.15bn reais to build three plants in Mato Grosso do Sul, Goiás, and São Paulo, which, collectively will have crushing capacity of 14Mt by 2013. At this capacity, ETH plans to produce and sell 2.9 billion liters of ethanol and 1.8 million tons of sugar. The remaining 634 million reais will go to IACO Agrícola for a mill in Mato Grosso do Sul and to Usina Sáo Fernando for a mill in Mato Grosso state, which will reach crushing capacity of 2.3Mt and 1.9Mt, respectively.
Investment continues to pour into Brazil. Today Itochu and Bunge announced a partnership to build an $800 million biofuel plant in Brazil which will begin operations in 2010. Recently Archer Daniels Midland (NYSE:ADM) announced an investment, alongside Brazil's Cabrera group, of a $500 million venture into two mills, which will come online in 2009 and 2010.
But here in the U.S., support for our domestic biofuels market seems to divide along state lines, with the corn belt continuing advocate the industry, and everyone else remaining skeptical, at best. Meanwhile, the corn belt ethanol advocates are dead set against scrapping the $0.54 tariff on Brazil-imported ethanol, while its own critics generally advocate the removal of the tariff. Perhaps now that ADM is invested in the Brazil markets, we will see the strongest lobby support for maintaining the tariff begin to fade.
On thing that everyone seems to agree on is that whatever the future of the global biofuels market is going to be, it is going to have to rely on feedstock that is demonstrably not impacting food supply and it has to support sustainability. The conspiracy theorist in us thinks that the oil industry is somehow involved in the fray of criticism and condemnation of the first generation biofuels industry.
That being said, it remains to be seen how quickly the next generation biofuels industry is going to move out of pilot and demo stages, and scale to the mass commercial production levels.
Demand side energy management and energy efficiency continue to become increasingly critical and compelling approaches to addressing GHG reduction and rising energy costs. A quote that jumped out at us this week, came from a report by Worldwatch (see Research and Reports above) which pointed out that
"In China, buildings already account for 23 percent of energy use, and with 300 million people-equivalent to the entire U.S. population-expected to move to cities in the next decade, the largest construction boom in history will unfold in the coming years."
Obama's pick for Energy Secretary in Steven Chu is definitely a signal that here in the U.S., energy efficiency is going to get more attention. Chu is well-known for his focus on the technical issues surrounding moves away from fossil fuel dependence and towards greater renewable energy consumption, as well as making buildings, which account for 40% of U.S. energy consumption, more efficient. This pick gave a boost this week to the demand side energy and energy efficiency sector.
Energy storage, especially in the EV and PHEV markets is getting an increasing amount of attention with all of the debate about the direction Detroit is moving, and needs to move in. One of the most challenging aspects of getting the EV and PHEV markets off the ground is cost, and the most expensive component is the battery. At the same time, there are some really promising areas of development for EV and PHEV batteries to make a more compelling economic case - pace the V2Grid movement - which promises potential for batteries to provide significant power back to the grid and reduce the TCO for EVs and PHEVs.
In addition, we are seeing ultracapacitors showing more promise in terms of delivering higher efficiency and better performance than batteries. This week Maxwell (Nasdaq:MXWL) announced its BOOSTCAP(r) Ultracapacitor product has been selected for use in Korea's subway system. Capacitors are getting more attention as a potential replacement for batteries.
And as mandates for renewable energy consumption drive production, and the intermittent nature of renewable energy continues to present challenges, demand to develop better storage technologies for renewable energy like wind, solar and hydro is driving progress in flywheel and compressed air storage technologies. Hydrogen is another promising storage approach, which is being developed by Hydrogenics (Nasdaq:HYGS).
Increasing demand for better storage solutions for EVs, PHEVs and renewable energy should be a catalyst for growth for energy storage stocks in 2009.
Despite the fact that installed geothermal capacity in the U.S. is projected to increase by at least 133% in the next few years, from 2,957.9MW to 6,915.64MW, companies are getting discounted against this growth pretty significantly due to increased concerns about capital expenses required to get these projects developed and online.
Overseas we are seeing continued announcements from governments committing to new geothermal projects and further exploration. Exploratory studies in Kenya announced this week revealed about 4,000MW of potential geothermal energy. To put this potential in perspective, consider the fact that the U.S. currently accounts for about 30% or so of global geothermal capacity, at 2,957MW.
The solar sector got hammered again this week on a cut from Q-Cells (QCE.DE) for its outlook, providing downbeat guidance for the markets into 2009, creating a negative reaction in solar stocks. The reaction was surprising, we think, in light of the fact that expectations of slowing growth, module oversupply, and polysilicon price declines seems to us to have been well-priced into the markets. In any case, Q-Cells cut its 2008 net income forecast by about 15% and its sales by 10%. CEO Anton Milner said he isn't looking for any recovery until the second quarter of next year. JA Solar followed suite with downbeat guidance, but bucking the trend, at least for now, was Renewable Energy Corporation (REC.OL) which said so far it hasn't been impacted directly by the credit crisis. Although it acknowledged that demand may fall going forward. CEO Erik Thorsen reaffirmed that REC has mainly long-term contracts in place which are backed by bank guarantees.
More headlines hit regarding declining poly prices in 2009, which are expected to fall by about 35%. Polysilicon peaked at about $700 per kilogram and is expected to decline to as low as $100 per kilogram by 2010. Falling poly prices will impact the upstream business, but this should also help buttress ASPs for the midstream group. However, for now, these companies aren't getting any credit for this in the markets.
All of this should help drive down installation costs, which, in our opinion, is a good thing and will help to drive demand. The DOE projected earlier that the inflection point for the solar market to take off is when cost per kWh gets down to around $0.10 in the residential markets, about $0.08 in the commercial markets and about $0.07 in the utility sector. In addition, cost reductions from manufacturers will reduce system installed costs. At some point, volume should offset declining prices - the question is whether all of the risk from falling prices has been priced in.
Wind energy companies continue to see pressure on more headlines about project delays and scrapped projects amidst the current credit crisis. And if the current dismal economic environment isn't painful enough, the wind energy industry is now dealing with complaints from the Coastal Habitat Alliance which has filed a petition with the Federal Aviation Administration looking for environmental studies for Texas wind farms.
One of the more promising announcements this week in the wind sector came from India, where Rajasthan is investing $1 billion which will go to wind energy plants being built by Suzlon (SUZLON.NS), of which $218 million will purchase supplies Enercon, India, and $181 million is reportedly being invested in a deal with Wish Wind Infrastructure. The projects will result in 1,600MW of new wind energy generating capacity.
The group closed up 4% this week, helped by a 30% gain from Composite Technology (CPTC.OB) and double-digit gains from A-Power (Nasdaq:APWR), one of the companies that we think has been most oversold in the group, Otter Tail (Nasdaq:OTTR) and Suzlon, which is benefitting from that deal in Rajasthan. Year-to-date the group is down 62%.
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Based in San Diego, Aspire Clean Tech Communications is dedicated to
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For more information about Aspire Clean Tech Communications, Inc., contact Todd M. Pitcher at 858-518-1387.
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