Archive for July, 2006

Getting Steamed about Global Warming

I need to rant.  A local co-op utility, IREA, just south of the
Denver metro area, just came up with $100,000 of their rate payer’s money to a
global warming apologist.  See an article about it at the Denver Post.  Fortunately, the reporter had the good sense to go to my friend and associate Phil van Hake, who was very clear about how idiotic this is.

Just to set the record straight:

  1. Global warming is not longer controversial in scientific circles.  Just read any relevant publications from the National Center for Atmospheric Research.   I chose them simply because they are government funded, and considering the stance of our government, they’d probably pooh-pooh global warming, too, if it were possible to do so and still maintain some shred of scientific integrity.  If that’s not a good enough source, I was just reading the latest issue of the Economist, (hardly an environmentalist rag), and where they discuss the continuing heat wave in much of the US.  No, we can’t absolutely attribute this particular heat wave to global warming, but the pattern of erratic and hotter weather is completely consistent with climate change models.
  2. Suppose you’re playing dice, and your opponent keeps on getting lucky rolls.  You might assume his luck is due to chance, but if someone later tells you that he was caught with loaded dice, do you then think to yourself, “He seemed like a really nice guy.  I’m sure he was unjustly accused.”?   That’s the game we’ve been playing with climate change: luck has not been going our way, and most reputable scientists are telling us the dice are loaded.  Isn’t it time to get up from the table and cut our losses?
  3. IREA is a CO-OP.  It should be spending money trying to increase the welfare of its members.  Instead, it’s spending their money lying to them.  When Exxon lies to us, at least I understand their management is doing it because they believe that those lies will lead to greater profits for their shareholders. 
    I think they (the Exxons of the world) are wrong, because when public opinion catches up with scientific reality, we will start enforcing strict carbon emissions standards, and companies that are not prepared for that eventuality will be hurt.  But IREA has no such excuse: they exist to serve their members.
  4. IREA is not alone in giving Pat Michaels moneyin his attempts to debunk climate change.  He’s an industry apologist, and does bad science.  Michaels has a history of threatening to sue people who say this sort of thing about him.  I’d love to have this discussion with him in a public forum such as a court of law.
  5. Here are some other sites having discussions about this:;

8/7/06– Colorado is far from alone in having to deal with obstructive government.  I just read a scathing editorial by RENEW Wisconsin  Executive Director Michael Vickerman on a so-called planning report from the Wisconsin PUC.  Wall Street has woken up to the need for renewable energy and energy efficiency, and main street is not far behind, but that does not mean that the bureaucrats are are going to wake up and smell the coffee any time soon.  What we have here are people who made up their minds long ago about coal-fired power generation, have supported coal as the “least cost” alternative for decades, and now that the facts have changed, they are fighting a furious rear-guard action to justify their past mistakes. 

To quote Stan Lewandowski, IREA General Manager, “A carbon tax or a mandatory market-based greenhouse regulation system would erode most, if not all, of the benefits of the coal filed generation.”   That is absolutely true.  If the true costs of coal fired generation were taken into account (which is what a carbon trading system, tax, or regulations should be designed to do), coal would have no price advantage.  Only someone wedded to coal as a generation technology would think this was a bad thing.

To quote John Maynard Keynes, “When the facts change, I change.  What do you do, Sir?”

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Wal-Mart: the Low Cost of Energy Efficiency

Last weeks Fortune’s cover story was entitled “Wal-Mart Saves the Planet- Well, not quite.  Of course, we have to be skeptical when WMT starts burnishing its green credentials; you’d have to be brain-dead not to guess that this is a public relations campaign.  On the other hand, as I never get tired of telling people, energy efficiency usually makes excellent economic sense; the main reason people and companies do not do a lot more of it is education and lack of global thinking (often the savings are indirect.) 

For instance, suppose you are designing a building, and have found that with R-38 insulation, and you calculate that each extra R-1 of insulation will cost $300, but only save $250 in future energy bills (These numbers are just for illustration.  If any architects/engineers have more realistic numbers to substitute, leave a comment, and I’ll change them).

A cost conscious designer would be tempted to stop there.  However, if he then considers the required size of the building’s heating, ventilation and cooling system (HVAC), he may note that if he increases the insulation to R-45, he can reduce the size (without impacting comfort) of the HVAC system, and save $1000.  So, and extra $2100 would be spent on insulation, and $1750 would be save on energy bills, and $1000 would be saved on the smaller HVAC system, for a net savings of $650, without even considering the added benefits to society of lower energy use.)

What does this have to do with Wal-Mart’s Green-washing?  When they started looking into ways to be more green, they started talking to Environmental Defense and the Rocky Mountain Institute.  And they discovered that there are a lot of “green” things they can do which will save them money.   In case you’ve been on another planet for the last couple decades, there is nothing that is more Wal-Mart than saving money.  Often, it has got them into trouble with the left, because they’re skimping on health care for their workers, or selling clothes made in sweatshops.

So Wal-Mart discovered that they could save money by using energy more efficiently.  To name a couple things, on their fleet of 7,200 trucks, they installed auxiliary power units that allow the drivers keep cabs warm or cool during mandatory 10 hour breaks from the road, allowing them to stop idling their engines.  This saves Wal-Mart $28 million a year in diesel costs, or about 10,000,000 gallons of diesel.  That’s about as much diesel as we’d save if we scrapped 5,000 Hummer H2’s, and made their owners ride bikes. 

They’re also making a move to reduce excess packaging on a private-label line of kid’s toys.  This is saving them on transportation costs (if the packaging is smaller, they can fit more in a truck), on top of the cost of packaging, and on the cost of disposal.  Annual net savings (on one line of toys): $2.4 million, 3800 trees, and one million barrels of oil.

The point is, I think that Wal-Mart CEO Lee Scott and much of Wal-Mart management has caught the efficiency bug.  I don’t think they’ve caught it because they’re on a crusade to save the planet; I think they’ve caught it because they’re on a never-ending crusade to save costs, and if it helps them with their gigantic PR problem, so much the better.

For better or for worse, Wal-Mart is one of the most powerful forces in our economy, not only with their own operations, but because of their power over their suppliers.  If they can cut the amount of packaging on things they sell, increase the efficiency of the entire nation’s trucking fleet by demanding more efficient semis from their suppliers, we should support it.

If we are going to move our economy onto a more sustainable path, we need Wal-Mart.  Like it or not, Wal-mart has enormous economic power, so just like a I am thankful for Nancy Reagan’s belated support for stem-cell research, so I am very happy to see Wal-Mart doing what it is.  So long as Lee Scott continues pushing at Wal-Mart’s stores and coercing his suppliers to do likewise, he has my support.

One caveat: there are only 5 Wal-Mart employees dedicated full time to efficiency.  This might be a sign of lack of commitment, but it might also simply be a sign of using resources (in this case man-hours) efficiently.  They are contracting with some of the top minds in the country for efficiency ideas: implementation requires commitment at the top levels of management.  Thinking about efficiency is probably best as a small part of everyone’s job, rather than a full time job for just a small part of the workforce.

I’m hopeful.  Does this mean we should give Wal-Mart a pass on all the other things we may not like about them?  Of course not.  But just because we disagree with them about some things, does not mean that we can’t support them in their drive to be more green. 

Is WMT, the stock, a buy?  I’m currently neutral on it (but last year I thought it was as Sell at 50, so this is an upgrade.)  At $45 (down 44% from its high in 2000), with a P/E ratio of around 16, and a dividend yield of about 1.5%, and expected long term growth of 12-14%, it still does not look like a great value.  But I am keeping an eye on it, and I’ll probably buy if it falls to $35.  (I generally only buy stocks when I think they are screaming deals, or if they are fairly valued and very, very green.)

Some other thoughts on Wal-Mart

  • I expect that Wal-Mart will be one of the first mass distributors of E85 ethanol, and maybe even biodiesel at their gas stations, partly because of this green push, and also because they are a lot more nimble than traditional gasoline retailers about changing formats.  Unlike stations owned by oil companies, they won’t worry about cannibalizing their own sales.  Last year, there was a Wal-Mart near me with a gas station, and a Sams Club about a ½ mile away without one.  Within the space of 3 months, the Wal-Mart gas station had been removed, and a new station was operational at the Sams.  They must have decided that gas would sell better at the Sams than at the Wal-Mart down the road, and the did something about it.  Fast.  When Wal-Mart decides to hop on the alternative fuel bandwagon, I think that will be fast also.  I wouldn’t be surprised if we start seeing Wal-Marts with E85 or B20 before the end of 2007.
  • I spoke this spring to a wind contractor who was working on the “green” Wal-Mart that opened last year in Aurora.  He was installing a small wind turbine to power the sign at the far end of the parking lot, along with a battery bank and some PV.  This was totally overkill for the power demands of the sign, and since it was an off-grid application, there is nowhere for the excess power to go.  Partly, this wastefulness is just due to experimentation by Wal-Mart to see what works, but I think part of this is also greenwashing… they probably think that the highly visible wind turbine and panels on the sign, way out in front of the store, is good advertising.   Cynical, yes.  Good PR?  Yes.  Green?  No.

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Why I Bought a Jeep

            First published on the Colorado Renewable Energy Society Website in April 2006.

            I started by looking at hybrids.  After all, I love my Prius to a degree most people reserve for friends, family, and pets.  While another Prius would not be big enough to haul the occasional sheet of plywood for my woodworking hobby, and lacked 4WD for

Denver snow, there are now four distinct hybrid SUVs on the market that would do quite nicely.

            So my wife and I looked at the Ford Escape and the Toyota Highlander. 

I did extensive web research.

We took test drives.

We got sticker shock.

Value for money is very important to me.  In fact, it is a central passion in my life.  As an investment advisor, I know that finding great companies is not particularly difficult.  Great companies are all around us.  Finding a great company that’s also a great value is another thing altogether, but that is where the real money in investment is made.

The problem with all the hybrid SUVs out there is that they are targeted at Blue Sun Libertythe luxury market.  Rather than using hybrid technology to primarily boost efficiency, the makers instead decided to focus on power.  The end results are fun to drive, but the relatively small boost to economy does not justify the increase extra $8,000 to $9,000 you can expect to pay when you leave the dealer’s lot.

At current gas prices, buying a hybrid SUV saves only about $0.02/mile, so the vehicle would have to last for about 450,000 miles to make back the extra cost of the vehicle, and that does not count the cost of replacing the battery pack once or twice in that time.  I believe that gas prices will continue to rise, but not enough to make the miniscule savings from a hybrid SUV justify the sticker price.

But what about the environmental benefits?  Were my wife and I doomed to squander our planet’s resources just because we wanted a roomy vehicle with four wheel drive?

Then I thought of diesel.  Diesel engines are more efficient than gasoline engines to begin with, and the newer “common rail” diesel (CRD) engines start quicker and create less particulates than the old diesel engines we remember from the last gas crisis.  Using B20, or 20% biodiesel, further reduces emissions, and since it comes from soy and canola, it is renewable, and the amount of energy necessary to make it is lower than the rather controversial ethanol.

While it is possible to cook up biodiesel from used cooking oil, I have neither the time nor confidence in my rusty chemistry skills to try that for myself.  Fortunately, we have a local company, Blue Sun, ( that pays farmers to grow soy and canola for use in biodiesel, and sells it through about 15 gas stations throughout
Colorado, including in Denver, Boulder, Golden, Fort Collins, Colorado Springs, and Pueblo.  My only complaint about Blue Sun is that it’s private, so I can’t invest in it.

I would have to plan my fill ups (although I could use regular diesel in a pinch), but it would be quite possible to fill up with B20 most of the time, with a little planning.  As an added benefit, I would know I was aiding the distribution of a renewable energy technology.  My B20 purchases would encourage the expansion of the biodiesel-at-the-pump network, to the point where it wouldn’t just be compulsive renewable energy advocates like myself who fill up with B20.

I had a vision of a day when every gas station had a biodiesel pump, and diesel engines running on B20 were as popular as…, well, as popular as hybrids are today, with people paying way too much for them.

There was only one thing to do, and I looked up diesel SUVs on my favorite car research site,, looked under diesel SUVs…And found the Hummer H1.

My heart sank… until I scrolled down the screen.

Below the Hummer, looking very out of place, was the Jeep Liberty.  Apparently Daimler decided to equip a few models from its recent Chrysler acquisition with their diesel engines.  It was a match made in renewable energy heaven, as far as I am concerned.

I ended up paying about $25K for my Jeep Liberty CRD, or about $8,000 less than I would have paid for a comparably equipped Ford Escape Hybrid (the
Toyota costs more.)  I’ll be spending about 50% more for fuel for the Jeep than I would be spending had I bought the Escape, but it will be 100,000 to 200,000 miles (depending on how quickly fuel prices rise) before the extra fuel costs add up to $8K. 

In addition, diesel engines last longer and need less maintenance than gasoline engines, and using biodiesel only adds to their longevity.  Hybrids, on the other hand, need an expensive battery pack replacement around 100,000 miles.

How does the diesel Jeep Liberty compare to the base model?  Fuel for the diesel engine costs about the same as gas for the standard V8, because B20 currently costs more than regular gas, although the diesel gets about 20% better mileage.   There are some savings in maintenance for a diesel engine over a gas engine, and the vehicle will probably last longer, but unless diesel prices fall, it probably won’t make up for the extra cost (about $2000… the diesel option costs more than that, but the current high cost of diesel fuel meant that the salesman was happy to get it off his lot, and I had more bargaining power.)

I paid about $2000 over the base model Jeep so I could feel good.  People buying Hybrid SUVs are also paying extra so they can feel good, too.  I think that’s wonderful, but even when you’re paying extra to feel good about your purchase, it’s important to keep in mind how much extra you are paying.

Is my Jeep better for the environment than the Escape I didn’t buy?  Probably not, but it’s not much worse, and I can leave that $8,000 I saved invested in one of my favorite renewable energy companies.  The earnings may even pay for that extra $.04 a mile I’m spending on B20… it would only require a 5% return if I drive 10,000 miles a year.

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To PV, or not to PV, that is the question.

Are you thinking about installing a photovoltaic (PV) system on your house?  Do you think to yourself, “It will be great to have my meter run backwards and have the electric company pay me for a change”?  “And I’ll be doing something to save our environment.”

The statement above that really bothers me is the part about doing something to save our environment.  My problem with it is the number of resources required: you’re going to have to give something up to buy that PV system, and the thing you are giving up could easily do a whole heck of a lot more good for the environment.  

Suppose you buy a PV system for $20,000 (rebates may halve the price of this, but you’ll see that that won’t make much difference in my argument.)  There’s a lot of argument over the precise numbers, but that system will produce 3,000 kWh (price $9/watt installed, 15% capacity factor) to 4,500 kWh a year ($7 per watt, 18% capacity factor.)   For electricity prices at a balmy Hawaiian $.24 per kWh, that system will then pay for itself (before maintenance) in a minimum of 18.5 years, and generate 83 MWh over that time, or around 150 MWh over the life of the system (30 years.)

Before anyone starts arguing about rising energy prices, let’s compare that PV system to something else we can do with the same money, at the same electricity prices. Suppose we take that same $20,000 and invest it in a 1 year CD at 5%.  After a year, we will get $1,000 in interest, which we will use to buy 500 25watt compact fluorescent light bulbs (in bulk) at $2 each.  We give these away to people who are currently using 100w incandescents.  Over the next several years, those CFLs will save a total of 300,000 kWh (8000h bulb life x 75w per hour saved x 500 bulbs). 

After only a year, we still have $20,000 so we can still buy a PV system if we want to (and take advantage of any rebates we missed out on the year before), we have avoided someone using over 300 MWh of electricity, which is about twice as much as the PV system will generate in its rated 30 year life (and don’t forget the cost of maintenance.)  Plus, most of the energy savings from the CFLs will happen over the next 8 years, rather than the 30 years it will take the PV system to generate half as much.  Most importantly, we have our initial investment of $20,000 back after one year, even though we are giving the CFLs away, while it will take over 18 years to get our money back from the PV system. 

 Because I believe in putting my money where my mouth is, anyone who mails me a receipt for the purchase of CFLs, I will PayPal them up to $5 or $2 per bulb, whichever is less (no more than once per person.)  Household LED bulbs also qualify for the same rebate.  I’ve uploaded a form to fill out, and plan to keep track of the number of bulbs, and the Negawatts generated on my website (as soon as my web guys get to it.)   This will be good for up to $1000 of total payments, or until December 31, 2006 (postmark), whichever comes first.  

Please note: I have withdrawn this offer as of 7/16/07. I have given out about $1,500 worth of rebates for over 750 CFLs, saving approximately 44 kWh per day.

For comparison, a PV system to offset the same amount of power on a daily basis would have to be over 7.5 kW, and would cost about $67,500, or 45 times as much (although it would last about 6 times as long as the CFLs, and it might only cost 20 times as much after rebates.)

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Energy security worries – a two-edged sword

The best thing to happen to renewable energy and energy efficiency this century is without a doubt the relentless rise in all forms of energy.  Gasoline going from $1 to $3 in just a couple years, higher utility bills, and worries about terrorism have defense hawks worried about “energy security” and environmentalists together for the first time.

Having a Republican president talking about renewable energy has certainly been nice for investors in renewables, but I know I’m not the only long term clean energy advocate whom this makes more than a little nervous.

I’m happy to have Bush, et al on board and paddling, but I’m worried that they’re also grabbing for the rudder with their emphasis on energy security rather than environmental degradation and efficient use of resources.

Here are the directions the energy security types are pursuing I think are misguided:

  1. Coal.  Because of rising energy prices, and the threat of future caps on carbon emissions, utilities all over the country are rushing to build coal plants (read the excellent press release from Environment Colorado) while they still can: they justify this because coal is a domestic resource, and it is “cheaper” than other sources of electricity (this is not true, when compared to wind, but it was true so recently that most people still believe it.)  Energy efficiency measures are much cheaper than any type of new generation.
  2. Nuclear.  Energy security hawks tend to be big fans for nuclear energy.  How having more sources of plutonium and hazardous waste around that could be attacked or used by terrorists increases our security, I don’t know.  Not to mention the fact that nuclear power is quite expensive.  I can only attribute the energy security hawk’s attachment to nuclear to their love of big solutions to big problems.
  3. Ethanol.  Cellulostic Ethanol will be a wonderful thing, when it emerges from the lab and becomes a commercially viable technology, but all the subsidies for corn Ethanol do very little to improve our energy security or reduce the amount of carbon we emit.  I see them mainly as a subsidy for farmers, cloaked as a move for energy security.  I do like the push for more flex-fuel vehicles, because it only costs $150 to make a vehicle flex fuel in the factory, over the cost of the gasoline version, and when and if cellulostic technology comes of age, the vehicle fleet will be ready for it.

In short, I’m glad to have the energy security hawks on board, but I’m hoping we can get them to listen a little more carefully to those of us who have been rowing this boat all along.

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Ethanol vs. Biodiesel

A new study from the university of Minnesota comparing the lifecycle energy costs and emissions of corn ethanol to soy biodiesel is all over the press this morning. 

The results are no surprise to any of us who follow the industry: corn ethanol yields 25% more energy than it takes to produce it; while soy biodiesel yields 93% more.

The numbers for ethanol ar not new: people have been arguing about the EROEI (Energy Return on Energy Invested) for ethanol for years, and the numbers have slowly risen with improving technology from about -10% to today’s 25%.  What are new, are the EREOI numbers for soy biodiesel.  I had only heard one number for the EREOI of “biodiesel” before – and no mention of the feedstock was made, nor was I able to trace it back to a reputable source… I suspect it was a back of the envelope calculation by a biodiesel advocate.  That number was a 220% return, quoted to me twice, once by management at Blue Sun Biodiesel, and once by the person manning the booth for the International Center for Appropriate and Sustainable Technology, both of whom do good work, but who have an incentive to believe this highest number they hear.  Disclaimer: I too have an incentive to believe the highest number I hear because I have a Jeep that I use biodiesel in to minimize my carbon emissions.   Using the new numbers, my Jeep Liberty has about the same carbon footprint as my 2002 Prius, when running on B100.  On B20, which I use in the winter, the Prius still looks much better.   I’m pining for a plug-in hybrid diesel.

But I’m very happy to see reality injected into the whole biofuels debate.  Neither ethanol not biodiesel (nor both together) is going to save the US from having to import petroleum: if our entire corn and soybean output were shifted to these biofuels, that would only replace about 12% of gasoline demand, and 6% of diesel demand… are we ready to start talking about massively investing in increasing the efficiency of our vehicles yet?

One other new note in the article, which I like given my affection for biodiesel, is that soy is a much less fertiliser intensive crop than corn, and so growing it has fewer local environmental impacts. I hope these authors continue their work, and expand the study to include other feedstocks for both ethanol (sugarcane, cellulostic) and biodiesel (canola, algae, recycled oil).

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Maui: Wind Farms and more

 Picture: Kaheawa Wind Farm on Maui

Kaheawa Wind Farm on Maui

It seems that every time I turned around in the last three weeks I’ve been hearing about Hawaii.  First, I was in Maui for a week, and I read in the paper that Shell is proposing a second wind farm for the island… and the first was not yet complete. (One thing that puzzled me was that the proposed wind farm was shown on the map to be on a part of the island with the least wind… what’s up with that?) 

When both farms are operational, Maui will be getting about 20% of its electricity from wind.  It will be an interesting experiment in terms of how much wind a system can handle… 20% is the most often quoted number, but Maui will definitely put that to the test, since it is a small, closed system… the Danes also get about 20% of their electricity from wind, but when they have excess electricity on windy nights with low deman, they can sell the excess to Germany.  In Maui, excess electricity has nowhere to go.Still, while there are costs to adding a variable resource like wind to the electric grid, these costs have been overblown.  They do not take into account the risks associated with alternative generation such as nuclear (which has to be shut down completely for refueling every few months) and gas (which is subject to extremely volatile energy prices.) Keep in mind that the electric grid is designed to deal with a loads which are just as variable as wind resource, if not more so, and while different wind farms are producing electricity at different times, electric demand tends to all happen at once, due to air conditioning or heating loads.  In fact, since wind in some locations is very predictable as to when it blows, the variable nature of wind can actually help with this problem.  Last February, we had blackouts here in Denver during a severe cold snap, which was attributed to a shortfall in natural gas generation capacity due to a massive increase in demand by households for gas for heating (a good example of the risks of powering electricity generation with gas.)It turns out that in the windy areas along the northern Colorado border with Wyoming, the wind tends to blow strongest at night… exactly when we were having blackouts due to lack of generation capacity in Denver.

Wind’s variability may end up being an asset, instead of the liability it is made out to be. Maui will be an interesting test case for that. 

[Side note: I’ve noticed that a lot of people are finding this article by typing “Will Maui wind farm pay for itself” in search engines.  So I thought I’d answer that question.  Yes.  This project is projected to cost $300 million.  It’s a 40MW faceplate capacity.  Given a typical 30% capacity factor, and sells its electricity for 10 cents per kWh, it will generate over $300 million in revenues in three years.  On Maui, 94% of non-wind electricity generated from fuel oil, and I can’t find a reference for the cost per kWh of generation from imported fuel oil but we can safely assume that it’s more than the cost of generation from coal or natuaral gas on the continent, which ranges from 2 to 6 cents per kWh, hence my assumption of 10 cents per kWh price.  However, at the extremely conservative price of 5 cents per kWh, the farm will still pay for itself in 6 years.]

My wife and I also took some time off from snorkeling to tour the Alexander & Baldwin Sugar Museum, which got me thinking about ethanol.  Ethanol from corn, as it is normally made in the
US is not a very economic proposition without subsidies (of which there are many) and the energy balance is not great, either.  However, Brazil has been quite sucessful at producing ethanol from sugar, and it takes less energy to produce ethanol from sugar than from corn.  In fact, Brazilian ethanol producers are so sucessful that the US feels the need to impose a tariff of $.54 a gallon.

According to the President of the Hawaiian Solar Energy
, whom I bumped into at Solar 2006, there is currently a pilot plant for making ethanol from molasses, which sounds like a great idea to me, because molasses is practically a waste product of sugar refining… it’s shipped to California and fed to cattle. 

The final recent appearance of Hawaii in my lfe came at a Rocky Mountain Institute event in Snowmass, last week, when I got to talk to a couple of RMI’s staff about the work they are doing there.  They’re working with Governor Lingle, as well as the utilities and the regulators there to completely redesign the rules by which the energy game is played. 

Typically, the largest barriers to the adoption of energy efficiency and renewable energy are perverse incentives in the way that utilities are compensated.  Ratepayers typically pay the electricity prices based on how much the utility pays for its fuel.  Hence, there is no incentive for the utility to manage fuel price risk, because someone else picks up the tab when prices rise; the utility is typically gauranteed a fixed return on investment, no matter how bad those investment decisions were in the first place… just so long as they can get the Public Utility Commission to sign off on the investment at the time.

Another perverse incentive for utilities is that typically they make more money if the customer buys more electricity, so it is very difficult to design a system in which the utility encourages its customers to use energy more efficiently, or generate electricity on site.  At the Intermountain CHP Summit, I heard of a couple cases when a utility heard that a customer was looking into generating their own electricity, and the utility preemptively decided to lower their rates for that customer, making the proposed project uneconomic.

According to RMI staffers, they’re helping design a new regulatory regime for Hawaii, with input all the interested parties, which removes these perverse incentives.  The rate structure will be changed so that the utilities will actually be rewarded for helping their customers become more efficient users of electricity, etc.

I like what’s happening in Hawaii.  Because they are acting now to deal with rising energy prices and working on a system which will help them control their CO2 emissions, the utilities there will likely be much better equipped than most US electric utilities to deal with the regulation of  CO2 emissions, when that finally happens.  

Investors looking for the steady income stream of an electric utility, who are also concerned about the impact of future CO2 regulation should consider HE (Hawaiian Electric Industries.)

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The silicon wafer industry

At Solar 2006, the annual meeting of the American Solar Energy Society there was much talk  of the shortage of polysilicon wafers, which are used to make the dominant type (crystalline) of solar Photovoltaic panels.  The other major use of polysilicon is for computer chips, which has been the dominant use until recently. 

I sat in on the following panels where the industry was discussed:

The CEO spotlight, where Goran Bye, the CEO of REC Silicon; as well as the “Market Status and Trends” panel, where several of the panelists discussed the polysilicon supply.  In particular, Hilary Flynn presented a paper by herself and Travis Bradford entitled “An assessment of global silicon production capacity and implications for the PV industry.”

According to Flynn and Bradford, the silicon wafer industry is highly consolidated, with the following major players: Hemlock, Wacker, REC Silicon, Tokuyama, MEMC Semiconductor, Mitsubishi, and Sumitomo having about 99% of the market in 2005.   Demand currently far exceeds supply, with more polysilicon being used in 2005 than was produced, with the excess being a drawdown of inventories, recycling, or an artefact of inaccuracies in the sampling method, or a combination of those factors.

From my own reading, there is much anecdotal evidence of the polysilicon supply shortage, with PV manufacturers scrambling to tie up contradts for supplies sufficient for their projected production, and even some failing to do so, with MEMC even reneging on an agreement with Evergreen Solar to supply them.

However, the silicon processing is extremely capital intensive, with long lead times, and all the major manufacturers are announcing large planned expansions to investment, and several new players are also entering the industry.  There is a long lead time between when a plant is announced, and when it come on line, so the silicon market is likely to remain out of balance, with extremely high prices and profits for silicon processers through both 2006 and 2007, assuming 30% growth in PV production.

It seems unlikely to me that PV manufacturers will be able to continue to make up the polysilicon shortfall in 2006 and 2007 from inventory (although no one seems to know what inventories are, except that they’re small, hence supply of PV growth will be constrained below 30%.

Hence I expect all polysilicon manufacturers to be very profitable through 2007, with prices beginning to subside (and perhaps crash) in 2008-9.  A crash of polysilicon prices would be facilitated by overbuilding of producers, combined with less than anticipated demand from PV manufacturers.  This might be aggravated if one of the other PV technologies (CIGS, CdTe, or Amorphous silicon) were to grab market share from crystaline silicon due to price breaktroughs and constraint in the supply for polysilicon.  Both CIGS and CdTe have the potential to be cost competitive with crystalline silicon (“PV value chain supply and demand challenges” Booz Allen Hamilton, presented at the conference), but will probably be constrained by the limited supply of Indium (CIGS) and Tellurium (CdTe) both of which are very rare.  As an aside, this might produce a large opportunity for investment in mining companies with large proven reserves of Tellurium or Indium– if one of these technolgies make much more rapid strides than crystalline PV.

There are two technologies in use by polysilicon manufacturers.  The most common is the Siemens process on which the majority of production facilities are based.  This process is extremely energy intensive, about 10x more so than the other technology, fluidized bed, which is currently used by MEMC and REC Silicon plans to use in it’s new capacity.  Most other manufacturers seem to be sticking with the Siemens process, most likely due to patent issues.  For this reason, my favorite silicon manufacturer is MEMC, since their less expensive process is likely to make them better able to weather a crash in the price of processed silicon in 2008 or 2009.  In the next year or two, I think most players in the industry will probably continue to benefit in terms of profits, although much of this may already be reflected in their stock prices.

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Look where few others are looking

In order to come up with investments that will out-perform the market, an analyst must do two things:

1. Have an opinion that differs from the market consensus.

2. Be correct in that opinion.

 This probably seems absolutely obvious when I put it on the page in front of you, but when it comes to investing, few people follow these tenets.  First of all, by definition, most people *can’t* have a nonconsensus opinion; if they did, then that opinion would be consensus.  It’s a catch-22.

 Also, it is simply emotionally difficult for most people to hold an option that differs from their friends and family.  As my mom once said, “Everyone likes to be validated.”

 It may be great for your social life to agree with the people around you, but it’s a lousy way to invest.  Here’s why: when most market participants think that a particular stock or sector is a good buy, then a lot of them have already bought and are waiting for it to go up.  There aren’t many people left to buy.  When the stock or sector becomes less popular, the same people will start to sell, and it will decline.

 To produce above average returns, you have to buy before everyone else has, and sell before they do.  This means buying something when it still can become more popular, and selling while most market participants are still excited about it.

 How can we do that?  By developing an understanding of consensus opinion (the popular press is great for this), and figuring out where they are wrong (which can be accomplished by paying attention to sources of information outside the popular press (when was the last time you read a cutting-edge academic paper) or by putting together lots of different pieces of information that others have yet put together.

It’s not enough to simply hold an unpopular opinion.  Unpopular and wrong can lose you a lot of money as well.  For instance, if a little birdie told me that the whole mess in Iraq would resolve itself tomorrow, I’d probably sell the stock of a bunch of defense companies.  If instead the mess over there gets worse (which is pretty close to consensus opinion in my circles,) and the Pentagon puts in more orders for munitions, all those stocks I just sold would go up, and the person who sold those stocks expecting a spontaneous outbreak of peace wouldn’t be a very happy investor.

 When considering investing in the Energy sector, the first question to ask is, is the market over- or underestimating future energy prices?  If you think the market (by which I mean the consensus of opinion of market participants) is overestimating, then you should sell or stay out, if you think the market is underestimating, then it’s time to increase your energy allocation.

What do I think?  In the long term (a decade or two) I’d say the market is underestimating, but in the short term, it’s probably overestimating.  Conclusion: it’s probably best to wait for a pullback before allocating a serious amount of money into the energy sector, but it’s probably worth slowly dribbling a little money in, which I like to do using Cash Secured Puts , while I wait for a pullback in energy stocks.

Renewable energy has been getting a lot of press recently, so this also makes me shy away from stocks that are obviously in the sector… if the company has “Solar” or “Ethanol” or “Wind” in its name, I think it’s time to stay away, even after the recent small pullback.   I prefer the suppliers to the renewable energy companies, and companies involved in energy efficiency (which not only has better economics than most renewables, but fewer people are excited about it. A search on Google News just turned up 4370 articles that mentioned “renewable energy” without mentioning “energy efficiency”, while there were only 2340 that mentioned “energy efficiency” without mentioning “renewable energy.”  Even renewable energy advocates say (occasionally as an afterthought) that you should consider energy efficiency measures before investing in renewable energy, so the fact the renewables are so much more popular is a sign that the consensus is confused: hence it makes more sense to invest in Energy Efficiency companies now, than it does to invest in renewables.

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I’m in the business of giving investment advice for a fee.   You will probably come across a lot of information here that could be taken as company recommendations, investment advice, etc., and no doubt some readers will act on what they read here.  Here are a few things you should know before investing:

 1) Past performance is no guarantee of future results.  Neither I nor anyone else knows the future.  Any investment can go up or down, and there is no strategy which gives protection against losses in adverse markets. 

2) Anything I write only reflects my knowledge or opinions at the time of writing.  I have no intention of going back and updating past posts to reflect new information or changes in the how I’m thinking.  People who want up-to-date advice should contact me about becoming clients.

 3) I am an investor, as well as an investment advisor.  I and my family will often will have investments in the same stocks I’m writing about.  My clients will also have positions in these stocks.  If I decide it is time to buy or sell a stock, I first place orders in client accounts (for which the trade would be appropriate) and inform clients of the change.  I will next place orders in my accounts and those of my family members.  Only after all this happens will I publish the new recommendation to the blog.  You get what you pay for, when it comes to investment advice.

4) Appropriateness.   Most people should not be investing in alternative energy stocks.   Most of these companies have never been profitable, nor is there any guarantee that they will be profitable ever.  Anyone investing in alternative energy stocks should be prepared to lose everything invested.  If you are investing solely on the basis of articles in a free blog like this one, you seriously need to have your head examined.  Don’t do it!

 Any investment should be considered in terms of your entire financial picture.  If you don’t feel capable of doing this, you need to learn how, first.  I plan to include a lot of posts that will help you become a more sophistocated investor, but there are a lot more efficient ways to learn about investing than in these posts.  See my website for some good places to start. 

If, on the other hand, you just want to know more about the trends in alternative energy, and are not planning on gambling your hard earned cash based on my out of date thoughts, welcome!

5) Most people aren’t ready to invest in the stock market, let alone alternative energy.  Investing in the stock market is like sitting down at a poker table with a bunch of chain smokers wearing visors.  If you don’t know who the sucker is, you’re it. 

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The purpose of this blog

I’m starting this blog as a record of my thoughts on investing in renewable energy and energy efficiency.  I plan to include comments on the industry, links to articles I’m reading, and whatever else comes to mind.

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