By Tom Konrad, Ph.D., CFA

Last week, I published this call to buy Innergex (INGXF, INE.TO) because investors had been overreacting to the losses from the February cold snap in Texas.  The stock is up since then, but still seems a decent value.

Canadian Yieldco Innergex Renewable Energy (INGXF, INE.TO) took a big financial hit from the power disruptions in Texas in March. 

It’s complex, but their financial hedges on power prices for three of its wind farms ended up creating enormous liabilities – more, in fact, than two of their wind farms are worth.  Two of their facilities also had benefits from the high power prices, but not nearly as large as the losses on the financial hedges.

Innergex claimed “Force Majeure” at the affected sites – a contract clause that would allow them out of the financial obligations of the hedges.  The counterparties rejected the claims, and now two of the claims are in court, and one is subject to negotiation between the parties.

The two claims that are in court are there because Innergex now values those wind farms (Flat Top and Shannon) at less than the financial loss on the hedges.  The worst case scenario here is that the court will decide against Innergex and allow the counterparties to foreclose on the two wind farms.  There is no additional liability to Innergex beyond the value of its financial stakes in Shannon and Flat Top.

The hearing in the Shannon and Flat Top cases was held on May 6th, and a ruling is expected at latest by May 20th.  I’ve been buying today (in the mid $15 US range) because I estimate the decline in the stock price has more than priced in the full loss of both wind farms, and the increased certainty of a ruling (even one against Innergex) should send the stock price back up.

I generally feel that investors overreact to this kind of uncertainty, so it’s often a good time to buy- especially when the financial impacts of the downside risk are limited, as they are with Innergex.

DISCLOSURE: Long INGXF

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

The post Buying Innergex – Texas Was Bad, But Not That Bad appeared first on Alternative Energy Stocks.

by Debra Fiakas, CFA

The post “Water:  Invisible Crisis” on December 6^th highlighted the building problem of inadequate supplies of quality water in Latin America.  The World Water Council’s Comision Nacional Del Agua reports that As much as one-third of the Latin America population lacks access to safe water.  Unabated pollution and lack of water treatment have been identified as culprits.  In South America, for example, 40% to 60% of water comes from aquifers that are subject to increasing pollution from untreated run-off from mining and agriculture operations.

Our survey of Latin America water sector in South America found an interesting mix of pollution abatement and water treatment suppliers and service providers in the region.  European companies have set up shop in several of Latin America’s major cities and even a few U.S. and Canadian firms maintain at least a relationship with a local distributor.  One might conclude that it is not lack of access to technology or expertise that is holding Latin American communities back from clean, safe water.

For the ambitious entrepreneur the shortfall in clean water is an opportunity for new business in Latin America.  The astute investor could look for a strategy to participate.  We look at several who provide immediate investment alternatives with publicly traded stocks.

Andritz Group SA (ANDR:  VI, ADRZF:  OTC) is primarily known for its equipment for hydropower stations and the pulp and paper industry.  Make no mistake about it, this Austrian company knows water as well.  Andritz has set up shop in Brazil with its Separation Segment that offers mechanical technologies for municipal water treatment, including filters, screens and separators.  The company is well established in Brazil and could be a good partner for municipal operators.  Andritz successfully set up the Santo Antonio hydropower plant in Brazil and regularly supplies Klabin’s pulp mill in Brazil.

In the most recently reported twelve months Andritz earned 3.6% operating profit on Euro 6.6 billion.  The company converted 8.1% of those sales to operating cash flow.  The cash flow is needed if Andritz intends to come down from its current leverage lever where the debt-to-equity ratio is 144.38.  There is some competition for cash use.  Andritz maintains a healthy dividend payout policy and the current forward dividend yield is 4.24%.

Japan’s Kurita Water Technologies Ltd. (6370:  Tokyo, KTWIF:  OTC/PK) provides water treatment solutions to various industries.  Its specialty is treatment chemicals that can be used in boilers and cooling towers as well as industrial processes and wastewater treatment.  Interestingly, the company has chemical products for use in biomass generation.  Kurita can also set up turnkey water treatment facilities, including waste water reclamation systems.

Kurita has had boots on the ground in the state of Sao Paulo in Brazil since 1975.  In 2011, the company opened a water treatment chemicals factory in Sao Paulo near Artur Nogueira.

Kurita’s shares are quoted on the OTC at a price that represents 20.8 times trailing earnings.  That is not a particularly dear or cheap price, but investors might be swayed by the current dividend yield of 2.0%.  The company earns about 10% return on equity and maintains a fairly modest leverage level with a 20.00 debt-to-equity ratio.  Kurita has achieved top-line growth in each of the last five years and is habitually profitable.  While cash flow from operations have varied year to year, over the last five years Kurita has converted 10% of sales to operating cash.

U.S. companies are not left out of the Latin America water treatment market.  Unfortunately, few are publicly traded.  Fluence Corporation (EMFGF:  OTC, FLC: ASX) is a small company with big aspirations and interesting technology.  Its engineers design and manufacture water and wastewater treatment systems for municipal, commercial and industrial applications.  The company specializes in treatment of brackish water with its proprietary NIROBOX water desalination system.  The EcoBox water reuse system offers strong cost/benefit for decentralized industrial water applications.

Fluence is headquartered in New York State and maintains a presence in Buenos Aires, Argentina. The company has been active in the Carribbean, recently installing a NIROBOX desalination system at a resort in Costa Rica.  Fluence also implemented a wastewater treatment plant for the municipal government in Bordeaux, St. Thomas in the U.S. Virgin Islands.  The treatment plant features Fluence’s proprietary MABR (membrane aerated biofilm reactor) modules that require as much as 90% less energy than the aeration methods used in competing sludge treatment solutions.

Fluence shares are widely listed on exchanges and quotation services around the world.  Frankly speaking it needs all the friends it can find.  The company has grown sales dramatically since inception in 2015, reaching the $100 million mark in just four years.  Unfortunately, profits have not followed…as yet.  The company has reported deep losses in all years.  In the most recently reported quarter ending June 2019, Fluence had to draw $11.3 million out of its bank account to support operations.  At the end of June the company had $16.5 million left on its balance sheet.  The financial picture helps explain why Fluence shares are priced well below a buck and trade infrequently.

Foreign operations and unprofitable businesses mean risk.  However, there is no doubt that each of these three companies provides solid value for their thirsty Latin American customers.  They are worth consideration for the investor who wants to be part of the Latin America water solution.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

This article was first published on the Small Cap Strategist weblog on 12/10/2019.  

The post Water Treatment With a Latin Beat appeared first on Alternative Energy Stocks.

Community Solar in New York has a messaging problem. It is confusing, and even some industry professionals have given up in disgust because of aggressive marketing and a lack of clarity.

Fortunately, aggressive marketing is not universal among community solar developers.

Unfortunately, the lack of clarity is almost universal.

How Community Solar Works in New York

The system the New York utility regulator set up for community distributed generation (CDG, a term which includes community hydropower and community wind as well as community solar) is counter intuitive for most potential customers.

As shown in the diagram above, the electric utility pays for a project’s electric production with credits which can be used to reduce the electric bills of any of its customers in the same load zone. The project sponsor cannot directly monetize these credits, but instead signs up CDG members (also called customers or subscribers) who pay the sponsor in return for the credits, which reduce the cost of their electric bills.

Those Darned Environmental Attributes

The confusion arises because most individuals who sign up for a CDG contract (which can be a purchase or a subscription model) think of it as buying solar (or hydro or wind) electricity. In many cases, the credits are even denominated in kWh. Others are denominated in dollars.

In fact, CDG bill credits are that and only that: bill credits. CDG members are getting the financial benefits of clean power, but not the environmental benefits. According to Jeff Irish, VP and General Manager of solar installer and community solar developer SunCommon, the utility gets the right to claim that it is using solar power, a benefit that it uses to meet state requirements under the Clean Energy Standard. The Value of Distributed Energy Resources (VDER), which is used to calculate the value of the credits members receive, includes a payment (“E”) for the environmental attributes of the energy generated.

The CDG members receive the “E” payment as part of the bill credits they receive, while the utility gets the environmental attributes of the electricity. These attributes include the right to claim that it is using solar (or other renewable) power equal to the amount generated by the project. This renewable energy becomes part of the energy mix used by all the utility’s energy supply customers. The solar energy generated is therefore shared between all of the utility’s energy supply customers, and reflected in the utility’s environmental disclosure. It also helps the utility meet its Clean energy Standard requirements.

Consequences

This may all sound like bureaucratic nonsense, and many readers are likely wondering why anyone should care if community solar member think they are getting solar electricity, and not just savings on their electric bill. After all, the solar electricity is being generated, and the community solar member is helping the project sponsor by allowing the sponsor to turn CDG credits in to cash. Without community solar members, there would be no way for the sponsor to make money, and hence no community solar.

The problem comes from double counting. If community solar members sign up just for the financial benefits (which can be substantial – typical savings are a 10% discount on the utility bill) it does not matter at all if they think they are getting solar electricity. If, on the other hand, the members signed up in part because they want to advance solar energy in New York by making sure that all the electricity they personally use is renewable, they will be disappointed if they learn that “their” solar electricity is being used by their utility to meet its Clean Energy Standard mandate.

When utilities can count community solar towards their state-mandated renewable energy goals, every kWh a utility gets from community solar allows it to buy less renewable electricity from some other source. In any case where a utility is purchasing clean energy solely to comply with the state Clen Energy Standard, community solar customers of that utility will not add to the total amount of renewable energy used by the utility. Instead, their community solar will displace renewable energy from some other source.

This is why US EPA guidance regarding green power claims clearly states that purchasers of green power ensure that the contract “conveys the full rights to the environmental benefits of the generation source. In the United States, this is generally substantiated through the conveyance and ownership of renewable energy certificates (RECs).” Without the REC tracking mechanism, there is a risk that people will claim to be using more renewable electricity than is actually generated. For every megawatt-hour (MWh) of renewable electricity generated, only one person can claim to have used it, and that person is the one who bought and retired the REC (or had the REC purchased and retired on their behalf.)

An Exception

While New York community solar members do not get the right to claim that they are using renewable energy with their subscriptions, there is a loophole.

Hydropower from facilities put in service before 2015 does not meet the eligibility requirements of New York’s Clean Energy Standard, with a few exceptions. Some hydropower facilities smaller than 5 MW are switching over from previous power purchase agreements with their existing facilities to compensation via the CDG mechanism and the Value of Distributed Energy Resources (VDER). Those facilities that do not meet those eligibility requirements do not get the “E” value of VDER, and the hydropower operators retain the RECs, which are tracked by the New York Generation Attribute Tracking System (NYGATS.) These RECs cannot be sold, but they can be transferred to CDG members.

One such community hydro company is Natural Power Group, Inc., which is signing up customers at its Wallkill Community Hydro, and Wappingers Falls facilities. Central Hudson customers receive bill credits on their electric bill at a 10% discount. This small, family-owned firm does not receive the “E” value in VDER, and so its customers are eligible to receive RECs and other environmental attributes of its generation, but does not currently provide them to customers. Natural Power Group’s contracts specify in the fine print that the customer has “no right with respect to any attribute or commodity associated with the hydro, including any environmental attributes, renewable energy attributes or credits, carbon offset credits.”

When asked about this, Natural Power Group owner Sarah Bower, replied that the contract was written when she and Central Hudson believed that the company would be receiving the “E” value. More recent rule changes mean that Natural Power Group is not receiving the “E” value. According to Bower, “Although we are creating environmental certificates that are registered with NYGATS, they are going nowhere.” She had not previously looked into transferring these certificates to customers because she believed that “it would simply increase book keeping with no tangible results.”

Customer Confusion

Many New York community solar customers and community hydro customers don’t know if they should be claiming to be using renewable energy. On the solar side, a cleantech professional wrote that when he asked for “more clarity on the REC question… the sales process fell apart” and the community solar developer lost what should have been an easy sale.

On the hydropower side, the current limbo has led different customers to reach different conclusions and make different claims. A group of representatives of local governments participating in New Yorks’s Clean Energy Communities Program recently gathered to share the result from their climate action planning efforts. Several had signed up for community hydropower with Natural Power Group, but their interpretations of the impact on their carbon emissions varied.

Ulster County and the Town of Marbletown chose to strictly adhere to the EPA guidelines. According to Amanda LaValle, Coordinator at the Ulster County Department of the Environment, “In line with the EPA guidance, we deem it necessary to own the environmental attributes in order to make green power claims. For electricity, this means owning the RECS. Ulster County has been buying 100 percent green power using voluntary RECs since 2014, and the County’s need for RECs has been decreasing since then due to energy efficiency upgrades. The County intends to acquire an increasingly larger portion of its RECs from local sources, such as through its contract with Natural Power Group.”

The Town of Rosendale also spoke to Natural Power Group about RECs, and concluded that, since Natural Power Group is not selling the RECs to anyone else, it can count them towards its carbon reduction goals. While not at the meeting, the Town of Woodstock states in its March 25th environmental report to the Ulster County Climate Smart Committee that Woodstock’s “recent subscription for hydroelectric power from the Natural Power Group will eliminate most of the carbon emissions attributed to electricity.” In an email, Kenneth Panza, Woodstock’s Liaison to the committee, explained that he believes Woodstock has no need for RECs or other environmental attributes to make these claims.

Natural Power Group is investigating what would be involved in providing RECs to customers who want them. Its supply of RECs is far more than would be needed for this task. Without the “E” value from VDER, the credits the company receives for its generation are worth less than half what retail customers are charged for the same amount of electricity used by its customers.

It is possible that the company may find that it is able to provide its customers two to three times as many RECs as they need to cover the electric use. This could be useful to Towns such as Rosendale and Woodstock which also buy electricity for street lights, because street-lighting bills are not eligible customers for community solar or hydroelectric, and these Towns might be able to apply the extra to electricity usage from streetlights or other bills that are signed up for community solar (and hence do not receive RECs.)

The possibility that Natural Power Group may be able to transfer more RECs to a customer than their current usage also holds a risk for others claiming environmental benefits without actually owning the RECs. RECs can be transferred at any time until they are “retired” as part of a customer’s claim to be using renewable energy. While Natural Power Group’s RECs are currently in limbo, until Natural Power Group actually transfers these RECs, those of its customers who are claiming to be using renewable electricity are opening themselves up to embarrassment. If used in advertising to sell a product or service (i.e. “made with 100% renewable electricity”), such claims can even invite legal liability.

[UPDATE: After researching the issue further, Natural Power Group has said, “We are receiving non-tradable certificates [RECs] (or will be officially as soon as the account is transferred from Central Hudson.) These certificates are available to our customers under contract with us. This allows you to claim that you are buying renewable energy in the form of hydroelectric.]

Conclusion

New York’s electricity regulator chose to separate the right to claim to be using solar electricity (RECs) from community solar because allowing the utility to use the RECs to meet its Clean Energy Standard mandate means that the utility can pay more for the electricity than it would otherwise. This means that community solar customers get more savings on their electric bill, and more community solar farms can be built.

No good deed goes unpunished, and the system has led to confusion. In some cases, confusion has led potential customers not to sign up for community solar because they are not getting the RECs. More often, it leads to customers assuming that they are getting renewable electricity when they are not. This leads to double-counting and undermines the State’s renewable energy goals. Some customers who want to do their part by buying renewable electricity believe they are getting it when they sign up for community solar or hydro-power, even when they are not.

Customers need to realize that community solar and community hydropower are a great deal even if they do not include renewable electricity. Typical subscriptions provide utility bill credits at a price of ninety cents on the dollar. Purchases of panels at a community solar farm (such as those offered by SunCommon) can provide even greater financial savings for customers able to use the Federal tax credits.

Fortunately, there is nothing to prevent a community power customer from also buying RECs by switching to a green energy supply company, urging their municipality to join a green Community Choice Aggregation program, or persuading their community hydro company to include RECs in their contract. The significant savings from community solar and hydro can easily pay for the low cost of RECs. While some retail customers may find themselves using their entire savings from community solar to buy green electricity, large and sophisticated buyers like Ulster County or Community Choice Aggregators can purchase RECs for a fraction of a penny per kWh, or less than one percent of a typical electric bill.

DISCLOSURE: During an interview for this article, Natural Power Group offered to pay the author for help navigating the NYGATS system. Details of the work and pay had not been discussed as of the final draft of this article, and the author does not believe that the offer influenced his (already positive) opinion or writing about Natural Power Group. It and all the other entities written about in this article were given a chance to comment on a previous draft. Natural Power Group did not request any changes.

Tom Konrad, Ph.D., CFA is an investment analyst and portfolio manager specializing in clean energy stocks. He is active in promoting clean energy in New York’s Hudson Valley through his role as the Chair of the Town of Marbletown’s Environmental Conservation Commission. His writing can be found on Greentech Media and AltEnergyStocks.com.

The post Clearing Up Some Confusion Over Community Solar In New York appeared first on Alternative Energy Stocks.

Hydroelectric stocks are publicly traded companies whose business involves converting the energy of falling water into electricity.

This list was last updated on 11/20/2020.

If you know of any hydroelectric stock that is not listed here and should be, please let us know by leaving a comment. Also for stocks in the list that you think should be removed.

The post List of Hydroelectric Stocks appeared first on Alternative Energy Stocks.

by Debra Fiakas CFA

Are you an investor hungry for current income?  Is there a green line of global warming fear running through your investment selections?  I have stock that fulfills both requirements.  Brookfield Renewable Energy Partners (BEP:  NYSE) is a renewable power producer with assets in Canada, the U.S. and Brazil.  Brookfield generates over 5,900 megawatts of power each year from plants running on river water, wind or natural gas.  Another 2,000 megawatts is apparently under development in Canada and Brazil.

What Brookfield does best is hydroelectric production.  The company claims over 170 hydropower stations across the U.S., Canada and Brazil, diverting river water through turbines to generate very clean energy.  Hydroelectric power generates less than 5% of the greenhouse gas emissions from coal-fired power plants, which can spew out as many as 900 tons to 1,000 tons of carbon dioxide per gigawatt hours of electricity produced.  More details can be found from the Global Reporting Initiative provides information on the greenhouse gas emissions from various power sources.

If Brookfield’s hydroelectric power is green enough for you, then let’s move on the company’s generation of income for its shareholders.  Since Brookfield shares began trading in October 2001, the stock price has climbed steadily to a level 230% higher than its debut price.

Brookfield started paying a quarterly dividend in December 2011.  Management has pledged to distribute between 60% and 70% of funds from operations as well as to grow distributions by 3% to 5% each year.  The current quarter dividend is $0.3625 per share.  At the current price that represents a very attractive forward dividend yield of 5.1%.  Does Brookfield have the cash to fulfill its dividend pledge?

Brookfield has reported net losses in two of the last three years.  Yet, investors looking only at net income will not get the full answer to the dividend policy question.  Indeed, the company consistently generates significant positive cash flows.  In the last twelve months Brookfield converted $1.33 billion in revenue to $395.0 million in cash from operations.  Brookfield’s sales-to-cash conversion ratio of 29.7% stands out among power producers.  What is more Brookfield has $227 million in cash on its balance sheet.  That is a good nest egg, but we do note the company has $7.2 billion in debt on the balance sheet as well.

Despite the debt, Brookfield is an attractive holding for income-seeking investors.  The icing on the cake is a beta measure of risk at a tepid 0.40. If the stock as it trades on the Toronto (BEP.UN:  TSX) or New York exchanges (BEP:  NYSE) appears a overpriced, there is several series of preferred stock that also trade on the Toronto exchange.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

The post Income From Hydroelectric Power appeared first on Alternative Energy Stocks.

Tom Konrad CFA

The US Department of the Interior, the Department of Energy (DOE), and the US Army Corps of Engineers are quietly laying the groundwork for a renewable energy boom that you might not expect.  What they’ve done is announce a memorandum of understanding to work together to support environmentally sustainable hydropower.

They’re not talking about building new dams, which have questionable environmental benefit, but rather to remove barriers to developing cost-effective hydropower at existing dams and waterworks. 

Hydropower does not get much attention from investors.  In large part, that’s because of the lack of growth.  As Energy Secretary Steven Chu said, “While hydropower is the largest source of renewable electricity in the nation, hydropower capacity has not increased significantly in decades.”  This new initiative won’t bring US hydropower growth up to the levels we’ve recently seen in wind or solar, but it should provide an opportunity for nimble renewable energy developers with some experience in hydropower to build profitable installations on Federal dams.

As I discussed in my overview of hydroelectric power in 2008, the main barriers to new hydroelectric facilities are complex environmental studies, permitting issues, and water laws.  That’s what makes this new inter-agency cooperation so important.  With the three relevant Federal agencies working together to remove barriers to development on federally owned facilities, hydroelectric developers can be reasonably confident that their investments in planning will eventually bear fruit in new hydropower generation, and not be blocked at the last minute by unexpected red tape.

I see this as part of a pattern of the Obama administration promoting renewable energy by administrative means now that legislative action looks unlikely.  Other manifestations of this trend include the Administration’s recent short-list of renewable energy projects to be given priority in the environmental review and public participation process, and the DOE’s work marking out National Interest Electric Transmission Corridors.

Quite often, the barriers to clean energy are not financial, but rather the bureaucratic red tape put forward by a system that was designed for an outmoded energy paradigm.  In an era of limited budgets, attacking these important non-financial barriers makes both environmental and fiscal sense.

Not So Small Hydropower

It’s not just the Feds who are pushing to tackle red tape for hydropower.  Colorado Governor’s Energy Office (GEO) has a partnership with the Federal Energy Regulatory Commission (FERC) to streamline the permitting of small hydro projects in existing conduits in Colorado. The GEO expects that the first application to FERC will be filed in late April 2011, and the first permit will be issued by FERC in late July, and end after 20 applications.  FERC and the state of Colorado will then assess the outcomes and look for ways in which the lessons learned can be implemented in FERC’s regular processes.

Despite the name the potential for small hydropower in the US is quite large.  A 2006 Idaho National Laboratory report [PDF] found that approximately 5400 sites could be feasibly developed, enough to increase hydropower generation in the US by 50%, or an average production of 18GW, about the same as the total non-hydro renewable generation in 2010 (EIA data).

Stocks

A couple stocks that might potentially benefit: AECOM Technology Corp., (NYSE:ACM) which I previously wrote about here, and Plutonic Power (TSX: PCC), which I recently wrote about because of their likely merger with Magma Energy (TSX:MXY).

DISCLOSURE: Long PCC,MXY.

This article was first published on Tom Konrad’s Green Stocks blog at Forbes.com

Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

The post Administration Lays the Groundwork for Hydropower Boom appeared first on Alternative Energy Stocks.

A Great Deal for Plutonic Shareholders, Not bad for Magma

Tom Konrad CFA

As a shareholder of Magma Energy Corp. (MGMXF.PK), I’m reading through the joint information circular [PDF] on the proposed merger of Plutonic Power Corp (PUOPF.PK) and Magma to form “Alterra Power Corp.” I’m not thrilled with the merger, although I plan to vote for it, now that it’s arranged.

Overall, I think the merged Alterra will be a stronger company than either company alone. Both companies are in capital intensive niche Renewable Energy industries, so the added scale and diversification of Alterra should better enable the merged company to borrow money to finance projects at lower rates. Obtaining financing at favorable rates is essential to the profitability of renewable energy projects.

My misgivings about the merger arise from the price. Magma shareholders will have a controlling stake of 66.5% of the merged company, with current Plutonic shareholders owning the balance. Plutonic shareholders are being paid a 32% or 17.5% premium, based on pre-merger market capitalization or book value, respectively. That would be a normal buyout premium, except that Magma was a much stronger company, and so Plutonic shareholders also gain more as part of the merged entity. Although the two companies work in different renewable energy industries, their projects have much in common. In addition to raising finance, environmental permitting, grid interconnection, and negotiating with utilities are crucial to the success of any renewable power producer, and a larger company with more projects may be able to make more effective use of employees with specialized local knowledge or skills in these areas.

Before the merger, I considered Magma shares a good buy, but I would not have bought Plutonic shares, because the company would have needed to either do a deal like this or raise money in the next year or so. This put Magma in the stronger bargaining position, and so I would have liked to see a smaller premium paid for Plutonic shares. That said, since two thirds of Plutonic shareholders will need to vote for the merger in order for it to be a success, this premium is probably necessary to gain sufficient support. Passage by Magma shareholders is a virtual certainty, since the owners of 38.7% of Magma shares have already committed to vote for the deal, and only 50.01% support is needed.

As a Magma shareholder, I think the deal is acceptable, and will be a way for Magma to pursue opportunities for growth beyond Geothermal power, part of the company’s current strategy. I also like Plutonic’s Run of River and Pumped Hydroelectric assets, although until this proposed merger, I was unwilling to buy the company’s shares because I felt its balance sheet wasn’t strong enough.

Overall, I’m in favor of the deal. Too bad they couldn’t have come up with a better name. Apparently “Alterra” means “Other Earth” or “Other land” in Latin, but it doesn’t do much for me. I liked both Plutonic and Magma better.

Plutonic shareholders will gain an instant 32% premium on their shares, while the shareholders of both companies can look forward to steadier growth.

DISCLOSURE: Long MGMXF.

Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

The post The Magma/Plutonic Merger appeared first on Alternative Energy Stocks.

Dana Blankenhorn

Most renewable energy companies specialize.

Solar companies do solar. Wind companies do wind. Geothermal companies do geothermal. Biomass companies do biomass.

But a small Canadian merger challenges that assumption.

Magma Energy (MGMXF.PK), a geothermal company, said it will spend about $100 million in stock to buy Plutonic Power (PUOPF.PK), which has wind and hydropower projects, and ambitions to get into solar. The combined companies will go by the name Alterra Power.

Both companies are based in Vancouver.

Size really does matter, crowed Magma CEO Ross Beatty on a conference call announcing the deal. Their merger presentation calls the resulting company “a dominant renewable power developer in Canada.”

True, but is this truly size?

Plutonic has only two projects operating at present, with three more under construction. The solar play is, for now, an ambition.

What the deal may really speak to are the prospects of the geothermal industry. “Geothermal is a small energy sector and has real limits to its growth since it only occurs in specific places on earth and many of the world’s best geothermal assets are already developed,” Beatty said on that same conference call.

Is that true? Last time I heard the Earth was round, and its thermal assets are beneath all of us.

What Beatty is doubtless referring to are the current requirements of geothermal plants. They need to be relatively close to warmth, so they can reach it at low drilling cost, but they can’t be so close that the ground they are drilling through will be unstable, prone to earthquakes.

The question I’m asking of my friends in the business today is, then, are these limits absolute? We can drill miles down into the Earth, and slant that pipe so it goes horizontally. We already do this for natural gas. Why not for heat? And I know you don’t want to tap directly into magma (despite the company’s original name) but aren’t there ways to tap heat that don’t require absolute stability?

The floor’s yours on this one.

There’s a second question asked by this merger. Should renewable energy companies specialize in one form of energy, or is consolidation in the whole space inevitable? What is really gained by combining wind, solar, hydro and geothermal assets under one corporate umbrella, other than financing power?

Good questions for this week of the Renewable Energy World show in Tampa.

DISCOLSURE: No positions.

Dana Blankenhorn first covered the energy industries in 1978 with the Houston Business Journal. He returned last month after a short 29 year hiatus because it’s the best business story of our time. In between he covered PCs, the Internet, e-commerce, open source, the Internet of Things and Moore’s Law. It’s the application of the last to harvesting the energy all around us he’s most excited about. He lives in Atlanta.

The post Must Renewable Energy Be Diversified? appeared first on Alternative Energy Stocks.

Portfolio theory can lend insights into which carbon abatement strategies policymakers should pursue.  If policymakers listen, what will it mean for green investors?

Tom Konrad, Ph.D., CFA

Good Info, Not Enough Analysis

I’ve now read most of my review copy of Investment Opportunities for a Low Carbon World.  The quality of the information is generally excellent, as Charles has described in his reviews of the Wind and Solar and Efficiency and Geothermal chapters.  As a resource on the state of Cleantech industries, it’s generally excellent.  As an investing resource, however, it leaves something to be desired.  Each chapter is written by a different expert in a particular field, which means that the information is up to date, and comprehensive, but this approach means that there is little attempt to compare the potential of the different investment opportunities presented.  What is the point of in-depth research into carbon abatement technologies if we do not then take the next logical step and emphasize the technologies with the greatest potential for carbon abatement and investment returns?

A Portfolio Approach

The most useful attempt at investment decision-making is buried in the otherwise uninspiring last part of the book. A summary of a 2007 report from the London Accord, A Portfolio Approach to Climate Change Investment and Policy is buried among self-promoting chapters from companies such as Nissan (NSANY)and BP (BP) promoting their (real) investments in clean technology,   The report uses a Monte Carlo implementation of Modern Portfolio Theory to determine low-risk mixes (portfolios) of carbon-mitigation strategies, and was written by Professor Michael Mainelli of Z/Yen Group, and James Palmer.

While intended primarily for policy decision-makers, A Portfolio Approach attempts to determine which portfolio of carbon reduction technologies is likely to produce a desired level of climate change at the lowest cost (or highest investment returns) at the lowest risk of failing to achieve the reduction goal.  Phrased this way, it is easy to see why portfolio theory is an appropriate tool, since it is designed to minimize systematic (overall) risk even when all individual strategies in the portfolio have significant risks of achieving the expected returns and carbon reductions.

Data

The data on various carbon reduction strategies came mainly from the 2007 IPCC Working Group report, "Mitigation of Climate Change."  This report is not complete, omitting some technologies with significant CO₂ reduction potential, in particular solar thermal collectors such as solar hot water heaters and larger installations for process heat in industrial processes.  "Solar," as referred to in the report, refers solely to solar Photovoltaic and Concentrating Solar Power (CSP.)

One decision I found questionable was to ignore the carbon reduction potential of investments with "negative abatement costs on the basis that these investments should be undertaken under any business-as-usual scenario, and are not strictly investment measures as a response to climate change." (p5/22)  This is circular logic.  For an investment with negative cot to exist, there must be a market failure.  Almost by definition, in a well functioning market, all investments with negative cost will have already been made.  Simply saying that these investments "should" be made assumes that these market failures will correct themselves without any effort on the part of policymakers.  Why should energy market failures correct themselves in the future if they have not already?  

In the authors’ defense, they run one scenario (#3) in which investments with negative abatement costs are allowed, and they state "Further examination of negative abatement proposals seems in order, as it should be important to understand why these investments fail to be made under current financial conditions.  Neglected negative abatement may justify regulatory intervention by policymakers, e.g. imposing minimum building or transportation efficiency requirements." (pp.17/22 and 18/22)  

From the hedging in this statement, and the fact that they spend less time discussing scenario 3 than either of their other two, I conclude that something prevents the authors from giving market failures the attention they are due.  I find this an extremely common failing among financial practitioners, and believe it is an unfortunate and common consequence of in-depth training in financial modeling.  Most financial models contain an assumption of market efficiency, and do not produce meaningful results in cases of large and persistent market inefficiencies.  Without tools to model market inefficiencies, practitioners are prone to ignore them, convincing themselves that the inefficiencies are unimportant or will cure themselves.  Most of the critiques of "Green Jobs" programs are based on this fallacy.

Put another way, if you have a hammer (a modeling technique which assumes market efficiency, such as modern portfolio theory), you tend to see all problems as if they are nails (efficient markets.)

Results

Since the authors only look at scenarios 1 and 2 (those which ignore negative cost investments) in depth, these are the scenarios I will focus on.  I believe the results of these scenarios are still relevant answers to the question, "After negative cost investments in energy efficiency have been made, which positive cost investments should we pursue?"  Even if all the necessary carbon reductions could be achieved with negative cost investments, it would most likely be unwise to pursue such an approach to mitigate climate change: like all investments, there is no assurance that the expected reductions/returns will be achieved.  Pursuing a wide variety of carbon-reduction strategies provides the greatest chance that some such strategies will achieve the expected reductions, and others will exceed expectations, thus making up for any investments in the mitigation portfolio which do not achieve the expected reductions.

The chart below shows a series of "frontier portfolios": That is, portfolios of carbon abatement investments which achieve specified levels of carbon abatement at minimal cost.  The vertical axis is gigatons (Gt) of equivalent CO₂ emissions (CO₂e) reduced annually, and the horizontal axis
is the annual investment needed to achieve this level of reduction.

There are diminishing returns for carbon abatement, with the cost of incremental abatement increasing significantly above 15 Gt CO₂e per year, and no practical increase in abatement beyond 20 15 Gt CO₂e and $400B expenditure per year.  

For comparison, to stabilize the atmospheric concentration of CO₂ at 350 ppm, a goal which, according to Joe Romm, will require 8 Gt CO₂e (approximately portfolio 2) of reduction by 2030, and another 10 Gt CO₂e (for a total of 18 Gt CO₂e, or portfolio 4) by 2060.  Since the model does not include negative cost investments in energy efficiency or solar thermal collectors, it is likely that these levels of abatement could be achieved at considerably lower cost by incorporating these opportunities.

The pie charts in the first column show the fraction of carbon abatement expected from each investment in the selected frontier portfolios, while the second column shows the cost of each investment.  The two columns differ because different investments produce different levels of abatement per dollar of investment.  For instance, the cost wedge for Biofuels in portfolios 3 and 4 are much larger than the corresponding abatement wedges.  This indicates that abatement with biofuels is more expensive on a per-ton basis than for the other investments in those portfolios.

I will focus on portfolios 2, 3, and 4, since those are the portfolios which deliver the necessary levels of abatement, which we will need to ramp up to over the coming years and decades.

Forestry

The most striking thing about these portfolios is that Forestry dominates CO₂ abatement, as well as cost in portfolios 2 and 3.  The more aggressive portfolio 4 has three relatively large cost wedges: Building Efficiency, Forestry, and Biofuels.

Unfortunately, according to the report’s authors, the carbon abatement from Forestry is very uncertain.  To make matters worse, the methodology used in the report is extremely sensitive to the expected returns (or abatement, in this case) of particular investment classes.  Small errors in the expected returns can lead to frontier portfolios which are dominated by a single investment class, in this case Forestry.  The report notes that "forestry abatement potential is highly uncertain." (p.8/22)  While we can conclude that forestry is likely to be a significant part of our carbon abatement strategy, there is a good chance that forestry will not dominate the mix as it does in the model.

For stock market investors who want to allocate part of their portfolio to forestry, I recently wrote about investing in forestry stocks and forestry exchange traded funds (ETFs). While I was focusing on the potential for forestry to benefit from biofuels and bio-electricity in the article, any marginal demand for forestry services (including carbon sequestration) should benefit this sector.

Hydropower

Hydropower is also a significant investment in these portfolios.  Much of this investment will probably take place in the developing world, but there are also significant opportunities for upgrades to facilities at existing dams in the developed world.  I looked at the potential for hydropower stock market investments last year.

Biofuels

Biofuels also contribute significantly to all the portfolios, especially in the higher abatement scenarios, although the costs are high relative to other investments.  I don’t believe that this is very realistic if we are also going to have large contributions to carbon abatement from forestry.  My guess here is that the authors did not take into account the negative interactions between forestry and biofuels, where an increase in one will drive up the costs of the other because of competing land and water use.  Land used for forestry cannot also be used for biofuels, and vice versa.

Wind

We see significant contributions from wind in portfolios 3 and 4, and the costs and potential for wind are much better understood than for many of the other scenarios.  Better yet for stock market investors, investments in wind are simple, with two wind energy ETFs allowing a simple investment in the sector.  Of the two, I have a slight preference for FAN (you can see my reasoning here.)

Efficiency, in all its Forms

Finally, port folio 4 shows considerable investment in Building Efficiency and Industrial Efficiency (which we usually refer to as just Energy Efficiency), while portfolio 2 has a good slice of Transport efficiency (what we usually call Clean Transportation.)  Keep in mind that these slices are only investments that do not have "negative cost," that is they do not cost less than new investments in conventional generation.  Since efficiency dominates investments with negative cost, the total investments in all forms of efficiency are likely to be many times what we see in these graphs.  While there is not yet an energy efficiency ETF available, there is one focused on clean transportation, the Global Progressive Transport ETF (PTRP).  I also have a few stock picks in clean transport.

For industrial and building efficiency, there is no ETF, but here are five of my favorite efficiency stocks, and you can find a much larger list of energy efficiency stocks here.  It’s also important to note that smart grid stocks will fall into this category as well, at least for the purposes of the report.   Here are five of my favorite smart grid stocks.

Geothermal

Geothermal also has a small slice of portfolios 2 and 4.  This is significant given the small current size of the industry: even these small slices imply rapid growth for an underappreciated sector.  I mentioned three geothermal stocks to consider here, but I have since
sold my stake in Raser Technologies (RZ), and will probably not repurchase it.  Our Twitter followers saw that first.  Charles did a good run-down of the public geothermal stocks in June.   

Other Thoughts

It’s also worth looking at what is not in the efficient portfolios, but since this entry is already quite a thesis, I’ll save that for later.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

The post What A Portfolio Approach To Climate Policy Means for Your Stock Portfolio appeared first on Alternative Energy Stocks.

Tom Konrad, Ph.D., CFA

The Algonquin Power Income Fund (AGQNF.PK) has been one of my star performers in an excellent year.  Is it still a good investment at these prices?

 Since I recommended the Algonquin Power Income Fund (AGQNF.PK/APF-UN.TO) in January as a renewable energy income stock for 2009, the company is up 69%, in addition to the C$0.02 monthly dividend, worth approximately another 8% through August on the US$1.82 purchase price, making it the second-best performing of my ten picks (after Cree, Inc (CREE).)  However, since the major basis for my recommendation at the time was the stock’s extremely cheap valuation and high yield, I thought it was worth revisiting, on the occasion of the company’s Q2 update [pdf]. 

Major events in the first half  were Algonquin’s planned acquisition of a 50% stake in California Pacific Electric Company (Calpeco), the former California assets of NV Energy (NVE), and the fund’s plan to convert into a corporation and acquire some tax loss assets through a deal with Hydrogenics Corporation (HYGS).

Calpeco

The Calpeco deal gives Algonquin some exposure to electricity transmission and distribution (in which their partner Elmira has management expertise) in addition to their current exposure to renewable energy generation.  Since I like the potential opportunities in electricity transmission, I think this was a step in a good direction for Algonquin.  Furthermore, about half of Algonquin’s stake in Calpeco will be financed with an equity investment in Algonquin from Elmira at C$3.25 per unit.  Since this is only slightly below the current price, and well above the price at which I recommended the stock, the transaction will be non-dilutive for both me and my readers, and a reasonable exchange for more recent investors.

Hydrogenics

In July, a reader worried that the deal with Hydrogenics was a bad idea because Hydrogenics is a fuel cell company, an alternative energy sector neither of us is enthusiastic about.  In fact, this is a short term deal, and shareholders need not be concerned with ending up owning a fuel cell company when they thought they owned a renewable energy power producer.  Despite the legal complexity, this deal is not a tie-up with Hydrogenics, but rather a way for Algonquin to acquire corporate status, and Hydrogenics’ tax loss assets at the same time.  Because Algonquin is profitable, and Hydrogenics is not, these tax loss assets are valuable to Algonquin, but not Hydrogenics, allowing both companies to benefit. Algonquin will gain the benefit of Hydrogenics previous losses in exchange for a cash payment, which will allow the cash-poor, unprofitable company to continue operations. The transaction has been approved by Algonquin unitholders and Hydrogenics shareholders, and awaits regulatory approvals.

Results

The Trust’s first half revenue was down compared to 2008, which management attributes to lower natural gas prices.  Gas prices affect the trust’s revenues through lower contract prices for the heat from their thermal generation units.  I find this to be a good sign, since I expect that low current natural gas prices will rebound because they do not provide sufficient incentive for natural gas companies to drill and replace the gas supply from depleting wells. Although I expect that low natural gas prices will depress revenues in the short term, Algonquin’s operating cash flow and earnings should continue to be easily sufficient to fund distributions to unit holders with plenty left over to fund Algonquin’s growth plans.

At current prices of C$3.32 for APF-UN.TO and US$3.07 for AGQNF.PK, with a yield of 7.2%, I consider Algonquin to be reasonably valued, and continue to hold my positions.  However, because I currently expect a market decline, I would only suggest buying Algonquin today if you also hedge your position against general market moves.

DISCLOSURE: Tom Konrad and/or his clients have long positions in AGQNF.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

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