Investing in CleanTech, Post Copenhagen

Ever since the ClimateGate scandal broke, I have been asked “how do we play this?” With the chaotic failure of Copenhagen, this is a more pressing question, as bets are being shuffled in cleantech with the new change of assumptions. At a high level the primary investment implications are to move out of sectors that require government subsidies or carbon taxes, and into sectors with economic competitiveness. This is not to say we won’t see attempts to pass cap™ or carbon taxes, but they seem likely to give way to a different spin on cleantech, that of saving green jobs not saving the planet.

With this in mind, we need to start where green technologies are or will soon be price competitive. Casey Research has a really useful newsletter on point, and here is on of their charts:

Let’s walk through major CleanTech sectors with this chart in mind.

Carbon Trading

This one is easy: stay away, stay far away. This will be a huge casualty of the failure at Copenhagen. Even as the masses assembled, Denmark was marked with a huge scandal over fraud in carbon markets. Australia’s cap™ bill failed on the eve of the confab. The Danish scams were in the Billions of Kroner. Now the scams are being found more broadly, across Europe. Organized crime may have skimmed an astounding 5B Euros ($7.4B).

Geothermal

The authors of the Casey Energy Report make a great case for geothermal. Right now geothermal is used near hotspots of surface geothermal activity. The core insight is that future technology can turn almost any area into a geothermal hotspot, providing a 24/7 energy source which has very low incremental costs once set up. No need to worry over the sun shining or the wind blowing. There is a public play here, recommended by David Fessler:

This is an area with plenty of potential, particularly in the western United States. When it comes to profitable, large-scale geothermal and recovered power producers, Ormat Technologies (NYSE: ORA) is pretty much the “Lone Ranger,” but many smaller operations will likely fire up geothermal plants in 2010.

Wind

T. Boone Pickens made a play for wind in Texas, then very visibly backed out of it. Wind would work well offshore of New England, but has been blocked by the Kennedys, among others, for ruining their views. In general, a spine of wind down the Great Plains would make sense, given the wind there. Windmills could become a cash crop.

Part of what deterred T. Boone as well, besides not being able to shake down governments for subsidies, was the need to connect the windmills to the grid. In vast areas where wind would work, the grid is inadequate, non-existent, or caught in political wrangling. Hard to make wind a cash crop if the grid won’t connect to it! Watch for approvals of new powerlines to renewable areas to inform as to where to focus investments, such as just happened in SoCal.

A microcosm of the wind market is the Bonneville Power Authority, which runs hydro on the mighty Columbia River and wind in the breezy Columbia Gorge. The actual output in practice is far less than expected. This calls into question the cost estimates of wind. The BPA has found that at peak wind, they would overwhelm the transmission lines, and have to cut off turbines; and further have had to dump water over the dam without getting power from it due to the way nature works (the water flows even as the wind blows).

If you want to play this, David Fessler has a wind recommendation:

Wind installations will continue during 2010, but well off the record pace of 2008. Nearly 300,000 megawatts of wind farms are waiting for grid enhancements and upgrades. Vestas (VWDRY.PK) is the world’s largest wind turbine manufacturer, with over 39,000 turbines installed around the world.

Solar

The solar sector is 3x more expensive other mainline energy sources, making it a bad bet for base energy production. Potentially solar can run down a cost curve, but it is having a terrible time getting out of the starting gate. I have an indirect interest in BrightSource, a solar-thermal engineering firm. Solar-thermal uses mirrors in the desert to drive a heat pump to spin a turbine. The team behind BrightSource was the pioneering team in the ’80s behind solar-thermal in that wave of energy consciousness, and near the end had 90% market share. Yet steadily the subsidies were pulled as oil continued to get cheaper and cheaper, and the lights were turned out on their firm. Their new company hit a serious bump in the road this summer, when their plans to build a huge planet in the Mojave Desert were stymied by the local eco crowd (NIMBY!) as well as some obscure political interest by Senator Diane Feisnstein.

Possibly the solution lies in photovoltaic cells (PVs). The SciAm article A Solar Grand Plan (you can download it here) paints a compelling picture of mass PV farms across the Desert Southwest, joining that theoretical spine of wind down the Plains. It is difficult to see how it is more than science fiction, unfortunately. It requires some engineering breakthroughs, such as mass storage of energy in caves/mines using compressed air, and superconducting DC lines that stretch from the Desert Southwest to populated centers across the country. More daunting is the need for 30,000 sq miles to be covered with PV cells along with concrete, power lines, roads, and the support for a massive construction project. To give that perspective, that is the size of land between SF and LA, from the ocean to the mountains. Hard to see how that swathe can be available somewhere, and more than that can be built upon. We might be able to find it in Arizona, but the system needs water to construct and water to maintain (PVs get dusty).

Still, it appears that distributed PV cells (on homes and businesses) have a market, because the savings at the retail end of the utility price curve are enough at the margin to cover the 3x higher cost. Currently the Chinese are dumping PVs into the US, reusing excess semiconductor capacity. This is depressing domestic production but incenting domestic uses. A number of thin film PVs are coming online in 2010. (Disclosure: I have an indirect interest in Miasole, one of the thin film ventures). Perhaps the Chinese PVs will make a market for thin-film.

Caution is warranted in solar, as the initial exuberance has fallen to hard economic and logistical realities. Nonetheless I agree with David Fessler’s comments on this sector:

This is one sector that should continue to see consolidation in 2010. With an excess of silicon wafer capacity and new low-cost thin-film designs just now coming into production, expect the transition from silicon-based panels to thin film to continue in 2010. And despite the negative press, one of the ultimate winners in this space will be First Solar (FSLR).

Here is a bit more on First Solar, from Toby Shute, who posts on solar regularly in SeekingAlph:

The thin-film kingpin came back the next day with guidance for 2010, plus news of a major capacity expansion. The forecast was notable in that it went beyond the usual sales and margin figures, and it included free cash flow guidance. Free cash flow is a rare commodity in this capital-consuming industry. With such a robust financial profile, it’s no surprise that First Solar is comfortable expanding its current capacity by nearly 50%

Natural Gas

Nat gas seems to be the transitional fuel from oil to renewables like geothermal. We have had recent large discoveries, and gas has become cheaper than oil. In the longer run, nat gas may become the foundation of the so-called hydrogen economy, where it can be used to fill up hydrogen fuel cells (the CH4 in gas is converted to H). This is several years away from commercial development.

There are many ways to play gas. Some ideas include ETFs like First Trust ISE Revere Natural Gas (FCG) or ProShares Ultra Oil & Gas (DIG). (Please note that I am not endorsing these, just passing them on)

There is a lot of backroom political wrangling over nat gas. if you go into this area, be sure to keep an eye on influence peddlers in Washington.

Nuclear

Quick comment on nukes: there are a bunch of future models being designed. The most interesting uses Thorium as a fuel. It makes a better fuel than uranium. A long-term play is to look into Thorium.

Electric Vehicles

A lot of action here, although little yet public. The nano-scale Lithium battery maker A123 went public this Fall, and is worth watching. Tesla Motors should go out in 2010 (disclosure: I have an indirect interest in Tesla). It should get a good reception, given it is the first one out. Fisker with its Karma plug-in should follow.

This may be a market where it is better to catch the early IPOs than wait. A lot of electrics will be coming out in the period from 2010-2012, including the Chevy Volt. The current hybrids are expected to give way to plug-in electrics of various designs. The primary battle is between all electrics like the Tesla and electrics with range-extenders (motors or fuel cells) like the Volt or the Karma. Toyota has a huge lead with the Prius, and recently announced a plug-in lithium-ion car with a motor range extender. Consequently the competition should get pretty fierce.

An interesting longer-term play is to invest in Lithium. All the future batteries are using lithium-ion technology. It is also stressed by laptop/netbook and mobile-phone demand. The coming tablet computers will further increase demand for lithium.

As a personal note, four of the five cars in my family (including kids who have flown the coop) are hybrids. I think they drive better – a smoother and quieter ride. While the GW alarmism will abate, and carbon-trading flop, the transition to electric vehicles will continue.

Efficiency

Another whole category is energy management, ranging from the Smart Grid for utilities, to energy metering for businesses and homes, and down to systems to lower energy usage in devices. Again, few companies yet public, but a plethora being invested in via venture capital and the Dept of Energy. This is a space to watch.

About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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