Cleantech, Hedging Economics, and Commodity Hell

It never ceases to fascinate me the massive amount of impact commodity price swings have on business plans.  Apple, Google, Facebook, they don’t deal with this.   Commodity price swings just don’t hit their bottom line.  But in cleantech, well, government and policy is king, commodity and resource shocks are queen, you and I are the numbered cards, technology is the joker, and time is the ace.

Food for thought:

My colleague Richard Stuebi just did an article on the impact of the run up in corn prices – 60%!

The first wave of distributed power business cases (including the entire damn fuel cell sector) 10 years ago collapsed when natural gas prices spiked to unheard of heights.  They’re back now, based on low gas prices.

All the carbon development business cases got made, then crushed, under price swings in carbon prices, fixed price contracts, and delivery dates. I can count maybe a dozen billion dollar fortunes made and lost in carbon on this.

The entire Chinese solar market got built not because of great technology or even great manufacturing, but because of a price environment where old, larger US and Japanese companies BP Solar, etc. were unwilling to go long on silicon and risk getting upside down, and the the new manufacturers from China bet the farm on that and where able to add highly profitable capacity and take share as the German market grew.  Today’s margin pressure is a reversal of that .

There was never a shortage of silicon, but of refining capacity, a function of contracts.  However, this “shortage” drove billions in investment in thin film and concentrated solar power, mostly under a materials cost business case.

Today, all solar companies find the price of money is the new commodity that drives their margins.  And the Solyndra executives essentially claimed commodity price hell for their downfall, saying they collapsed because of “unsustainable prices” from China when PV became a true commodity and they couldn’t compete.

The wind market is under pressure now because low gas prices makes wind relatively less competitive – only a few years ago, wind was adding capacity in the US faster than anything else.

Those same low gas prices are making a mockery of the old solar business case that your power prices will just go up and up and up.

The first wave of corn ethanol darlings, VeraSun and Aventine, went bust not from bad business plans, but from busted hedges.  In fact, the valuations of ethanol companies were based on unrealistic refining margin assumptions based on very wide price deltas in the growth phase, when the industry was short capacity relative to the US demand.

Corn ethanol itself significantly moderated retail gas prices in that oil price peak, in part by simply adding a new source of very liquid supply into an inelastic demand curve, bringing down refining profits.

The EV and plugin craze launched in the heart of the oil price rise driving interest in anything that saved gas. But an EV’s payback is built on essentially on decoupled oil and gas prices – high oil and refined product and low power from cheap gas, combined with up front cost of batteries and their life.  The same “spark spread” business case that drove distributed generation.

 

A couple of proposals:

Linked ethanol markets between the US and Brazil would moderate the corn price spikes, our tariff ensures the value and pain of swings is steep and localized in our food market.

When you IPO an energy company, analysts look heavily at its “leverage” to different commodities, and value it appropriately.  Why don’t we do that in cleantech?  Looking through the latest biofuels prospectuses, Gevo, Codexis, Kior, Amyris, Solazyme, etc, they seem  suspiciously naive on the same things that killed their low tech brethren VeraSun.

I guess in cleantech, what the CTO maketh, only God and and CFO can taketh away. AKA, when are venture capital firms going to freaking hire economists before they make investments?

 

2 replies
  1. Tamir Druz
    Tamir Druz says:

    Neal,
    This is an excellent piece of analysis on how commodity prices have drive the boom-bust cycles with various sub-sectors of cleantech. I also agree with your recommendation to eliminate the $0.5/gal tariff on Brazilian sugar ethanol> I would suggest a slight modification to your 3rd recommendation though. Instead of hiring economists to address the commodity price risk, I would suggest hiring a good hedger or hedging consultant to design a strategy that "locks in" the commodity-price component of the business case/value proposition of the investment, or at least cushions the loss if that piece goes south.

    Tamir Druz
    Druz Commodity Market Solutions
    druzenergy.com

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