Tesla, First Solar, Better Place and Comments on a Weird Quarter in Cleantech

Wow.  This has been a really interesting few months in cleantech.

First Solar announced a $0.99 cent/Wp target within 4 years for installed with trackers utility scale in its investor deck.  That equates to around $4-5 henry hub gas price in a new combined cycle gas plant.

The scary thing is that best utility scale PV solar is already approaching the $1.50/Wp range in the LAST quarter, equating to $7-8 Henry Hub.

The Top 5 PV manufacturers announced module costs all south of $0.65/Wp.  First Solar says <$0.40/Wp in 4 years. Greentech Media says the best Chinese C-Si plants will do $0.42 within 3 years.  Screw the EU and US dumping  trade wars.  That my friends, is grid parity for a massive swath of the electricity market wholesale AND retail.

These companies are learning to work on GP margins of sub 10%.  They are getting lean, and mean and good.

 

Better Place finally went bust with a whimper.  $850 mm in venture money gone.  As we predicted, battery changing for electric cars is a really bad idea.  But this time, unlike the billion that Solyndra took down, nobody noticed.  Maybe because EVs are being rolled out right and left.

Why was it a bad idea? Well, 1) they would make car companies have to change their fleets, and effectively COMPETES not leverages what the rest of EV and battery world was doing, 2) it implicitly assumes fast charging and better cheaper batteries were not coming, so we needed a work around – meaning if the industry succeeds, Better Place has no advantage, if the industry fails, Better Place has no leverage, a really bad bet for an EV lover, 3) it assumes the costs of the swappable battery car and changing stations were not high, and could come down as fast or faster than conventional EVs and battery technology, 4) it means basically all fillups are full service, which I consider a really dumb idea.  We stopped that in the US in 1980s?

 

Tesla got profitable, sort of.  Announced a positive EBITDA.  Well, ok, but a big loss if you excluded emissions credits that are expected to be a 2013 only event –  about 12% of revenue.  Exclude those and the car manufacturing business had <6% gross profit margins and still loses a lot of money.  But a huge step forward.  Especially as the Model S is now the best selling EV.  Oh, and seriously, even GETTING GPs to positive this fast is a big deal as well as EBITDA positive under ANY circumstances this fast.  Kudos!

This is huge, because as we reported last year, Tesla by itself holds up the venture returns in the cleantech sector.

An analysis of Stifel’s monthly report on EVs and Hybrids shows the Leaf, Volt and Model S making progress, still young and small and choppy sales, but EVs as a group outpacing sales of the HEVs at the same point in their lifecycle.  EVs + HEVs is now consistently at 4% of new US sales. Not half the market, but definitely real.

 

But somehow, nobody’s making much profits.  This industry is looking like profits will always be elusive and come either in the bubbles, or only to the #1 or 2 player.  2013-2014 are looking like set up years for cleantech.  Our prediction? By 2015 NO ONE will question whether cleantech sectors are viable.  It will be about how fast they erode other people’s profits.

Contrarian Wisdom Isn’t Necessarily Better Than Conventional Wisdom

For years, many observers (including myself) have argued that — from an environmental perspective — it is preferable for energy prices to be higher, so as to (1) discourage consumption of energy, mostly from fossil fuels which generates significant environmental impact, and (2) make various forms of energy efficiency and cleaner (if not zero-emission) alternative sources of energy more economically attractive to customers, which in turn will produce a virtuous cycle of further improvement in energy efficiency and alternative energy to penetrate markets in an ever-increasing fashion.

Recently, Carl Pope (formerly CEO and Chairman of the Sierra Club) penned an article that aims to turn this wisdom on its head.  In “The Road To Climate Heaven Is Paved With Ever Cheaper Oil”, Pope makes the point that the most environmentally-damaging forms of oil — such as the oil sands in Alberta — are intrinsically the most expensive to produce.  As a consequence, if oil prices were consistently at $70/barrel or less, production from these resources would be unprofitable and would relatively quickly cease, which in turn would (paraphrasing here) save the planet from future horrible devastation.

Pope notes that — of world oil demand at levels around 85 million barrels per day — about 80 million barrels per day can be sourced from relatively-clean conventional oil resources that are economically recoverable at much lower prices, rather than the dirty stuff which are economically viable only at higher prices.  In other words, the world supply curve for oil is pretty flat and low up to about 80 million barrels per day, and then goes vertical beyond that.

Assuming that his analysis of global oil supply is approximately accurate, Pope asserts that we just need the largest consumers of the world to somehow reduce demand levels by about 5 million barrels per day — permanently — and then the dangerous sources of marginal supply will be shut out of business.

It’s an interesting argument.  But I am not persuaded.

First of all, let’s consider how we got here:  World oil prices have consistently been hovering in the $80-120/barrel range since mid-2007 (except for a brief period in 2009 during the absolute trough of the global economic meltdown).  Why is this?  Except during the economic standstill, global oil demand has been robust at (as Pope says) around 85 million barrels per day — even in the face of high (and generally increasing) prices.  Note that U.S. demand has essentially been declining, so the rest of the world (especially China) has been picking up the slack.  (Imagine for a moment how much more demand there would have been had prices not increased so substantially!)

Put aside for a moment the question of how to achieve a demand reduction of 5 million barrels a day from the developed economies.  (Pope himself fudges on this point by stating that the developed economies could “encourage transportation efficiency and fuel diversity” in some unstated way.)  What would happen if Pope’s dream were somehow to be achieved?

At first, as Pope would hope, world oil prices would no doubt fall.  I don’t know if they’d fall by tens of dollars of barrel, but it’s possible.  If that were to happen, it almost certainly would cause a significant increase in demand within not-too-much time, which in turn would spur prices upward again.  Eventually, this force of increased demand would push prices back into the range that again makes viable production from the dreaded dirty marginal resources.

This is the notion of an equilibrium, central to free-market economic thought:  that any exogenous shock to the system will produce a response from the market that will tend to bring the system back into balance.

For Pope’s fantasy to play out, there would have to be not only an immediate reduction in developed-world demand for oil on the order of 5 million barrels per day (thus dropping oil prices to a significantly lower level), but an ongoing reduction from the developed-world to offset the faster growth in oil demand that would be generated by much lower oil prices that would somehow need to be maintained by ever-shrinking demands from the developed world.

I simply don’t see this happening.  Efficiency won’t be enough; it requires a massive shift off of oil for transportation — the “fuel diversity” for which Pope argues.  Low-cost natural gas (largely due to fracking, another environmental bete noire) for compressed natural gas vehicles and better (higher performance and lower cost) batteries for electric vehicles will help, but daunting investments in fueling/recharging infrastructure would be required for either (or especially both) to achieve mass-penetration — and I don’t see the money for these laying around.

With his recent article, Pope reaches for a similar conclusion, but coming from a different angle, as those who are seeking to forestall the construction of the Keystone XL pipeline to thwart access to markets for oil sands from Alberta and thereby prevent their development as a means of protecting the planet.  They share a supply-oriented mindset:  curtail supply by whatever means necessary (in Pope’s case, taking actions to depress market prices; for pipeline opponents, fighting legal/regulatory battles) to prevent consumption of a particular source of oil.

In my mind, this is not the way the modern economic world works.  In the market-oriented economy that generally prevails around the world, it is demand — not supply — that drives all the mechanisms.  World oil markets are fungible:  pushing down in one place will cause counterbalancing forces elsewhere, mostly negating the initial restriction.  Trying to control markets by somehow altering supply is futile, as the forces of demand will insidiously work around any inhibitions.

To see an example of this, look at the ineffectiveness of the so-called war on drugs:  demand may be lowered from unfettered levels but nevertheless remains abundant, against all social wishes.  The market is not destroyed; be assured, the market remains — it’s just been driven underground to all sorts of illegal and nefarious suppliers.

Similarly, the lack of a Keystone XL pipeline will not prevent the tapping of the Alberta oil sands (as long as oil prices are high enough).  Participants in the market are too nimble and inventive.  Oil sands output is already being shipped to the U.S. not only over existing pipelines, but as they approach capacity, by an increasing number of rail cars.  In addition, the Canadians may build their own pipelines to the Atlantic or the Pacific Coasts, allowing oil sands to reach world markets even with constrained access to the U.S. if Keystone XL is never built.  So the opposition to the pipeline will mainly have ended up being for naught — other than to drive up oil prices a little bit, due to the extra costs introduced into the market by denying an economically-attractive project from being built.

I respect Pope for all he has done in his career for the environment, building awareness of the critical issues our planet faces and generating urgency for action.  But, at least in his most recent writing, his unconventional economic wisdom does not ring true to me.  I’m often a contrarian myself, but in this case, I believe that Pope’s out-of-the-box thinking should probably be put back in the box.

TVA Privatization: An Idea Whose Time Has Not Come, And Is Not Approaching

For those who are irate about the U.S. government intervening in the energy markets, you’ll have to go back a long time to find when that was not the case.

To illustrate, rewind 80 years:  in the 1930’s, the Administration of Franklin D. Roosevelt looked at the physical and economic backwaters of southern Appalachia and determined that what this part of the country needed to arrive into the 20th Century was the availability of electric power.  With Federal intervention, rivers were dammed, hydro powerplants were installed, and lines were strung.  Voila!  The Tennessee Valley Authority (TVA) was born.

For eight decades, the residents and businesses of this area of the country — not just Tennessee, but large parts of Kentucky and Alabama, and slivers of Virginia, North Carolina, Georgia and Mississippi — have benefited from electricity well before the market would have brought it, and at prices well below what the market would have brought it.

No doubt, it would gall many folks from the area served by TVA — immortalized by the movie “Deliverance” — to realize how much their lives and economic successes owe to the largesse of the Federal government.

As I discovered from reading this article in the Economist, the Federal budget released on April 10 by the Obama Administration mentioned “the possible divestiture of TVA, in part or as a whole.”  Such a privatization is consistent with what I’ve long argued:  that assets in industry segments subject to sufficient competition, such as power generation assets in wholesale power markets, are more properly owned by private parties than by the public sector.

Bluntly, the folks in TVA-land have been getting a huge handout from U.S. taxpayers for decades, with below-market debt financing an enormous infrastructure build-out that would have cost much more with private capital.

I’ve never seen a good reckoning of the aggregate amount of the subsidies that TVA has received since its inception nearly 80 years ago, but it’s certainly in the billions of dollars.  Perhaps even tens of billions of dollars.  According to this 2008 analysis by the Energy Information Administration, the TVA benefited from low-interest capital underwritten by the U.S. government by between $65 and $189 million in 2006 alone.  During periods of high interest rates, such as the late 1970s, the benefit may have been much higher.  (Oh, and by the way, TVA was undertaking a massive nuclear powerplant construction program at that time, so the effect of interest rate subsidies would have been especially pronounced then.)

Is it time for the subsidy to end?  The proceeds from a sale would help address the ever-growing fiscal crisis the U.S. faces, while injecting much-needed competitive discipline to wholesale energy markets in the South.  However, I strongly suspect that the political forces to maintain the status quo will be too strong.

As the Economist noted in their concluding remarks, “elected officials in the TVA area are either frosty or outright hostile to Mr. Obama’s proposal [for privatization].  Most are Republicans, who might be expected to applaud a plan to shrink government.  But power does strange things to politicians.”

Indeed.  In other words, don’t bet on the TVA being privatized anytime soon.  The lack of discernible public debate on this eminently worthy topic should tell you everything you need to know about the likelihood of TVA privatization in the foreseeable future.

Survey of Advanced Energy Business Executives

In April, the Advanced Energy Economy Institute (AEEI) released the synthesis of a survey of executives in the advanced energy sector conducted by PA Consulting to suggest priorities for U.S. energy policy.

The report, Accelerating Advanced Energy in America, outlined business challenges and policy challenges thwarting the growth of the advanced energy sector, in order to identify policy improvements that could overcome these challenges.

The most significant business challenges identified were:  financing of emerging technologies, scaling technologies from development to commercialization, declining electricity prices (primarily owing to the natural gas boom), and recruiting a qualified and skilled workforce.

The most significant policy challenges identified were:  regulatory/policy uncertainty, “static definitions” of technologies qualifying for support, inadequate R&D support, and politicization of advanced energy.

From these challenges, AEEI summarized the respondents’ observations to make the following suggestions on sound energy policy:

  • Business leaders want stability and predictability in market structures.
  • They want a level playing field with their competitors – with traditional energy, and with each other.
  • They want government to support research across a wide range of technologies.
  • They want subsidies that make new technologies more competitive to be limited in duration, and phased out in a gradual, predictable manner, not maintained forever or cut off after arbitrary deadlines.
  • They want government policies crafted around broad problems, rather than pre-ordained solutions so that the market can identify the best ways forward.

It’s a reasonable wish list to ask of policymakers.  But, then again, when did “reasonable” last prevail in Washington DC?

Speed in the Oil Patch – Automation at the Wellhead looks like Cleantech

I had a chance to wander around the Offshore Technology Conference this week and chat about some of the technologies on display.

OTC is still heavily a mechanical engineer’s conference.  Despite the high tech nature of the industry, in large part vendors are not yet leading customers, and steel still rules the day in technology.

One of the areas that interests me is speed.  Speed to find, speed to drill, speed to produce.  In every industry, speed kills.  (In the good way). Speed with more data and more controllability? That changes the way we do business.  Efficiency, speed, better, safer, cleaner.  That’s where the oil & gas industry is headed.

Superior Energy Services (NYSE:SPN) one of the largest drilling and wellhead services companies, picked up one of the technology awards with CATS, the Complete Automated Technology System.  Neat stuff.  Basically, take a small workover rig that needs half a dozen or so people and a lot of manual labor, modularize components into a truly mobile ready to use package, add more robotic material handling, soup up the control system, cut down to half the people, and automate completions.

  • Cuts labor.  They’ve got 3 people where they had 6.
  • Improves safety, now on 3 rigs running for 8 months, zero loss time incidents.  I asked how many he’d have expected in that time – 6.
  • Controllability and knowledge management.  Once automated, we can turn to a statistical management, not a black art.
  • Speed.  The units themselves are small units, so a bit slower in use if I follow correctly.  But more controllability means more predictability.  And a ready- to-use design means faster up, faster down, higher percentage of time on.

Quote: we won’t be building any more conventional ones.  These are expensive day rates, but all fully utilized.

 

Baker Hughes (NYSE:BHI) picked up another one of the awards with a steerable drilling liner technology called SureTrak.  Basically, same directional steering and drilling system, within liner in place, packed with logging-while-drilling and measurement-while-drilling sensors, once done, unhook the liner, and just leave it there.  Brand new, done it 8 times now, with Shell and Statoil according to one of the sales managers.  Same as before, automate and integrate a process, allow you to solve different and more technical problems, and deliver speed, less time up and down.

 

Eventually, we will automate our industry and move it all the way to the information age.  REALLY automate it.  Until then, one step at a time.  That sounds odd from an industry that uses seismic and ROVs and supercomputers.  But one of the guys at the Weatherford booth said it best when asked about the digital oilfield – is anyone yet using all of your digital oilfield software the way you think it should be used?  Answer, no, it’s all still very silo’d.

Reporting from Omaha

Over the weekend, I attended the annual shareholder’s meeting of Berkshire Hathaway (NYSE:  BRK.A, BRK.B) in Omaha to hear the wit and wisdom of CEO Warren Buffett and Vice Chairman Charlie Munger.  For five hours on Saturday, Buffett and Munger fielded questions from panelists and investors on a wide range of topics.  A good synopsis of the often amusing banter was provided by an ongoing blog operated by the New York Times.

During the marathon Q&A session — quite impressive for a pair of octogenarians to endure — Buffett and Munger thrice touched upon topics of relevance to the cleantech sector.

First, Buffett commented on the excellent performance of Berkshire’s railroad, BNSF, which experienced a very strong first quarter of 2013, with much higher growth in volumes than other U.S. railroads.  Buffett noted that it was very fortunate for Berkshire to have “lots of oil discovered next to BNSF’s tracks”:  BNSF is able to take advantage of the oil boom in western North Dakota associated with the Bakken shale, due to its extensive route network in the area.   A side implication is that BNSF is well-positioned to ship oil imported from Canada, whether or not the Keystone XL pipeline gets built.

Of course, BNSF also has a large exposure to coal hauling.  However, it’s important to recognize that BNSF’s coal business is mainly centered on production from the Powder River Basin, which is both incredibly cheap and low-sulfur.  As such, it remains competitive with low-cost natural gas, and is not being displaced as much from the power generation sector as is coal from Appalachia, so BNSF is unlikely to be as hard-hit by the shale bonanza as other railroads.

Second, an investor asked about the potential effects of the increasing competitiveness of solar energy on the future financial performance of Berkshire’s utility business unit, MidAmerican Energy.  The question was likely prompted by a recent report issued by the Edison Electric Institute raising the concern that solar and other forms of distributed generation may lead to reduced revenues and profitability of grid-based electric utilities as customers source a greater share of their electricity needs from on-site sources.

Buffett and Munger noted that Berkshire was aware of the declining cost of solar energy and correspondingly saw good investment opportunities in the sector, as evidenced by three very large projects acquired by MidAmerican with over $5 billion in capital requirement.  However, they noted that these plants were central-station generation, as opposed to on-site distributed generation.  Moreover, they are located in the deserts of the southwestern U.S., not in MidAmerican’s utility territories.

Extrapolating from Berkshire’s entry into solar — central powerplants in deserts — Munger was particularly skeptical that rooftop solar would pose much of a cannibalization threat anytime soon in MidAmerican’s not-so-sunny locales in the Pacific Northwest, Iowa and the United Kingdom.

Buffett asked MidAmerican’s CEO Bill Fehrman to stand in the audience and comment further.  Fehrman opined that MidAmerican’s relationships with their regulators were sufficiently positive that tariffs would be restructured if/as rooftop solar penetrates their customer base and leads to reduced revenues/profitability associated with the grid services that MidAmerican provides to its regions.

Personally, I agree with these assessments — insofar as MidAmerican’s current portfolio of territories is concerned.  For electric utilities in far sunnier locales, and with regulatory regimes that are generally more populist in their leanings, rooftop solar may sooner pose more of a downside.

Third, another investor asked about the potential impacts of climate change and of climate change policy on Berkshire’s businesses.

Buffett began his response sarcastically by noting the unseasonably warm weather that Omaha was enjoying (which it most definitely wasn’t, as attendees had to prevail against a cold windy rain to enter the auditorium).  After this Fox-worthy cheap-shot, Buffett cautiously offered that — though he certainly wasn’t an expert — he believed that there was a real chance that man-made climate change was occurring, because most of those who really understood the issue and were worried were quite compelling in their logic.

However, he was less concerned that climate change would represent a major negative force against Berkshire — especially their insurance businesses.  At several points during the day, Buffett extolled the excellence of the pricing discipline and risk assessment of Berkshire’s insurance businesses, and Buffett indicated that he didn’t think that the risk profiles of the insurance businesses had changed materially due to climate change, at least so far.

Munger then chipped in with some commentary on climate policy.  He was pessimistic that any global policy on carbon would be effective, due to the massive coordination problems between all of the various countries that would need to be signatories.  However, Munger was supportive of higher taxes on carbon fuels, which “Europe stumbled into” for reasons other than climate change.  This suggestion prompted some applause from the audience, which surprised Munger.  Buffett then noted to Munger that far from everyone applauded, which drew laughter and a much louder burst of applause from the crowd — indicating that the Berkshire shareholder base on average is probably not as concerned with this issue as is your intrepid reporter.