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Ethanol – the Good, the Bad, the Ugly, the Beautiful

The Good

By John Addison. The 9 billion gallons of ethanol that Americans used last year helped drive down oil prices. For those of us who fuel our vehicles with gasoline, as much as 10 percent of that gasoline is ethanol. The Energy Independence and Security Act of 2007 requires that more biofuel be used every year until we reach 36 billion gallons by 2022.

Reduced oil prices are good. We can go from good to great, if we move past fuel from food and haste to fuels from wood and waste. Although the economics do not yet favor major production, pilot plants are taking wood and paper waste and converting it to fuel. Other cellulosic material is even more promising. Some grasses, energy crops, and hybrid poplar trees promise zero-emission fuel sources. These plants absorb CO2 and sequester it in the soil with their deep root systems. These plants often grow in marginal lands needing little irrigation and no fertilizers and pesticides, standing in sharp contrast to the industrial agriculture that produces much of our fuel.

Cellulosic biofuels are becoming economic reality. Norampac is the largest manufacturer of containerboard in Canada. Next generation ethanol producer TRI is not only producing fuel, its processes allow the plant to produce 20% more paper. Prior to installing the TRI spent-liquor gasification system the mill had no chemical and energy recovery process. With the TRI system, the plant is a zero effluent operation, and more profitable.

A Khosla Ventures portfolio company is Range Fuels which sees fuel potential from timber harvesting residues, corn stover (stalks that remain after the corn has been harvested), sawdust, paper pulp, hog manure, and municipal garbage that can be converted into cellulosic ethanol. In the labs, Range Fuels has successfully converted almost 30 types of biomass into ethanol. While competitors are focused on developing new enzymes to convert cellulose to sugar, Range Fuels’ technology eliminates enzymes which have been an expensive component of cellulosic ethanol production. Range Fuels’ thermo-chemical conversion process uses a two step process to convert the biomass to synthesis gas, and then converts the gas to ethanol.

Range Fuels in Georgia is building the first commercial-scale cellulosic ethanol plant in the United States. Phase 1 of the plant is scheduled to complete construction in 2010 with a production capacity of 20 million gallons a year. The plant will grow to be a 100-million-gallon-per-year cellulosic ethanol plant that will use wood waste from Georgia’s forests as its feedstock.

The Bad

Over one billion people are hungry or starving. Agricultural expert Lester Brown reports, “The grain required to fill an SUV’s 25-gallon tank with ethanol just once will feed one person for a whole year.”

Corn ethanol that is transported over 1,000 miles on a tanker truck, and then delivered as E85 into a flexfuel vehicle that fails to deliver 20 miles per gallon is bad. GM and Ford have pushed flexfuel vehicles that can run on gasoline or E85, which is a blend with as much as 85 percent ethanol. For the 2009 model year, the best rated car running on E85 in the United States was the Chevrolet HHR using a stick-shift, with a United States EPA gasoline mileage rating of 26 miles per gallon, and an E85 rating of only 19 miles per gallon.

In other words, if you passed on using E85 and drove a hybrid with good mileage, you would double miles per gallon and produce far less greenhouse gas emissions than any U.S. flexfuel offering. Top 10 Low Carbon Footprint Four-Door Sedans for 2009

The problem is not the idea of flexfuel. You can get a flexfuel vehicle with good mileage in Brazil. The problem is that GM and Ford used their flexfuel strategy as an eay way out, instead of making the tougher choices to truly embrace hybrids and real fuel efficiency. Flexfuel buying credits and ethanol subsidies have created incentives to buy cars that fail to cut emissions.

A new paper – Economic and Environmental Transportation Effects of Large-Scale Ethanol Production and Distribution in the United States – documents that the cost and emissions from transporting ethanol long-distance is much higher than previously thought. Ethanol is transported by tanker truck, not by pipeline, although Brazil will experiment with pipeline transportation.

The Ugly

It’s a tough time to make money with ethanol. Major players, like Verasun, are in bankruptcy. For the industry, stranded assets are being sold for pennies on the dollar. With thin margins, low oil prices, and high perceived risk, it is difficult to get a new plant financed.

Activists worry about oil refiners, such as Valero, offering to buy ethanol producers such as Verasun. But oil companies can bring needed financing, program management, and blending of next generation biofuels with existing petroleum refined gasoline, diesel, and jet fuel.

Government mandates for more ethanol do not match today’s reality. Subsidies to industrial corn agriculture are not good uses of taxpayer money. Encouraging federal, state, and local governments with their 4 million vehicles to give priority to flexfuel vehicles with lousy mileage is government waste.

Not all government help is misplaced. Range Fuels large-scale cellulosic ethanol production was helped with an $80 million loan guarantee. The loan guarantee falls under the Section 9003 Biorefinery Assistance Program authorized by the 2008 Farm Bill, which provides loan guarantees for commercial-scale biorefineries and grants for demonstration-scale biorefineries that produce advanced biofuels or any fuel that is not corn- based.

The Beautiful

Beautiful is the transition to electric drive systems and the development of next generation biofuels. Last year, Americans in record numbers road electric light-rail in record numbers. In 2008, Americans drove 100 billion miles less than 2007. Americans also drove 40,000 electric vehicles.

Critics and special interests try to stop the shift to electric vehicles by wrongly stating that if there is coal power used, then there are no benefits. Mitsubishi estimates that its electric vehicle is 67 percent efficient, in contrast to a 15 percent efficient gasoline vehicle. Efficient electric drive systems lower lifecycle emissions. With the growth of wind, solar, geothermal, and other renewables, lifecycle emissions from electric transportation will continue to fall. For example, my main mode of transportation is electric buses and rail that use hydropower. My backup mode is a Toyota Prius that I share with my wife.

Long-term we will continue to see the growth of electric drive systems in hybrid cars, plug-in hybrids, battery electric, fuel cell vehicles, light-rail, and high-speed rail. Over decades, the use of internal combustion engines will decrease, but the transition will take decades, especially for long-haul trucks. During these decades we can benefit from next generation biofuels that will replace corn ethanol and biodiesel from food sources.

Shell has a five-year development agreement with Virent, which takes biomass and converts it to gasoline – biogasoline. Gasoline, after all, is a complex hydrocarbon molecule that can be made from feedstock other than petroleum. Unlike ethanol, biogasoline has the same energy content as gasoline. Unlike cellulosic ethanol alternatives, Virent produces water using a bioforming process, rather than consuming valuable water. Virent has multi-million dollar investments form from Cargill, Honda, and several venture capital firms. Biogasoline will be its major initial focus. Its technology can also be used to produce hydrogen, biodiesel, and bio jet fuel.

Sapphire is an exciting new biofuels company backed with over $100 million investment from firms such as ARCH Venture Partners, the Wellcome Trust, Cascade Investment, and Venrock. The biotech firm has already produced 91-octane gasoline that conforms to ASTM certification, made from a breakthrough process that produces crude oil directly from sunlight, CO2 and photosynthetic microorganisms, beginning with algae.

The process is not dependent on food crops or valuable farmland, and is highly water efficient. “It’s hard not to get excited about algae’s potential,” said Paul Dickerson, chief operating officer of the Department of Energy’s Office of Energy Efficiency and Renewable Energy “Its basic requirements are few: CO2, sun, and water. Algae can flourish in non-arable land or in dirty water, and when it does flourish, its potential oil yield per acre is unmatched by any other terrestrial feedstock.”

Scale is a major challenge. Producing a few gallons per day in a lab is not the same as producing 100 million gallons per year at a lower cost than the petroleum alternative. Yet, some of our best minds are optimistic that it will happen in the next few years. We will see fuel from marginal lands, from crops and algae that sequester carbon emissions. The fuel will blend with existing gasoline, diesel, and jet fuel, and run in all engines, not just those with low mileage.

Some think that such a transition is as impossible as an interception with a 100 yard run for a touchdown in a Superbowl. It is exciting when the impossible happens.

John Addison is the author of the new book – Save Gas, Save the Planet – which is now available at Amazon. He publishes the Clean Fleet Report.

Broad markets rise, sustainable energy mixed (week ending 9/19)

Author: Mark Henwood

Capping a crazy week, broad markets end up, while commodities retreated slightly.

Camino’s indices ended the week mixed amid highly volitile trading.

In Biofuels, we again saw the potential for huge losses driven by poor risk management practices applied to hedging strategies. Read more here. Veresun (VSE) dragged the Biofuels strategy down for the week with a 67 % decline. This is after a a 50% bounce the stock received following it’s announcement it was reviewing “strategic alternatives” in the wake of its hedging loss.

On the up side LED-Lighting’s Cree (CREE) capped its strong week with an upgrade. Oppenheimer’s analyst apparently thinks light-emitting diodes are being adopted as a mainstream lighting product. This is a continuing demonstation of the influence of analysts.

I like LEDs. They last a long time (5x a CFL), they have a cool form factor, they don’t use mercury, they are rugged, they are dimmable, and they produce very nice light. Unfortunately, commercial LED products are no more efficient then CFLs and currently cost 20 times as much. Their long life doesn’t yet offset this high cost. Given time I expect them to penetrate more lighting applications but we are not there just yet for mainstream use. I’ll get excited when their cost start to fall significantly and approach no more the 5x the cost of a CFL.

Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks.

Sustainable energy indices mixed, broad markets gain while commodities retreat (week ending 7/18)

Author: Mark Henwood

Emerging Markets, EAFA, and S&P500 all rose this week partially on reduced pressure on commodities (DJP) which fell 7.8% for the week.

Biofuels shares responded mid-week to news that Verasun (VSE) was keeping 330 MGY per year of new capacity idle. As I wrote in my post for the week ending June 13th with tight margins it comes as no surprise that producers are reducing production plans . With ethanol consuming somewhere around 30% of corn supplies the cost of corn should respond to a reduction in ethanol production. Reduced ethanol supplies should be supportive of stronger ethanol prices. At some point an equilibrium will be reached.

Later in the week UBS upgraded the ethanol sector to a buy on “improving margins”. VSE’s price (and others) responded strongly gaining 21% on Friday and ending the week up a huge 49% at USD 6.12/share. With this big change I thought the margin on producing ethanol would have materially improved. True, corn has been dropping significantly since the start of July with the December contract closing Friday on the CBOT at USD 6.28/bushel. But ethanol has been falling also in July, with the December contract closing Friday at USD 2.36/gallon leaving the “corn crush” margin at the same slim USD 0.2/gallon it was in the middle of June when Verasun’s stock price was below USD 5.0/share. I’m not sure I understand the improving margin argument.
The LED-Lighting strategy continued to disappoint falling an additional 9.9% for the week with a cumulative decline of 35% since we started tracking the sector at the end of March. Orion Energy Systems Inc. (OESX) lost 38.7% of its value for the week after it reduced its guidance for 2009 to a 25-28% growth rate, down from its previous 50% expectation. With its long term potential, I’m looking for signs this strategy may be fairly priced after this year’s big correction.
Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. He also is an investor in sustainable energy stocks and has positions in Renewable Electricity.

Beware the Allure of Ethanol Investing

I am a fan of ethanol. The addition of corn ethanol to our US fuel supply chain has had a significant impact in keeping gasoline prices way lower than they otherwise would have been, and has paid for the subsidies many times over. But that has not translated to gains for ethanol stocks, which are down on the order of 50% over the last year according to the Camino Energy index, and it won’t change anytime soon.

As the bellwether US ethanol pureplays are finally down to earth, and my predictions have come to pass. Two years ago ahead of Verasun’s (NYSE:VSE) IPO, I blogged an analysis saying I thought Verasun should trade in the $3 to $8 range, depending on the margin, PE, and growth assumptions. The bankers and the market thought I was nuts, treating VSE and Aventine (NYSE:AVR) which listed near the same time as technology style growth stocks. The company listed at several times my target range, and then traded way up from there. But as I had predicted, the margin pressures from a range of commodity price movements and the relatively low barriers to entry for capacity additions came to bear. But the fall is probably not over.

I stated then and reiterate now that ethanol companies are basically small refiners with potentially worse economics. And refiners traditionally trade at single digit PEs, and single digit PE. Worse, refiners don’t always do well when commodity prices rise or their markets grow fast, as the spreads they make their margin on are often affected as much by relative capacity contraints as the raw commodity prices themselves. In fact, fast moving commodity prices in either direction in either refined products or feedstocks can sometimes bode ill for refining profits, depending on what’s happening in capacity.

VSE now trades under $5. Right in the middle of range I predicted it should. And the PEs for VSE and AVR are finally down in the range close to the independent refiners group I follow, Valero (VLO), Sunoco (SUN), and Tesoro (TSO). BUT. And there is a but. The TEV/EBITDA multiples for VSE and AVR, which are way down, are still 2-3x those of the refiners, and the PEG ratios are still richer as well. This likely means more room to fall, or at least languish.

The next wave of venture backed ethanol companies, mostly cellulosic, are beginning to break ground on pilot plants, and given the penchant for certain ethanol crazed venture investors to IPO deals when windows open, it is likely we will see some of these soon. And it is likely that they will be sold to the market the same way, as high growth stocks based on great technology and macro conditions justifying stratospheric PEs on unsustainable margins. Then they’ll hit their first commodity cycle, the margins will compress, the bloom will come off the rose, the multiples will come down, and the investors who bought and held post IPO will get crushed.

We’ve seen it before and we’ll see it again. Try not to get caught this time.

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is the founding CEO of Carbonflow, founding contributor of Cleantech Blog, a Contributing Editor to Alt Energy Stocks, Chairman of Cleantech.org, and a blogger for CNET’s Greentech blog.

Only Renewables Gain (Week Ending 4/25) + Solar ETFs

Author: Mark Henwood

Broad market indices were mixed this week and so were Camino’s PurePlay™ indices.

The Solar index followed last week’s 7.0% gain with a small 0.2% decline. The index members were also mixed with 15 stocks increasing and 19 stocks declining. Most notable in the group was Centrosolar (C3O.DE) which gained 26.2% for the week. The stock jumped on the 23rd after the company announced provisional results that were above expectations. Sales for the quarter were up 86% over the previous year and EBITDA almost tripled. One analyst suggested the stock was undervalued.


Camino’s Renewable Electricity index managed a small 0.1% increase with 8 stocks climbing and 15 retreating.


Biofuels reversed last week’s 1.5% gain with a 1.9% loss. There were 7 advancing stocks to 8 stocks falling. Several of the ethanol stocks (AVR, PEIX, VSE) seemed to benefit from coverage by Oppenheimer whose analyst believes that overcapacity in the sector will resolve itself in the next 12 to 18 months.

Fuel Cells slumped 5.1% on 1 stock advancing and 6 stocks declining. FuelCell Energy (FCEL) reported a sale to Posco which was well received by the market resulting in a 11% price increase for the week. The sale involved delivering 25.6 MW at a contact value of USD 70 million, or over USD 2,700 / kW. Analysts believe this number is below cost but will help the company reduce its cost. After years of losses FuelCell needs to get it right and get its costs down so it can compete in a very competitive natural gas fired electric generation market.

Solar ETFs It came as no surprise that solar ETFs have been launched by Claymore (TAN) and VanEck (KWT). These two providers worked hard to differentiate their products by using slightly different company selections and weighting schemes. Unfortunately they didn’t decide to compete on cost coming out at an identical 65 basis points.

The result is indices that have a 74% overlap in their 27 constituents. Between the two indices the only company not included in Camino’s Solar index (34 constituents) is MEMC Electronics (WFR). By our computation in 2007 at most MEMC has a 25% exposure to solar so we’re not sure why Claymore included them. We don’t think they currently belong in our PurePlay™ index.

Going forward we expect these ETFs will have comparable performance and very high volatility. We routinely calculate Sharp ratios for our indices in an effort to assess the risk/reward profile of the sector. Over the last 365 days our solar index’s Sharpe ratio was 0.8 and over the last two years the ratio was 0.48, both periods measured against the 13wk T-Bill. Traditional fund managers would probably not find these values attractive particularly considering their high beta. That said, we think there are plenty of opportunities in the sustainable energy sector.

Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. He also is an investor in sustainable energy stocks. Mark has no positions in solar.

Only Renewable Electricity Stocks Advance (Week Ending 4/11)

Author: Mark Henwood

Sustainable energy stocks followed the broader markets down this week with only Renewable Electricity able to show a gain.

The Solar index followed last week’s 14.5% advance with a 4.7% decline. The retreat was broad-based with only 4 stocks increasing and 30 stocks declining. Aloe Solar SG (AS1.DE) led the declines falling 13.1% for the week despite positive news on April 3 that it’s production expansion was on track and it had received orders in 2008 for EUR 150 million. With First Solar (FSLR) also falling 3.5% the decline was not limited to the silicon world as some commentary alluded to. Without extraordinary news to push the sector down the relatively modest change for this highly volatile group seems to be primarily driven by broader market movements.


In the Renewable Electricity sector Camino’s index advanced 0.3% with 14 stocks climbing and 9 retreating. German wind farm developer Planbeck Neue Energien Ag
(PNE3.DE) led all increases with a 13.1% gain. On March 31 the company reported on 2007 results and conducted a press and analyst conference. The company reported a solid pipeline and positive news about its wind blade subsidiary SSP Technology. While the stock price didn’t react for a few days it looks like this week’s price gain is a reaction to the recent news.

Biofuels reversed last week’s small gain with a 7.5% decline culminating in a YTD decline of 32.4%. There were 3 advancing stocks to 12 stocks falling. Aventine (AVR) led the way down lowering 23.1 % for the week. 9.5 % of the decline occurred Friday after a USB analyst lower their target price due to concerns over corn prices and shrinking margins. Aventine is now valued at USD 0.97 per gallon of production capacity. This compares favorably with VeraSun’s (VSE) value of USD 0.67 per gallon of production capacity (after this year’s 5 new plants start-up). If it is possible to make any money producing ethanol, the company valuations have to be getting low enough to be attractive.


Fuel Cells also reversed last weeks gain with the index falling 2.2% on 1 stock advancing and 6 stocks declining. Ceramic Fuel Cells LTD
(CFU.L) kept the index from falling further with its 13.6% gain for the week. We found no public news that would explain Ceramic’s being able to move counter to the market unless these are second reaction to the company’s Feb 28 order announcement. ITM Power (ITM.L), on the other hand, continued to lose ground with a 12.4% decline. I share the market’s skepticism about the impact of the company’s recent electrolyzer development.

Solar continues to move with the broader markets, all of which were down for the week. With its high beta over any period during the last 500 days the index’s performance this week is to be expected. Biofuels continue to be plagued by questions regarding profitability. Clearly, getting bigger, like VeraSun did with it’s acquisition of US Bioenergy, isn’t perceived as materially helping the basic operating cost issue. At some point stock prices for Biofuel companies will get low enough to present a compelling price / cash flow return and investors will start taking positions.

Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. He also is an investor in sustainable energy stocks. Mark has a position in PNE3.DE

The Week in Sustainable Energy Stocks (Week Ending 3/14)

Author: Mark Henwood

The Dow traded in a 569 range this week reflecting negative credit market news and strong intervention by government institutions. Global results were mixed with EAFA advancing and the S&P and Emerging Markets declining. The final changes were not dramatic. This translated into mixed results for the Camino indices with three indices retreating and one, Solar, advancing.

The Solar index increased 1.8% bringing the YTD decline for the sector to –41.5%. LDK Solar Co. LTD (LDK), which fell 21.3 % last week, led all stocks in the index with a 16.3% increase. Most of this gain happened Thursday and Friday after the company’s press release reported it had sold 100% of its 2008 production and 90% of 2009. The communication also shed some light on the inventory issue. This strong sales picture may be supportive of the view that demand for PV product hasn’t been affected much by larger economic concerns. Overall the sector had 19 stocks climbing and 14 stocks falling.

Biofuels experienced a 1.9% decline with 6 stocks rising and 10 stocks falling. Gushan (GU) was the leader recovering 7.5% after last weeks 24.9% decline. On the declining side, Schmack Biogas (SB1.DE) led the field with a 11.6% decrease. This may be a delayed reaction to the company’s 2/26 release of 2007 results where strong sales growth (47% !) was coupled with a wider than expected loss. VeraSun (VSE) and US BioEnergy (USBE) also suffered steep declines after VeraSun reported on Wednesday that ethanol prices weren’t increasing as fast as corn costs. Getting bigger with the merger isn’t going to change that equation.

In the Renewable Electricity sector Camino’s index retreated 0.5% with 8 stocks climbing and 11 retreating. Geodynamics Ltd. (GDY.AX) led the pack with a 17.2% decline. The only news we found was an ASX note on 3/11 that a flow test had been delayed until 3/14.

Fuel Cells had another down week with the index decreasing 3.2% on 3 stocks advancing and 4 stocks declining. ITM Power (ITM.L) suffered a 25.2% decline. On Feb 5 Citigroup criticized the company’s unfocused business strategy and apparently the company’s 3/14 announcement of a testing contract with Bi-Fuels did little to sharpen the strategy.


What did I learn this week? Traders are listening carefully to company communications and are very quick to take decisive action on news, both positive and negative. I also think LDK’s order news may be significant as a bell weather for overall demand in the solar sector.

Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. He also is an investor in sustainable energy stocks. Mark holds a position in GDY.AX .