Renewable electricty dominates California utility plans

by Mark Henwood

On Thursday (10/16) I attended the User Group meeting of Plexos Solutions LLC, a boutique firm providing software and consulting to the rapidly changing California electric market. One of the presentations covered issues surrounding integration of renewable energy resources into the California Independent System Operator (CAISO). This is important to sustainable energy investors because virtually all the growth in generating capacity in California is forecast to come from renewable resources. While the fundamentals of this market have been overwhelmed by broader market conditions this last month, over time the fundamentals provide the tailwind that will lift stocks. And the growth expectations for renewables are very high in the California market.

Over the period 2007 – 2012 the CAISO is planning for increases over existing capacity of:

  • 5,053 MW of wind, a 187% increase,
  • 1,064 MW of geothermal, a 68% increase,
  • 946 MW of concentrating solar, a 203% increase,
  • 508 MW of utility scale PV solar, a 2,032% increase, and
  • 221 MW of biomass, a 28% increase

These are huge numbers representing billions of dollars of projects and electric revenues. Particularly striking to me are the growth expectations for the two main solar approaches.

In the concentrating solar sector, the state currently has 354 MW of large projects operating with the last one completed in 1990, 18 years ago. Most of this capacity is owned by FPL Energy, part of a large regulated utility. So the new capacity has to come from a sector that hasn’t, in California at least, been able to construct a project for many years. Equally noticeable it the paucity of publicly traded companies in the concentrating solar sector. Solar Millennium (S2M.DE) is one the few with significant concentrating solar activity.

The state currently has 8 projects with 3,689 MW of large concentrating solar projects in the permitting pipeline. But these numbers are deceptive. Of the 8, two projects are actually “solar/thermal” hybrids like the existing operating projects. These two projects represent 1,180 MW of capacity with 112 MW attributable to solar. The remaining 6 projects are a gamut of technologies ranging from troughs, reflectors, towers, and Sterling engines. These projects are all owned by private companies or municipal utilities and currently don’t present an opportunity for public market investors.

The PV solar sector provides more avenues for public investors to participate via investment in the PV supply chain. If the numbers work out the utility market represents a multi-year, very large opportunity. Let’s take a look.

As of the end of 2007 California had an estimated 279 MW of installed PV in homes and businesses and 25 MW of utility scale projects. This makes sense since the home and business markets are net metering against retail rates whereas utility scale projects have to compete against wholesale markets. So the premise is that PV solar is now becoming sufficiently competitive at the wholesale level to install over 500 MW in the next 5 years.

One of the first test cases was recently announced. On July 10, 2008 the California Public Utilities Commission approved a 7.5 MW contract between First Solar’s (FSLR) FSE Blythe project and Southern California Edision. Unfortunately much of the economic information was not disclosed but some key data can be gleaned from the record. First, the company is projecting an excellent 27% capacity factor for the project, significantly higher than typical estimates for PV projects. But equally important is the company is pursing the development receiving a price at or below the “market reference price” which is based on a highly efficient modern thermal plant. After accounting for some messy seasonal and time-of-use factors I calculate the project will receive approximately USD 0.14/kWh on average plus a 30% tax credit now that the Emergency Economic Stabilization Act of 2008 passed. If FirstSolar can make money at this project then they are very near the holy grail of grid parity (at least until the credit expires December 31, 2016). And the utility systems can, according to the CAISO, absorb large amounts of solar power for years to come. Game on.

Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks. Mark has no position in the stocks mentioned in this article.

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