Last week, several branches of the Colorado state government organized a symposium on "How Colorado Electric/Gas Utilities and Their Customers Can Benefit from the American Recovery and Reinvestment Act [ARRA]." I attended, with an ear to how the likely implementation would affect Clean Energy Stocks.
Overall, Colorado seems to be taking a very organized approach to a monumental task. According to Colorado Public Utilities Commission (PUC) Chairman Ron Binz, who officiated at the conference, they intend to organize proposals into an overall thematic plan for spending stimulus money. In addition, they are working to eliminate barriers to regulated utilities participating. In particular, the PUC "will allow expedited review of applications filed to request financial incentives including ratemaking treatment."
The symposium was four hours long with no breaks. For readers seeking some specific information, here is a link to my notes. What follows are my thoughts on what it may mean for different clean energy sectors.
Solar seems unlikely to be a big winner from the ARRA. This makes sense because the point of the bill was to stimulate jobs. Solar, especially Solar Photovoltaic [PV] panels, are very capital intensive investments, meaning that few jobs would be created per dollar spent. Solar PV has long been the poster-boy for green energy, yet its high-tech capital-intensive nature means PV installations create fewer jobs per dollar invested than most other clean energy technologies, and many fewer than the most effective, energy efficient.
Sitting next to me was a representative of a major solar project developer whom I've known for a couple years. After the panel on electric generation, he commented to me "that was a total waste of time."
The prospects for wind seem slightly more hopeful, according to Brian Greenman, principal at Greenman Financial Advisors. Brian is another member of the Denver renewable energy community whom I've known for several years. His firm has established a niche providing a wide variety of financial services to wind project developers across the Great Plains. He says that there is a real chance that the Department of Energy loan guarantee program may begin guaranteeing loans; something which has not occurred for clean energy deals since it was established in the 2005 EPAct.
The major hold-up has been uncertainty about the potentially enormous size of the subsidy cost. Now, new money has been appropriated, and once new rules are established, this subsidy cost is likely to either be regularized, or eliminated entirely. The main roadblock stopping wind projects right now is the inability to obtain financing, a problem which should resolve more quickly with a functional federal loan guarantee program allowing wind projects to borrow up to 80% of the capital needed at rates of less than 0.5% above U.S. treasury bills. Large solar projects may also be able to qualify for such guarantees, but this is a bigger deal for wind because of the much larger program size.
The bad news is that these loan guarantees are unlikely to be available until the last quarter of the year, even with expedited rule-making.
Of the utilities with existing Smart Grid efforts, all seemed interested in accelerating roll-out. Black Hills Corporation (NYSE:BKH) has an AMI-roll out using meters from Elster, currently going on in Pueblo, which they hope to use ARRA money to accelerate, and to expand to more rural areas where it might not otherwise be economic for them. The Poudre Valley Rural Electric Association has a program focused on commercial customers using a Landis + Gyr solution. Xcel Energy (NYSE:XEL) has an extensive Smart Grid pilot program in Boulder Colorado, with seven partners. The City of Fort Collins has an ongoing Fort ZED project with a wide variety of partners.
These expansions should be good news for the equipment providers, but a look at the partners brings up one of the perennial headaches of investors interested in the smart grid: nearly all the companies listed above or in the partnerships are privately held. While there are publicly traded smart grid companies, the wide variety of solutions and companies offering them make it difficult for a public investor to be confident that the companies he owns will be the ones which do well long term.
The best solution I have come up with is to own a little bit of all the smart grid companies I find, with a focus on the lower-tech solutions such as Demand Response, and established metering companies which I consider likely to acquire smaller private players. Charles Morand provided a list of four smart grid stocks in December, while I took a look at three more (Itron (NASDAQ:ITRI), Echelon (NASDAQ:ELON), and EnerNOC (NASDAQ:ENOC)) in November. To these, I'd add General Electric (NYSE:GE) and Telvent (NASDAQ:TLVT). I don't know of any projects by these companies in Colorado, but if the trends here are any guide, companies which already have existing projects with utilities can reasonably expect those projects to accelerate.
One other trend of note was that the utilities were generally much more interested in the potential of the smart grid to make their distribution systems more efficient. For example, Xcel's representative said that their goals, in order of priority, were improved utility efficiencies, improved asset operations, asset life extension, recapacitating existing infrastructure, and (lastly) new assets and services. All of these except the last are upstream improvements which are unlikely to be seen by the customer. While smart grid applications which allow residential users to understand our own power consumption may be more exciting to us, these are unlikely to be the first applications which the utilities choose to roll out in a big way.
Energy Efficiency stocks are likely to be big winners, simply because of the amount of money in the stimulus directed towards building retrofits, both for low income and federal buildings. If anything, however, energy efficiency can be more difficult to invest in than Smart Grid, because good efficiency measures tend to have more to do with system integration than with products.
That said, there are a few products which seem likely to get a boost. First and foremost is insulation, which will be used extensively in weatherizing homes and businesses. Owens Corning (NYSE:OC) gives the best exposure to this sector, since major competitors Johns-Manville is owned by Berkshire Hathaway (NYSE:BRK.A), and CertainTeed is owned by Paris-traded Saint-Gobain, a more broadly diversified building products group.
Other energy efficiency products which are likely to see a boost from ARRA funds are ground source heat pumps, which will be likely to feature in multifamily residential and commercial building retrofits. I profiled heat pump companies Waterfurnace Renewable Energy (OTC:WFIFF) and LSB Industries (NYSE:LXU) in December, in anticipation of the stimulus package. LED lighting company Cree, Inc is also well placed to take advantage of energy efficient building retrofits. Other companies which may benefit are small innovators which have efficiency improvements targeted towards specific applications. One such is company is Power Efficiency Corp (PEFF.OB), which sells controllers which improve motor efficiency in variable-load applications such as escalators and rock crushers.
Despite Geothermal Power's small contribution to overall electricity generation, both Xcel Energy and Tri-State Generation and Transmission mentioned geothermal power as something they were looking to pursue with ARRA funds. If these plans come to fruition, likely beneficiaries are the industry leader Ormat (NYSE:ORA), a vertically integrated geothermal company, which I consider attractively priced around $25, and Raser Technologies (RZ).
Raser could be particularly well positioned to benefit from the stimulus because it focuses on building and commissioning geothermal plants much faster than industry incumbents such as Ormat by using off-the shelf turbines from United Technologies Corp. (NYSE:UTX), allowing them to get projects up and running much faster than their competitors. This should be a particular advantage when competing for stimulus dollars because of the emphasis on speed in the ARRA, which requires projects to be completed by 2012.
The Western Area Power Administration [WAPA], a federal agency, was given both new funding and authority to plan and build new electric transmission in its territory to deliver power from renewable sources. They have already begun the planning process, and their representative was enthusiastic about the process. These projects will likely be in partnership with private companies, and so several of the transmission companies we listed in anticipation of the stimulus package are likely to benefit.
Although batteries were not mentioned directly in this utility-oriented symposium, two speakers mentioned that they would be interested in using plug-in hybrid electric vehicles as part of a smart grid pilot project.
Both Xcel and Tri-State mentioned that they had specific Compressed Air Energy Storage (CAES) projects they would look to fund through the stimulus package. CAES is the second most cost effective way to store electricity on a large scale (the first being Thermal Energy Storage in conjunction with Concentrating Solar Power), but I do not know of any public companies focused on this technology.
Finally, the symposium did not focus on transportation infrastructure, and so I have not mentioned rail and transit companies which may also benefit. See our Clean Transportation archives for some of our ideas in these sectors.
DISCLOSURE: Tom Konrad is long ITRI, ELON, ENOC, GE, TLVT, WFIFF, LXU, ORA, RZ and PEFF. PEFF is also an advertiser on AltEnergyStocks.com.