Last night’s State of the Union Address from President Obama offered a clear plan to begin curbing the deficit through a five year freeze on domestic spending, whilst allowing investment aimed at supporting competitiveness and galvanizing US innovation. The good news for the Clean Technology industry is that the President put clear focus on the scope for government action in this arena to make a difference in terms of those latter objectives. Given that many of the climate change concerns underpinning developments in the policy agenda also overlap with national security concerns, this is an area where we may just see a decent amount of bi-partisan support.
Below are the main sound-bites from the President on key areas related to Clean Tech –
1. The Research and Development opportunity ahead is comparable to that presented by the Space Race -
‘Half a century ago, when the Soviets beat us into space with the launch of a satellite called Sputnik we had no idea how we'd beat them to the moon. The science wasn't there yet. NASA didn't even exist. But after investing in better research and education, we didn't just surpass the Soviets; we unleashed a wave of innovation that created new industries and millions of new jobs’. This is our generation's Sputnik moment. Two years ago, I said that we needed to reach a level of research and development we haven't seen since the height of the Space Race. In a few weeks, I will be sending a budget to Congress that helps us meet that goal. We'll invest in biomedical research, information technology, and especially clean energy technology - an investment that will strengthen our security, protect our planet, and create countless new jobs for our people.
We're telling America's scientists and engineers that if they assemble teams of the best minds in their fields, and focus on the hardest problems in clean energy, we'll fund the Apollo Projects of our time’.
I doubt the message could have been much clearer.
2. Biofuels – breaking the oil monopoly -
‘With more research and incentives, we can break our dependence on oil with biofuels…’
The key biofuel in play at the moment is of course Ethanol – and it has gained support recently from the roll-over of the ethanol tax credits at the end of last year and the decision by the EPA to allow up to 15% ethanol in gasoline (E15) for cars manufactured in the years 2001 and later. The tax credits have been a particularly inefficient way to address policy in this area. However, they have achieved the aim of building a biofuel industry with the capacity to start replacing oil at the pumps – in 2009 alone the US produced 10.6bn US liquid gallons of ethanol fuel – about 8% of the US gasoline supply by volume. However, to genuinely break the monopoly currently held by oil on a sustainable basis three further developments are critical –
- Firstly, the development of more efficient alternatives to corn ethanol – cellulosic ethanol or even beet ethanol are clearly preferable and are on their way. A wide range of other biofuels are also being researched – including, for example, fuel produced by algae. It is even possible that methanol can be produced from captured carbon.
- It is difficult to predict which fuels will be the winners. The point is to allow the development an industry with an end market to service. From this point of view, Bob Dineen, CEO of the Renewable Fuels Association, recently indicated that the ethanol industry is ready to accept lower future tax credits in return for government funding of investment in infrastructure to put biofuels out there in the gas stations. This would be a much more efficient approach to policy and would support not just marginally higher ethanol or biofuel mixes such as E15 but would also support the much more widespread availability of genuine alternatives to gasoline such as E85 Flexfuel. Whichever biofuels emerge as the winners from the intense research effort ahead, efforts will have already have been made to provide an avenue to get them to the pumps.
- Finally, we need the Open Fuel Standard Act. This would require manufacturers to produce an increasing proportion of new cars capable of using E85 Flex Fuel plus other more corrosive fuels such as methanol. To do so requires certain engine parts to be manufactured to be more corrosion-resistant and for the software governing fuel injection to be tweeked. Energy Secretary Steven Chu has suggested that this would only add about $100 to the production cost of the average car.
Could this be where we are heading? Interestingly, the idea of the Open Fuel Standard was behind the $40m put aside to develop a Flex Fuel plug-in hybrid in the Energy Policy Act of 2005. According to the Set America Free Coalition, at the time, this section of the Act was sponsored by a certain Senator Barack Obama.
Clearly, all of this could greatly support biofuel companies such as Amyris (AMRS
) as well as the Ethanol industry as a whole – which will most likely be trading in tax credits in return for a greatly expanded industry by volume. My own personal favorite in this arena is Pacific Ethanol (PEIX
). It owns a 20% share in a number of refineries. However, its main asset is its west coast customer base and its infrastructure network enabling it to deliver biofuels to clients. As corn ethanol is increasingly replaced in the future by other biofuels, Pacific Ethanol should be well-positioned to adapt with the market.
3. The Electric Car –
‘…and become the first country to have 1 million electric vehicles on the road by 2015. We need to get behind this innovation’.
The story for the electric car is fairly obvious, whether it be for pure electrics or plug-in hybrids. The additional twist is of course the future availability of Open Fuel Standard PHEVs – which would increasingly provide the nation with a fleet of cars which can be refueled at the pump with gasoline or biofuels as well as at the socket.
Clearly, an increasing move towards electrics, plug-in hybrids and cars that can work with an Open Fuel Standard would allow the personal transport sector to easily adapt to whatever new innovations become the most efficient in the future. This would finally give us genuine open competition in the market for transport fuel.
The main beneficiaries in this market are fairly obvious - Tesla (TSLA
), Ener1 (HEV
), Valence Technology (VLNC) – and my own personal favorite A123 Systems (AONE).
4. Clean Power Generation –
‘So tonight, I challenge you to join me in setting a new goal: by 2035, 80% of America's electricity will come from clean energy sources. Some folks want wind and solar. Others want nuclear, clean coal, and natural gas. To meet this goal, we will need them all…’
Perhaps the most striking news was the target set by the President in relation to power generation. By broadening the acceptable range of technologies to include both natural gas-fired and nuclear power stations as well as ‘clean coal’, and thereby moving from purely ‘renewable’ to ‘clean’ energy sources, the President has probably created a basis for an eventual compromise with the Republicans.
In 2009 around 54% of electricity generation was fueled by ‘clean’ energy sources – of which only 10% was from renewables, with 23% from natural gas and 20% from nuclear. The main problem has been the 45% from coal. Clearly, for the President’s objectives to be met the later is going to have to fall by more than half (although some of this will come from ‘clean coal’ using carbon capture technology). That compares with the current EIA forecast of 43% coal usage by 2035.
To meet the President’s new target, the Renewable Energy Standards in place in many individual States will clearly have to be augmented with a nationwide Clean Energy Standard, which may well also include specific wind and solar carve-outs on a state by state basis.
The big opportunity here is in utility-scale wind and solar. I have written about the opportunity in utility-scale solar at length in three articles since December. The leaders in US utility-scale solar are First Solar (FSLR
) and SunPower (SPWRA) and they stand to be the main beneficiaries from a further push in the policy agenda here. There is no real US pure play in the wind market (America’s main player in wind being GE
). Vestas (VWDRY.PK
) is the world’s biggest player and probably the best way to get exposure. An interesting additional bet is also American Superconductor (AMSC
), which produces electrical control systems for the wind industry. It is heavily exposed to China, its main client being Sinovel. However, AMSC has also being extending its client base recently with new orders outside of China and the coming push towards more wind power in the US could be a good opportunity for the company to further diversify. Alternatively, for those who prefer ETFs exposure can be gained in wind from FAN
and in solar from TAN
The increased use of renewables on such a large scale as implied above will also give tremendous support to the market for energy storage. Some of the Lithium battery producers may benefit here at least in terms of initial experimental projects. However, although Lithium technology is very clearly the most suited to currently support the electric car, it is less than clear which technologies will win out in the energy storage area. More traditional players like Exide (XIDE
) remain very much in the game as the nation electrifies with renewable technologies.
Lastly, to get a Federal level Clean Energy Standard passed, the legislation concerned is probably going to have to allow states with less access to reliable wind and solar resources to make up much of the difference with nuclear. The easiest way to play this is probably to simply get exposure to some ETFs - PowerShares Global Nuclear (PKN
), Market Vectors Nuclear Energy (NLR
) or iShares S&P Global Nuclear Energy (NUCL
5. Finally, paying for it all –
‘And to help pay for it, I'm asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies. I don't know if you've noticed, but they're doing just fine on their own. So instead of subsidizing yesterday's energy, let's invest in tomorrow's’.
Of course, the policy framework that is finally enacted into law also depends on the Republican reaction to all this. However, particularly with the President’s commitment to a five-year domestic spending freeze, there seems to be room for bi-partisan agreement. Amongst those interested in breaking oil’s monopoly as the only transportation fuel readily available, there are those motivated from a climate change point of view and those motivated by national security concerns. Interestingly, the overall approach defined by President Obama above may just have enough to manage to bring both sides together.Disclosure:
I am long PEIX