Alt energy analyst

Green Energy Prospecting: Eye on Ocean Power Technologies

Mr. Berenshteyn:

I applaud you for tackling the analysis of Ocean Power Technologies (OPTT). It is difficult to gauge the prospects of a company still under development and by its own admission, still two years from profitability.

I have spent a significant amount of time analyzing this company and others in the alternative energy sector. Let me offer a few points:

1. You begin your analysis with the following assertion: "In order for management’s claims to have any weight, we will have to assume that the cost per kW/hour will be competitive with coal which, depending on the grade, costs between $0.048-$0.055 kW/hour."

You may want to reconsider this line of reasoning in future analyses. While I understand the logic, it misses some very significant points.

First, to an increasing degree, U.S. states are coming under mandates called Renewable Portfolio Standards, which require the utilities to increase their generation of electricity from renewable sources. In spite of the coal industry's efforts to modify its emissions, coal is not clean. Unless I am mistaken, in California, coal is not even an option. Utilities in California are barred from contracting for more power from coal. More states are following California’s lead. Just in case you think resistance to coal is only in California, search for a recent story on the Kansas governor who is blocking construction of new coal plants.

Therefore, using coal as a benchmark and asserting that OPTT's power generation must meet coal's generation costs to compete is an incorrect assumption.

To understand the new paradigm, search for a recent contract by which electric utility Southern California Edison will place 250 megawatts of solar power on distribution centers and warehouse roofs. I can assure you that the solar panels are not generating power at 5 cents per kwh. It is the mandate that the California utilities must generate power from a minimum of 20% renewables that is driving the solar investment.

Second, there is a growing momentum to recognize that the repeated quotation of electricity generation costs from coal at the current “$0.048-$0.055 kW/hour” understates the environmental damage. Add in carbon taxes. Add in carbon sequestration costs. Is generation still at 5 cents? I don’t think so.

2. You base your sales price for an OPTT buoy working backwards from this coal generation cost per kwh. I’ll leave that aside for a moment, to clarify a more important point. I believe you are mistaken that the company can achieve profitability only with production of the PB500 at a production rate of 300 per year. What the company was communicating was that at that rate of production, electricity generation is at 5 cents per kwh, including all costs and profits to OPTT. The company is showing that with the continued scaling of its buoys, it can achieve really low electricity generation costs without assuming an overly aggressive level of production. (Draw a parallel to the wind industry. Do you think the first wind turbines generated power at the current 6 cents per kwh?)

In fact, the company may be able to get to profitability building the earlier generation PB150. At 400 buoys per year, the company estimates an electricity generation cost of 15 cents per kwh. This is without subsidies, incentives, or the investment tax credits and includes a return to OPTT. I am willing to bet that Southern California Edison’s recent solar deal is at 15 cents per kwh or higher. Also understand that the PB150 is already in production.

3. Also understand that the company outsources production of the buoys with the exception of the control system. This is its standard operating model and therefore, the outsourcing costs are built into the cost assumptions. You made it sound as if the company needed to expand dramatically in order to increase production significantly. You may be overstating the expense required.

4. Finally, consider that the equity market capitalization is currently less than the total net cash on the balance sheet. This means that the company’s enterprise value is less than zero. In other words, you’re buying the business for nothing, nada, zip. I can assure you that of all the alternative energy plays I have reviewed, this is rare indeed.

If this company is able to follow the development model of the wind industry, i.e. start with a small model then scale the basic technology to larger and larger versions of the initial model, Ocean Power Technologies will reward its investors handsomely.