2012-2016 Was An Unprecedented Period of Government Investment In Renewable Energy
Over the past four years, Solar and Wind companies and their underlying technologies grew tremendously from Obama's commitment towards the development of renewable sources of energy.
(Source: Department of Energy; Revolution Now Annual Report 2016)
Over Obama's tenure, the US government invested over 150 billion dollars on solar and alternative energy initiatives. The capital committed led to tangible improvements as show on the chart above, such as the cost of solar energy falling from $76/watt in 1977 to $0.57/watt in 2015. There were also failures, with Solyndra declaring bankruptcy after the government committed $535 million towards the company. Most glaringly, despite this massive commitment- solar energy still comprises less than 1% of U.S. energy.
In spite of the nascent nature of the industry, investors flocked towards government money by investing over $2 Trillion over the past decade on renewable energy companies. But to be fair, if one got in early enough, it was a winning investment.
Guggenheim Solar ETF (NYSEARCA:TAN)
From the end of 2012 to mid 2015, the market capitalization of Solar companies more than tripled, resulting in notable companies such as First Solar (NASDAQ:FSLR) and SolarCity (SCTY). As a result of the numerous tax credits made available for the development of solar energy, the U.S. solar industry now boasts over 260,000 workers, second only to oil and petroleum in total jobs for the U.S. energy sector.
However, as shown on the graph above, investors have begun to pull money out of the solar sector over the past year. This was to be expected as Trump gained traction throughout the election and ultimately became elected as president of the United States. A vocal pessimist of renewable energy, Trump has championed a return to coal and natural gas throughout his campaign.
A return to fossil fuels, and whatever happened to peak coal?
Keeping true to his campaign promises, Trump has filled his cabinet with pro-oil and gas advocates, notably Rex Tillerson, outgoing chairman of ExxonMobil (NYSE:XOM). At the same time, the president has signed off on executive actions promoting this agenda, namely approval of the Keystone XL and Dakota Access Oil pipelines and deregulation of the coal industry.
Assuming this agenda continues over the course of Trump's presidency, we can expect fossil fuels to do very well. However, a large portion of this expectation has already been priced into the market. Crude oil has appreciated from $30/Barrel to $53/Barrel over the past 12 months, while Coal spiked from $50/tonne to over $110/tonne before settling to current prices of around $80.
Coal Commodity Prices for years 2010-Current
Strikingly, coal has yet to return to its 2011 highs. To put coal prices in 2011 in perspective, 2011 was touted as the year for "peak coal", or the point in time where maximum global coal production would be reached. Which, according to the theory, would signal the point where coal would be in terminal decline. To give credit to this idea, China's coal consumption peaked in 2013, with the second largest consumer, the U.S. having peaked in 2005. At the same time, India has continued to ramp up their consumption of coal in order to solve its energy crisis. With an estimated 300 million of its 1.25 billion population living without electricity, the demand for a cheap and plentiful source of energy has never been higher, fitting the bill for coal to a tee. With India having recently overtaken the U.S. for coal consumption, and with the U.S. refocusing on the coal industry, peak coal may have been pushed back, signaling a return to 2011 highs.
What is Clean Coal?
Coal's been around for hundreds of years for good reason: it's cheap, plentiful, and easy to transport. That being said, it's one of the most notoriously dirty fuels used today, responsible for 39 percent of global carbon emissions. However, Trump didn't just promise a world of coal, he promised a world of clean coal.
Clean coal is the goal of being able to extract the energy from coal while mitigating as much of its environmental impact as possible. Central to this concept is the idea of Carbon Capture and Storage, also known as CCS. The idea being to capture the carbon emissions produced from burning coal for storage or use in other applications. While still an infant technology, government funding might allow for the same rapid advancement experienced by renewable energy companies in the past decade.
Trump is already advancing with clean coal plants, with new coal plants expected to open in Texas and Mississippi over the following weeks. This being said, a salient concern with the storage of carbon dioxide is the possible leakage of sequestered material. A worst case example can be found in Lake Nyos in 1986. Due to volcanic activity under the lake, Lake Nyos naturally stockpiled carbon dioxide in the form of carbonic acid. In 1986, the lake released a huge cloud of carbon dioxide wiping out nearby towns and villages.
With carbon capture technology already having demonstrated the ability to capture up to 90% of emissions from coal power production, the scaling of coal and oil energy may result in the U.S. having more carbon than they know what to do with. While storage can be a viable option, the utilization of carbon sources may be far more economical and safer in the long run. And to this end, Algae may be a key part of the solution.
Where does Algae fit into Clean Coal?
Algae are incredibly robust photosynthetic organisms that tend to thrive in most locations with carbon dioxide and water. They can be grown and harvested year round, and are very efficient in terms of what they can produce relative to the growth medium provided. Consider the following excerpt published in the Journal of Algal Biomass Utilization written by Ugoala et al.
"The major advantage of algae as a feedstock is its massive consumption of carbon dioxide. Algae bio-fuel is carbon neutral; only emits CO2 that it absorbs. Some latest studies have shown that the production of each gallon of oil from algae consumes 13 to 14 kilograms of the carbon dioxide. Other studies suggest that an algae-based system can capture about 80 % of the CO2 emitted from a power plant during the day when sunlight is available. Economic development demands energy, yet energy consumption has historically led to increased environmental pollution."
You may have heard of algae companies over the past few years with the goal of producing fuel for energy. A key reason why none of these companies have worked out is due to the prohibitively high cost of carbon dioxide. With costs ranging up to $160 per ton of CO2, the economics have been difficult for algae based companies to reach profitability in regards to their algae products. This is due to the efficiency of Algae in regards to taking up carbon dioxide from its growth medium, presenting an effective sink for carbon emissions for CCU (carbon capture and usage) purposes.
Department of Energy has already committed to Algae Carbon scrubbing technology
The natural synergy that exists between Carbon Capture and Algae has not gone unnoticed, with the Department of Energy funding two algae biomass projects under its Carbon Capture program in 2015. Of particular interest is
MicroBio Engineering's project involving a Florida coal-fire power plant, where the actual flue gas (gas from the chimney, so to speak) will be used to provide the carbon dioxide required to grow the algae. Presumably the preliminary data supports this thesis, because the following year the Department of Energy dedicated another $15 million in funding to advance algae biofuels to three separate companies, of which MicroBio was one.
Operating under the assumption that algae can continue to demonstrate promise in carbon capture processes, this may allow for a lucrative opportunity for algae companies based in the United States if mandates are issued that allow for an algae growing facility to be collocated with a coal burning power plant with greater ease. Not only would this reduce the carbon emissions generated by coal energy, but also the algae grown with the sourced carbon emissions provides additional economics in the form of fuel, food, and other resources, potentially offsetting or more than making up for the cost of initial carbon capture. If algae strains with the potential to produce substantial amounts of biofuels can be identified, this may become the industry standard for coal-burning plants particularly as oil prices continue to appreciate due to its profitability.
With the data on algae and its potential impact on carbon capture readily available, ramped up government funding on algae research and development does not seem so preposterous given the synergies with fossil fuels. Funding on a similar level that solar received would do wonders for the algae industry, and I believe presents a great derivative play for investors looking for exposure to fossil fuels energy companies.
The following is a list of algae companies I found particularly compelling. Some are private, and some are public. I am including private companies out of posterity in case they elect to go public in the future.
TerraVia was once an $800 million company named Solazyme. Solazyme was founded with the goal of utilizing microalgae as a renewable source of fuel for energy and vehicles. As the constraints of the infant technology became more apparent, the company branched out into skin and personal care products, and finally into food products. The company rebranded itself as TerraVia in 2016 to clarify its focus on food, nutrition, and personal care.
Although the company has depreciated from its former valuation of $800 million to currently $100 million, the company generated over $60 million and $46 million for the fiscal years of 2014 and 2015 respectively, pointing towards the viability for its algae products.
Unfortunately, TerraVia was thrown under the bus by one of its customers, Soylent, which served to crush the share price. However, with cash on hand, and a diversified portfolio of customers and product offerings, TerraVia may be in a prime position to appreciate out of its current valuation. The company has also retained its biofuel arm, which may stand to benefit from Trump's energy policy.
Sapphire Energy (Private)
Sapphire Energy was founded in 2007 with the goal developing Biofuel named "Green Crude" from its algal biorefinery. Although the company has remained private, the company has successfully raised over $300 million in grants and VC series funding, including money from Bill Gates. With pilot studies already conducted with the Toyota Prius and Continental Airlines' 737, the company expects to be in commercial production in 2018. Due to the existence of VC money, it wouldn't be unsurprising to see an eventual public offering. Even if the company does not go public, successful commercialization of the company's green crude would serve to validate the opportunity behind algal biofuels.
Headquartered in Florida and founded in 2006, Algenol is another algal biofuel company similar to Sapphire. The company's technology allows for the production and extraction of ethanol and other biofuels from carbon feedstock. In 2015, the founder Paul Woods resigned, concurrent with a raise from core investors, due to his frustrations with a lack of sufficient government funding coupled with the low oil prices at that given time. He wrote,
"Algenol will continue to push Carbon Capture and Utilization (CCU), using its current and very successful Direct to Ethanol platform to help companies lower their carbon footprint, while producing new sources of fresh water for countries and regions in such desperate need for fresh water.
A new focused CCU Algenol will work diligently over the next 2 years to finalize and further develop its system adapted primarily for carbon capture and fresh water creation. Low cost fuels cannot continue to be the sole focus of Algenol, we live in a new reality of low oil prices, low demand and abundant supply."
Fortunately, 2017 appears to be the ripe time for focus on carbon capture and utilization, and Algenol may stand to benefit from the global energy trends setting up. This is further substantiated by the substantial investment received by the company from Reliance Industries, a major Indian conglomerate with an energy arm. (India has a massive energy shortage and massively ramping up its coal consumption)
ZIVO Bioscience (OTCQB:ZIVO)
The smallest company on this list with a market capitalization of $14 million, I included ZIVO due to its interesting, low capital cost business model, and the amount of validation the company has received in regards to its partnerships and collaborations.
The company develops and commercializes nutritional compounds and bioactive molecules generated by its proprietary algal strains. This is to say; that ZIVO is able to mitigate most of the risk involved in the costly development of an in house growing facility and expensive CO2 inputs. The company has a number of potential monetization opportunities in human nutrition, animal feed, and animal therapeutics. I believe the most compelling near term opportunity stems from their animal health collaboration with Zoetis (NYSE:ZTS).
Zoetis was spun out of Pfizer, and is the largest producer of medicine and vaccinations for pets and livestock. With a market cap of over $26 billion, the collaboration with Zoetis serves to validate the opportunity in ZIVO's proprietary algal strain. With the partnership intended to target Bovine Mastitis, a disease that costs the U.S. Dairy Industry over $2 billion annually or 11% of total milk production. Success on this therapeutic would represent a substantial royalty for ZIVO. Moreover, due to the increased regulation on use of antibiotics on livestock, the bovine market would readily accept the therapy for mastitis. The company appears to have enough capital to power the pilot production and validation studies required to continue with the collaboration.
What I also found interesting about the company is its association with Synthetic Genomics. Synthetics Genomics (founded by Craig Venter, man who mapped the human genome) was the private company that received $500 million from ExxonMobil to produce an economically viable biodiesel. If ZIVO's proprietary algae strains exhibit a desirable trait to Synthetic Genomics, which may open the door to receiving potential biodiesel funding.
With Trump at the helm of the U.S. government, it's safe to assume that solar and wind companies will not be as viable as they were during Obama's presidency. With favorable tax credits and funding sure to be phased out, it may be time to consider pulling out of solar and wind companies altogether if you haven't already.
Assuming the president continues with his energy policy, Oil and Coal can be expected to continue appreciating, possibly back to 2011 values, the time frame remains murky. In a post-Trump America, where carbon emissions are sure to rise, this should allow for cheaper sourcing of carbon dioxide, the single largest cost in algae growth. This, in conjunction with the ramp up in government funding of carbon capture and algae programs, and Trump's promise of "beautiful, clean coal", creates a macro environment that I believe is very favorable for algae companies. Which is exactly why Algae is the new Solar.
Disclosure: I am/we are long TVIA, ZIVO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.