Tom interviewed Mark Townsend Cox, founder of the New Energy Fund, about how energy drives Wall Street and to put the VeraSun IPO into perspective.
* Background of your fund. Why did you start it?
I was a teacher in Kaduna, Nigeria in 1979. The kids were ages 7–14 and I had a class of 8-year-olds. The headmistress asked me to prepare a science project and I decided to have them make a parabolic dish to boil water with sunlight. Sticky fingers, glue patches and papier-mache using cardboard and coat hanger helped us complete our project very imperfectly. Two boys reflected the sun's rays onto the base of an aluminum kettle with a pint of water and about 10 wobbly minutes later the water boiled. Safe water was a major issue in Nigeria and fuel to boil water was extremely scarce for ordinary people. We had succeeded with found materials and had replaced any other fuel to cook food or prepare water.
Since that moment I've realized that there is about 1000 watts per hour per square meter from sunlight alone, averaged over day and night for the equatorial parts of the planet with proportionately less as you get closer to the poles. There is the equivalent of 350 billion barrels of oil of solar energy arriving on the entire planet every day. You often hear how renewable energy has enough capacity, "if only we could harness it", to supply more than our needs. Well, while this is true, it somehow fails utterly to persuade anyone that they should do anything about it. The fund was started after a 5 year stint as a portfolio manager for a small international investment advisor that had gained top (1st) position investing separately managed accounts using international small cap stocks. They used fundamental growth as an investment style. After 5 years my career was going nowhere. I had been wondering what I could do that would connect my Wall St. experience with a passion to understand the renewable energy world. There were less than 100 pure play quoted companies in 2002, but today there are almost 400, greatly increasing the trading volumes ($1.5 billion daily) and market capitalization of the sector ($300 billion).
* What's your take on alternative energy -- the investment potential?
Renewable energy is by definition a benign and synergistic experience for human communities. When oil was first discovered, there were no environmentalists jumping up and down decrying its environmental impact, but over the years the external costs of oil, gas, coal and nuclear power have become ever more self evident. These sources of energy add cost and affect: Climate, Health, Pollute land and water, cause Geopolitical issues, need Subsidies, suffer from Reliability problems and Deplete future generations of mineral resources that even today have much more value when used for polymers, drugs, solvents and other materials. Every one of these externalities has a $ sign attached to it but it's often difficult to identify just how much extra cost there is. When we buy a gallon of gas, we are not paying the approximately $10 that all of this costs and which is paid by governments from our taxes. Nuclear power has all of these external costs except climate but in different magnitudes. Arguably the risk of nuclear proliferation is the most potentially expensive of all the potential costs. In general the discussion revolves around only one or two of these at any time. Even Al Gore's new movie "An Inconvenient Truth" concentrates on the effect of greenhouse gases on the climate, but leaves many of the other issues alone. He may well be right though in identifying one time bomb which might affect us all imminently and as the BBC have suggested, irreversibly.
Renewable energy from the sun, and then from wind, tides, waves, currents, thermal gradients, hydroelectric and geothermal represents the bulk of the supply side technologies. They are plentiful. There are other mechanisms that synergize them such as osmosis that nobody is talking about, but which Stadtkraft in Norway has been developing.
We use energy in different ways. Obviously there are many ways that we need it, but it comes either as electricity for our appliances, or as organic chemicals like natural gas, gasoline or coal, and we burn it directly.
As fossil fuels like oil hit their peak, it leaves the appetite for transport energy very bleak. Coal will not hit a peak, but has severe side effects in terms of its green house gases and natural gas is also plentiful for now. Locally in the US its getting short because of the huge investment in gas fired combined cycle turbines over the past 15 years. LNG is the big savior but its suffering from more NIMBY than Cape Cod wind.
Nuclear appears to many to be a solution, and there is no doubt that it can be done safely and well today.... But it's still a big cost risk as containment and fuel security issues eat into the advantages found in huge energy content (40,000 kilowatts per pound) of uranium.
Consequently there is a huge opportunity for renewable energy to show its capabilities and already we have seen this window of opportunity seized by policy makers in Germany and the rest of the world. Some nations have fully embraced a hydrogen economy within as short a period of time as possible, like the Icelanders and S. Koreans. Others have gone with the structure of the Kyoto accord designed to help reduce greenhouse gases. Germany has taken a more "Green" party position that the fossil fuel paradigm is an economic distortion because of the above externalities and has encouraged renewable energy using market forces.
Attitudes are changing rapidly. The mainstream is still not aware of the alternatives or the economics of them (more later), but increasing the effects are being directly linked. There is still a discussion about whether hurricane Katrina could have been affected by global warming and the scientific consensus is saying that warmer gulf waters are indeed making that the case. Interestingly there are powerful groups paying for disinformation to be spread. This is illogical since, if the doom-sayer environmentalists are wrong, the downside is minimal, but if the opposite side are wrong, humanity better be looking for another planet to avoid the inevitable Malthusian checks.
The multi trillion dollar energy market is being directly addressed by renewable energy as it becomes mainstream. There is hardly any upside limit to this sector's growth in the coming two decades and there is certainly no chance that its going to shrink from here. Solar grew by over 50% each year compounded since 2000.
* There are a couple ethanol companies that are expected to go public. What does this signal?
It is just scratching the surface of the issue. There is an average of 1 IPO every week currently and your question really begs of what is understood by alternative energy in the minds of investors. Most folks think of cars when they think of alternative energy, but most alternative energy generates electricity. Ethanol appears to be the magic replacement for gasoline in the minds of most observers but there are many credible alternatives including hydrogen, electricity, methanol and biodiesel. The real issue is that there are 800 million cars in the world, almost every one of which has an internal combustion engine. When fuel was cheap this wasteful engine design was ok, but now it's the main way we get around and the shockingly small amount of the energy that we extract from the ground that gets the driver from A to B (~1%). This legacy mountain of internal combustion engines will be around for 20 years putting a calendar on how fast this mountain of metal evolves into the next generation technology even if every vehicle made today was completely green.
Household (and community) electricity demand can be complemented (or replaced) by solar, geothermal and wind and there have been many IPO's recently in all three segments. Companies like Suzlon in India, Suntech in China, Sunpower in the US. Clipper Wind in the US was the third North American turbine manufacturer and we are seeing now, a rush for ethanol companies. In my list of sectors in the supply of energy I have the following:
This list shows a total of 39 publicly quoted alternative fuel companies which amount to $14 billion in size today. This is the detailed list:
If Verasun floats with 16.25 million shares at $20 then the market cap will be $325 million, just above the cellulosic and food waste to ethanol company, Xethanol and number 11 in size. Pacific Ethanol, the largest current corn ethanol company, has had a recent share price of $45, almost twice as large as its current price, meaning that there is some volatility in this space.
* What's your take on VeraSun? I heard it is expected to do well this week.
I expect Verasun to be greeted with enthusiasm by the market and its an IPO I would not miss. I believe there will be demand for this and other companies in this sector as investors grapple with the attractive idea that there is a real "alternative" to gasoline.
* Do you expect other alternative energy IPOs over the next year?
There will be an acceleration in IPO's this year and for many years to come. Aventine is another ethanol company coming shortly. This is a partial list:
* What are some of the interesting technologies you're seeing?
1. Cheaper, more rugged, efficient, fuel cells and electrolyzers
ITM Power is a company with a remarkable new technology. While Ballard Power Systems spent 10 years promising fuel cells in our cars, they forgot to investigate how to make them cheap enough to actually buy. ITM power in the UK, staffed by the same polymer expertise that resulted in long wear contact lenses, examined thousands of polymer materials, more like a drug company, to find a Fuel cell membrane material that would be long lived, reliable, rugged, efficient and of course economic. They discovered a family of materials that were 100 times cheaper than the 'off the shelf' product used by Ballard and many other fuel cell manufacturers (Dupont's Nafion) with many other advantages too. They have just proved out electrolyzers that have no degradation over 3,000 hours of use, don't need platinum as a catalyst and don't need to be hydrated because they have a natural affinity for water.
The market for electrolyzers and fuel cells is many billions of dollars in addressable size. The cheaper the electrolyzer or fuel cell, the larger the addressable market. Their website shows that they are effectively able to produce energy as hydrogen, from cheap rate overnight electricity that is cheaper than gasoline in the European forecourt. They say a hydrogen economy is already here because.... we all have water and electricity delivered to our homes and work places already! If the electricity used is renewable, which it inexorably is, all the better.
The company have cash for 14 years of current burn and no debt. Shareholders include the Bank of New York, Fidelity, Barings, Framlington and many other major investors. Will a big car maker suddenly announce a commercial fuel cell or hydrogen vehicle using ITM technology in the next couple of years? Watch this space.
2. Effective means of generating electricity from any source of heat ....and at low cost
Freepower's founders come from the UK turbine engine sector. Mym Symcock and her colleagues founded Bowman power and her new staff hail from BP Solar and many prestigious areas of British applied science. They found an elegant solution to a challenge. How to generate effective and large amounts of electricity reliably from the myriad sources of heat found in industry and thereby wasting less energy. It turned out that the Organic Rankine Cycle was something these engineers had been toying with for years. A turbine that runs on a closed loop of vapor fuel that then liquefies again to be sent to the heat exchanger and then repeat the cycle. They produced a machine called the FP 6 (6 kilowatts) for about 10,000 pounds cost. Then they modified it to produce 10 kilowatts and reduced the cost to 8,000 pounds. It was cheap enough to provide a payback of well below 3 years and used off the shelf materials such as stainless steel that was very much simpler than the complex turbines you see in jet aircraft engines. The turbine has an expected life of 80,000 hours (almost a decade!) before requiring servicing and the heat source can be sunlight.
So many existing OEM's that already install electrical generating gear were interested in the unit as an add-on to existing projects, that the company organized itself to produce a range of outputs from 2 kilowatts (the size of a cookie tin and almost as inexpensive!) to a 250 kilowatt model. While they are still working on the beta installations of the 6's and 10's, the knowledge they glean is certain to hasten development of the larger turbines and bring about an IPO in the fall of 2006, that will enjoy the unusual distinction, for a renewable energy company, of actually having significant revenues before a public quotation as well as saving the planet.
3. Biodiesel with cheap agricultural feedstocks that don't compete with the food supply
D1 Oils has arranged to plant an oil bearing plant called the Jatropha tree worldwide to build up a source of cheap oil feedstock for biodiesel plants. To date they have about 50,000 hectares and expect to have 150,000 hectares planted by mid 2007. Each hectare of mature plants yields 2.7 tons of raw oil which is then refined (de-esterized) to separate the glycerin, which can make soap, and the rest is a high quality bio-diesel oil. This is the equivalent of an oil field with a production of almost 3 million barrels per year.....every year....without any depletion!
Biodiesel is popular because its a fuel which goes almost twice as far as gasoline per gallon, like regular diesel. Its also carbon neutral because every year, the carbon burned in diesel engines from biodiesel, simply gets reabsorbed by the next years growing crop of jatropha oil. As the crop size grows, the carbon that gets reabsorbed grows even taking some from our fossil burning activities.
No other renewable fuel can as easily be substituted for regular mineral diesel fuel and displace a portion of US energy dependence on foreign oil. No modifications whatsoever are required for a diesel engine to run on biodiesel. It can be mixed at any percentage with petrodiesel and performs on par with it in terms of horsepower, torque and mpg. 3.2 units of biodiesel energy are produced using 1 unit of energy. Harmful ozone forming emissions and particulates are reduced by 50% and CO2 emissions are reduced by 78% and in a carbon neutral manner. It is free of sulfur and aromatics. It has a higher flash point and is safer to transport. It's the only alternative fuel to have passed the safety health effects test required by the Clean Air Act. It is less toxic than table salt and as biodegradable as sugar. Fuel grade biodiesel conforms to industry standard American Society for Testing and Materials (ASTM) D6751.
4. The only micro-fuel cell success in the hundreds of global attempts
Medis Technologies is one of some 300 companies that are seeking to find a way of replacing the common portable battery, most often an alkaline variety, which powers almost all of our portable electronics. How many times have we been stranded and forced into admitting "my battery's just about to die on us" in a cellphone conversation. Most efforts in this area concentrate on releasing the 30 times greater energy density that on the face of it, are locked up in liquid methanol. But methanol is poisonous and inflammable and cannot be taken on a plane or train and.....doesn't really even provide anywhere close to the power to be obtained today from the humble alkaline battery. On top of this, it leaks water and the methanol fuel short circuits the fuel cell membrane further degrading performance.
Medis solution is to use sodium borohydride, a derivative of borax, which is also in clothes' washing powder. It has many hydrogen atoms in its molecule and when added to water releases all of them when an electric current is applied. Medis' ingenious solution costs $4.50 to manufacture one small module that will provide 1.5 watts and 5 volts power for up to 30 hours from a small sachet of chemicals and a box with the fuel cell in it. They describe it as taking the wall socket with you which has huge significance in countries like China and India where everyone has a mobile phone to charge but no electrical infrastructure, which we take for granted in the west. Lap tops need more juice, about 12 - 15 watts and recently Medis realized a version of their micro fuel cell that will address the needs of higher energy-demand portable electronics as well. The immensity of the pollution caused by alkaline and other battery chemistries defies belief, while this solution is incredibly planet friendly.
The company is expecting contracts, especially from mobile phone operators who want to increase the usage of minutes currently frustrated by limited battery power. They are so excited by the prospects of indicated interest that they have tripled their production line capacity in the Republic of Ireland. In the absence of real competition, Medis is a big winner waiting for an almost assured commercialization.
5. Aesthetic, efficient and the cheapest solar cell per watt
Sunpower's founder, Richard Swanson, created a solar cell like no other. It has connections on the back, has a high efficiency rating of 21% and looks really good, with none of the splotchy blue effect or the little silver lines defacing the cells. In fact they use monocrystalline silicon to exact the greater efficiency and this means the cells actually look good when they are combined together on a dark blue backing to create a solar panel. Since each cell has more done to it, they are more expensive per cell but they produce more electricity in sunlight so per watt they come out cheaper.
The company is expanding its production capacity by over ten times what it was last November when they managed a single 25 megawatt per year facility in the Philippines. By 2008 they will inaugurate 10 more and be helping thousands to harness the clean, renewable sunlight. As they cruise up the learning curve they will bring the cost of the cells per watt gradually down and hope to be able to provide finished panels at a price that will mean a payback of three years or less and do away with government subsidies.
Until then politicians of every stripe and country have been eager to curry the green vote and have encouraged subsidies for this form of electrical production, causing Germany, Spain, Italy, Greece, S. Korea amongst others and also many US states including New York, New Jersey and of course California. In economically challenged Germany the solar sector as a whole has made a dent in unemployment, for a state with limited sunshine. Many of Solarworlds cells and panels find there way here.