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Sunday, 24 October 2010

Who is the 800lb gorilla in the geothermal industry?

Wall street published its  list of the 25 most important alternative energy companies a few days ago and broke it down by category. I thought I’d highlight the companies the article considers to be the most important in each category (which I agree with) and add in some of my own thoughts. There is one glaring omission in 24/7 Wall St’s report and that is geothermal. Geothermal remains the red headed step child of the alternative energy industry! I have added in my top pick in geothermal which is the 800lb gorilla in the space, Ormat Technologies (ORA). I’ve also included a wave energy section which includes the only way to play it on a major US exchange.
First Solar (FSLR) is the top pick in the solar space due to its industry leading cost structure of just .76/watt. The thin film solar leader still provides advantages over traditional silicon solar companies although the cost advantages have diminished in recent years due to plummeting poly prices. The company remains the top US solar company, still has a solid European customer base and is attempting to make big inroads in China (although that strategy has been criticized and delays are expected).

Thermal solar, often called concentrated solar power, is a technology that is in its infancy but a technology that’s expected to be used at an exponential rate over the next ten years. Rather than using solar cells, mirrors are used to reflect light used to heat water which creates steam to drive a turbine. This lower tech solution is much less costly than a tradition solar cell plant.
Solar Millennium (SMLNF.PK) is a German-based company that trades over the counter here in the US, but is highly illiquid so I can’t recommend it. If you can find a way to trade it on the German market that’s probably a better option. What’s exciting about this solar thermal player is that the California Public Utilities Commission recently approved its plan (partnering with Chevron (CVX)) to begin construction on the first two thermal solar plants which are expected to produce electricity by 2013. If the entire project (four plants total) get approved, it would represent the largest solar project in the world and generate 1GW of energy (which is roughly enough energy to power a city about the size of Seattle).
General Electric (GE) is the top pick in the wind energy industry, but it should be noted the company is attempting a big push into the smart grid, solar and LED space as well. While this isn’t an alternative energy pure play for investors, it is a very important company in the US alternative energy market and it has a big presence globally. GE is attempting to transform the company and an increasingly larger portion of revenues comes from energy infrastructure with its wind turbine business (although it has stalled out recently) As 24/7 Wall St points out, energy infrastructure accounted for 18% of revenue in 2007, 21% in 2008 and 24% last year. The company recently announced an important relationship with Harbin Electric to try to capture a big piece of the China wind market which is expected to explode in the coming years and likely offer bigger growth than the US market.
ABB Ltd. (ABB) is the Swiss manufacturing behemoth that does over $30 billion a year in revenue and part of its business is the design and construction of solar and wind farms. It also will likely be a huge player in the modernization of the grid, so ABB while not an alternative energy pure play, is on par with a GE in terms of its importance to the alternative energy revolution.

ethanol BIOFUELS
Cosan Ltd.(CZZ) is Brazil’s largest producer of sugar cane-derived ethanol and recently announced a $12 billion joint venture with Royal Dutch Shell.

Honorable Mention: In my opinion, the steady profitability and bullish earnings report out of Green Plains Renewable Energy (GPRE) last night makes it my pick for the top US based ethanol producer.

Sociedad Química y Minera (SQM) is the largest lithium miner in Chile and it’s been said that Chile is home to 75% of the world’s lithium supply. Lithium battery demand will continue to surge. You do the math.

Advanced Battery Technologies (ABAT) 24/7 Wall St nails this one. ABAT is a lithium battery company in China that gets little respect here in the States. Most traders are interested in unprofitable US based battery plays with potential such as A123 Systems (AONE) and Ener1 (HEV), but ABAT sets itself apart in one key area. It is profitable and growing quickly. It remains my top battery play as well. As 24/7 notes, none of the revenues came from vehicle batteries in 2008 as the company focused on batteries in consumer products, but last year the company accumulated $21 million in revenue from batteries for buses. Not to be overlooked is the potential of the electric bike business in China which is becoming a revenue driver for the company. In fact, in the company's last earnings report, it highlighted that half of its revenues now come from electric bikes.

Itron (ITRI) has the potential for enormous growth as the smartening of the grid gets underway. Highlighted by 24/7 is ITRI's estimate that there are 1.3 billion electricity meters installed globally and less than 10% are automated. Of the 175 million meters installed in the US about half use automated technology and the company claims its technology is in about half of those. Hmm.. those stats really surprise me if accurate. I would have thought there were far more than 175 million meters in the US and far less than half being automated. I suppose the important take away is that there is big growth potential outside the US. The company also provides automated meter reading for gas and water meters and just announced a partnership this morning with Sierra Wireless to provide data over existing cellular networks greatly increasing efficiency of installation and collection of data.

ledlights LED LIGHTING
Cree Inc. (CREE) The LED space may be one of the most exciting places to invest for alternative energy investors in the coming decade for a few reasons. LED lights are exponentially more efficient and will last about 20 years, the US is phasing out the traditional light bulb beginning in 2012 and costs are continuing to drop. Granted, many will move to compact fluorescent lighting which doesn’t quite offer the the same efficiency or life span of an LED bulb, but comes at a much cheaper price. Expect LED to become a more viable option to the average home when the price for an LED is cut in half-- probably a few years away.
CREE is often thought of as the top LED pure play and for good reason. The company’s growth has exploded in the past couple years. However, the company will battle some big competition as the industry matures from both General Electric and Phillips (PHG). General Electric is expected to release its first household LED bulb next month.
Ormat Technologies (ORA) is the 800lb gorilla in the geothermal industry and the largest pure play. Chevron is actually the largest producer of geothermal energy in the world and provides about 13% of the total capacity, according to Wikinvest. Geothermal doesn’t get the attention that wind and solar get, but it’s going to be an important generator of near continuous alternative energy and Ormat is the safest way to play it.
In their report, 24/7 Wall St didn’t include wave energy either probably because the technology is still a ways off, but I think it’s worth mentioning Ocean Power Technologies (OPTT) which is developing the first commercial scale wave energy system in the US off the coast of Oregon. Obviously the technology presents unique challenges and it will probably never make up a significant portion of our energy needs, but together with other technologies could provide another source of clean, renewable energy. OPTT is the only wave energy stock currently traded on a major US exchange.

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