Modern Energy Monthly - Volume 1, December 2011

Editor's Note

When I first heard about the Occupy Wall Street movement, I didn't think it would last more than a week or so.

Clearly, I was wrong.

So about a month into it, I decided to interview some of the folks up in New York as well as some protesters here in Baltimore.

The protesters I spoke with in Baltimore proved to be exactly what the media wanted them to be: a bunch of spoiled, lazy, well-educated whiners complaining about unemployment, yet who have no interest in actually getting a job — at least, not one that they might suggest is beneath them.

I know for a fact there are a number of unskilled labor jobs available both within and outside of the city. It's not easy work — and the pay certainly isn't going to catapult you into the one percent category anytime soon — but it's honest work that will put food on the table.

New York, however, was a bit different. While I expected to see the exact same thing I saw in Baltimore, I was surprised to find that there were a lot of pretty smart people there who are more than willing to engage others in intelligent debate.

Sure, there were the chain-smoking drum circle types who think anyone making decent money should be run out of town. But you'll have that with or without these protests.

I did meet a few young people who didn't really seem to have a problem with capitalism or the wealthy, but instead had a problem with a system in Washington that allows the banks to operate in an unethical manner.

Bottom line: The taxpayer footed the bill for one of the biggest scandals in U.S. history. And this doesn't sit well when unemployment is high and morale is low.

You may remember a couple of weeks ago when Bloomberg reported that thanks to some shady dealings at the Fed, the banks were bailed out to the tune of an unexpected and previously unreported $7.7 trillion.

The taxpayers basically got screwed and the banks got bigger.

Here's an excerpt from Bloomberg:

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

Now, I have found that in New York, there are two types of protesters: There are all the folks who are essentially nothing more than overprivileged children who can't stomach the idea that they may not be able to land that $100,000-a-year job that they expected after graduating with a degree in Russian literature... and there are the folks who are paying attention and want legitimate change in Washington. They want an end to special interests and for our elected officials to be held responsible for their actions (or lack thereof).

The latter I agree with; the former I ignore, as they are nothing but a minor itch that will be scratched when they run out of cigarettes and charity.

And let's face it, their actions will have zero impact on how we profit from the transition of our energy economy.

While the protests raged on last month, the modern energy industry was chugging along steadily. In fact, last month we learned about a new report that showed the average global wind farm will be competitive with coal in just about four years. That's a very big deal.

You can read more about that in this month's Modern Energy Monthly.

Also this month:

• The Global Solar Power Grab

• Betting Big on Natural Gas

• New Water Desalination Opportunities

• Australia's Geothermal Game-Changer

• New Sales Numbers for Electric Cars

Let's get to it.

When Wind is Cheaper than Coal

In about four years, it'll happen...

The cost of electricity from land-based wind energy will be competitive with fossil fuel-based electricity.

According to the latest data from Bloomberg New Energy Finance (BNEF), the combination of three things will enable this “grid parity” reality.

First, economies of scale and supply chain efficiencies are enabling cost reductions. BNEF researchers have indicated there is a cost reduction of seven percent for every doubling of installed capacity.

Now take a look at the growth rate of global cumulative installed wind capacity from 1996 to 2010:

We don't know exactly where we'll be in another ten to fifteen years, but some estimates actually put total global installed wind power at 1,000 gigawatts by 2020. That's massive. That will be enough to provide 12 percent of the global community's power demand. Today, wind provides about 1.9 percent.

The second reason the price for wind-powered electricity is heading south is technological developments.

Thanks to better aerodynamics, controls, and gearboxes, manufacturers have been able to produce bigger and taller turbines. And this has allowed for the increase of power output. Capacity factors have increased by 13 percent due to these improvements.

Finally, researchers have found that operations and maintenance costs of wind farms have fallen as the quality of turbines has improved. BNEF reported one megawatt of today's more efficient wind turbines can deliver 2,900 megawatt hours per year. Compare that to the one megawatt turbines built in the 1980s that could only deliver about 1,800 megawatt hours per year.

All of these factors combined have reduced wind's levelized cost of energy. And with the continued development of larger and more technologically-superior turbines, these costs will continue to fall.

Researchers at BNEF also noted that the best wind farms in the world already produce power just as economically as coal, gas, and nuclear. But not until 2016 will the average global wind farm be competitive. That's roughly four years away!

The Global Solar Power Grab

There's no doubt that the solar market took it on the chin this year.

Across the board, solar stocks have struggled, and some companies have even gone belly-up.

But this is what happens with any maturation of a single market. Only the strong survive.

This year, an oversupply of panels, cells, and raw materials forced a steep decrease in average selling prices. As a result, the cost to install solar has also fallen dramatically, and extreme competition is forcing the laggards out of the market.

Solar stocks also struggled this year as the phasing out of European subsidies and incentives have slowed demand. Installations in Europe only grew by 3 percent this year, and as a share of global installations, Europe fell from 82 percent to 68 percent. That number is expected to fall to 50 percent by 2012.

Of course, increased demand in the United States and China will more than make up for any slowdowns in Europe.

This year, the U.S. will become the third largest market for solar, while China will be the fourth. China is likely to overtake the U.S. in another year, then the entire global market within three.

Also expected to grow dramatically over the next five years is Japan, where that country is in a rush to develop its solar capacity as it phases out some of its older nuclear power generation.

India is also expected to see 20 gigawatts of installed solar capacity by 2020. By the end of this year, India's solar capacity should come in at around 700 megawatts. This is a massive growth opportunity being facilitated by the Indian government.

It's still a risky road for solar investors right now, but there's no doubt that we're seeing some amazing bargains in the space.

Bottom line: The solar market will continue to grow by leaps and bounds, and once the solar sector is done shaking out, solar stocks will rebound strong and steady.

Betting Big on Natural Gas

Imagine selling just ten products a year... and walking away with as much as $30 million.

That's exactly what Siemens (NYSE: SI) plans to do with its latest gas turbine, which is said to be the most efficient gas turbine in the market.

Already in production in Germany, the new turbine boasts 61 percent fuel efficiency and the ability to reduce CO2 output by 30 percent compared to new coal-fired power plants.

Siemens is currently building a new manufacturing facility for these turbines in Charlotte, NC. When completed, it will employ 700 people and produce all the components of a combined-cycle power plant in just one location.

Siemens currently boasts about 40 percent of the advanced gas turbine market.

Siemens is betting big on natural gas in North America. It's also betting big on wind power. In fact, the company has won nearly $1 billion in wind turbine orders over the past four months just in Canada, the United States, and Puerto Rico.

To date, Siemens has installed 4,600 megawatts of wind turbines in the U.S. That's enough to power more than 1.4 million homes.

High Quality H20

At 11:58 p.m. in a crowded public hospital in Manila, Camille Galura made history.

At five pounds, five ounces, the beautiful, wrinkled child became the seven billionth human occupant on planet earth. And with her arrival came both excitement and concern.

While baby Camille's family likely celebrated her birth with laughs and tears, researchers tripped a silent alarm.

As Dr. Eric Tayag of the Philippines' Health Department pointed out, with our global population now exceeding 7 billion...

Will there be enough clean water for all these new arrivals?

If you're a regular reader of Energy and Capital, you know we've been writing about the water issue for years. After all, much like energy shortages, water scarcity creates both crises and opportunities.

Now the crisis is obvious, although too often invisible to those of us who are fortunate enough to turn on our faucets and get clean water.

This morning, I boiled some water to make a cup of tea. No big deal... I didn't think twice about it.

Meanwhile, halfway around the world, eight-year-old Indian children in Mumbai sniffed out leaks in massive pipes that run through the slums on their way to deliver fresh water to more affluent neighborhoods.

In Sudan, a couple of twelve-year-old kids slurped water through specially-fitted plastic tubes that guard against water-borne larvae that cause Guinea worm disease.  

I don't bring this stuff up to upset you, but rather to serve as a reminder that when we talk about water scarcity, we're not talking about lawn watering regulations or the high price of bottled water...

We're talking about life and death.

We're talking about full-blown crises that offer investors an opportunity to help the world's most vulnerable populations while making a few bucks in the process.

Now there are a number of ways to play the water angle. Perhaps the most obvious is desalination.

Today, 300 million people in 150 countries rely on desalinated water. And that number is expected to more than double over the next ten years, due mostly to the rapid decrease in construction and production costs.

Energy usage is also being decreased dramatically, thanks to hybrid systems, energy efficiency measures, and the integration of alternative energy sources.

In fact, most desalination plants in Australia are now powered by wind.

Saudi Arabia, the largest producer of desalinated water, is developing new solar programs. The most recent is a plant that will supply water to about 100,000 people using only solar-powered electricity. This plant will use new technologies developed by a Saudi research group and IBM (NYSE: IBM).

And just a few weeks ago, Israeli firm EDI Technologies unveiled its own transportable desalination system that uses traditional reverse osmosis technology, but does so without the use of chemicals.

The result: a less expensive, more eco-friendly production of drinking water.

Although chemicals are typically needed to pre-treat water and water filtration membranes, IDE's technology utilizes a biofilter that can do the same job — without the negative environmental side effects.

This is the future, my friends. And while IDE is not publicly-traded, there are still plenty of desalination opportunities out there...

Our favorite right now is a company called Energy Recovery, Inc. (NASDAQ: ERII), which manufactures pumps for desalination plants.

Australia's Geothermal Game-Changer

It's cheaper than coal, cleaner than natural gas and more powerful than nuclear. It can provide 130,000 times our annual electricity consumption...

And it's one of the most ignored forms of power generation in the world.

I'm talking about geothermal.

While the potential of geothermal is massive, actually getting a geothermal power plant up and running is not an easy task. The early capital costs are quite high, too.

Still, geothermal remains one of the many tools in our shed that we'll continue to use to power our nation.

But the U.S. isn't the only country with a robust geothermal resource. Iceland, Indonesia, and the Philippines all boast massive geothermal resources.

Australia is also showing to be a hot spot for geothermal development, too.

Thanks to a new geothermal map released by consulting company Hot Dry Rocks and Google.org, researchers have discovered that just 2 percent of Australia's geothermal resources could generate ten times more electricity than its total coal and gas electricity production today.  

That's huge — and of particular interest today, now that Australia has passed new carbon pricing laws that are to take effect in 2012.

The Australian government has already committed more than $12.6 billion for renewable and low emissions projects, and roughly $97.1 billion is now expected to be invested in Australian renewables by 2050.

Australia's solar and wind resources are also quite robust, but geothermal can provide base load power generation. In other words, geothermal can run 24 hours a day, seven days a week.

And despite high capital costs, geothermal power plants can produce power at a cost that is competitive with fossil fuels. As well, unlike natural gas and coal, the resource is nearly inexhaustible.

All in all, assuming Australia's carbon pricing law remains in place, we will likely see a lot of big money rolling into the country's renewable energy sector. Solar, wind, and geothermal will all benefit — as will future consumers, who will not be solely reliant on a handful of finite resources that will eventually become depleted.

It's also worth noting that with China's insatiable appetite for coal, it is likely Australia will be more interested in shipping more of their sizable bounty to the Middle Kingdom while utilizing more sustainable resources for their own power generation at home.

Despite Negative Rhetoric, Sales of Electric Cars Soar

One argument we often hear against the integration of electric cars is that no one wants them.

Of course, there isn't a shred of data to support such a claim.

Still, with so few electric vehicles on our nation's roads and highways right now, it's easy to see how some folks could get caught up in that kind of negative hype...

The truth is this first round of electric vehicle sales is proving to be quite successful — especially considering this is really the first year that we've had the opportunity to even purchase a mass-produced electric vehicle delivered by a major auto manufacturer.

Take the all-electric Nissan LEAF, for example. So far, Nissan has sold about 8,500 LEAFs in the United States.

How does that number stack up against previous disruptive vehicle technologies?

Well, when Toyota first launched the Prius Hybrid in 1997, the Japanese automaker sold only 3,000 units — worldwide.

So in its first year, Nissan has sold about 5,500 more units of an all-electric vehicle. Not too shabby... especially when you consider the LEAF carries with it the burden of range anxiety — something Prius owners have never had to deal with.

Over the years, the Prius did turn out to be a major winner for Toyota. Just one year after the Prius first hit showrooms, total sales hit 20,000. And today — well, total Prius sales numbers are in excess of 2 million, with about half of those sales generated in the U.S.

Nissan has clearly taken an early lead in electric vehicle development, much in the same way Toyota took (and maintains) the lead in conventional hybrid vehicles. In fact, the company announced last month it has set a goal of selling 1.5 million electric vehicles by 2016. That's only about four years away. And I have no doubt that this very aggressive goal will be met.

To date, global sales of the Nissan LEAF are in excess of 17,000.

That's all for this month's edition. We'll have plenty more next month...

Until then, let me leave you with this video of Jay Leno's Chevy Volt from the recent LA Car Show.

By the way, according to Leno, he has logged around 11,000 miles on his Volt since last December. And he still hasn't put a drop of gas in it!

Progress. Ain't it great?!

To a new way of life and a new generation of wealth...

Jeff