In Focus: Carbon Winners and Losers

carbon-co2

A seismic shift in the power generation landscape is starting to sink in. It has been two weeks since the EPA announced its new proposed carbon rules, one of the flagship efforts of the Obama Administration to address climate change. This shift is meant to move the country in the direction of inevitable changes coming to the energy economy. It is important for investors to know which companies and sectors stand to benefit from the new rule.

What the rule says

The basics of the proposed rule are this: States need to come up with ways to reduce power plant emissions. The goal is to allow flexibility to States so that they can implement innovative strategies to reduce the “pollution-to-power ratio” of fossil-fuel fired power plants. The EPA believes that by doing so, U.S. power plants should emit 30% less carbon in 2030 than they did in 2005.

The EPA is framing the effort with four “building blocks” in order to reach carbon reduction goals. These are:

1.     Improved operations at power plants.
This means building more efficient plants, or retrofitting existing ones.
2.     Substituting high carbon generating plants with lower carbon generation.
In effect, replace coal-fired plants with natural gas.
3.     Substituting fossil fuel plants with low and zero carbon generation.
A call to enhanced deployment of renewables.
4.     Increase demand side efficiency.
Lower the energy use of homeowners, businesses, etc.

All four of these building blocks have strong implications for alternative energy investors. They are listed below in order of relevance to the companies we track here at the Roen Financial Report.

Substituting fossil fuel plants with low and zero carbon generation

This building block is at the heart of the mission of the Roen Financial Report, moving beyond fossil fuels and into the realm of renewables. These two very different companies are among my top picks to benefit in this category.

proj


SolarCity Corp (SCTY) is an innovative, full service solar installation company that has had more digital ink spilled about it than most any other alternative energy company (including my own analysis). SolarCity takes the residential and commercial customers through design, installation and financing of solar systems. In addition to solar installs, SolarCity does home energy evaluation, energy efficiency upgrades, electric vehicle charging and energy storage. Growth has been outstanding for this company, and though it is a speculative investment, I have no doubt it will become profitable in the new two to three years.

Trina Solar Limited (ADR) (TSL) is a China-based integrated photovoltaic module manufacturer. It has a large production capacity and a global distribution network covering Europe, North America and Asia. Its sales have picked up since 2012, and Trina has posted positive earnings in its three most recent quarters. Trina Solar recently closed on $150 million of convertible senior notes and over $90 million of American Depositary shares. I see the fact that the company is looking to western capital and away from Chinese government loans as a positive sign.

Increase demand side efficiency

Efficiency is one of our favorite investment themes. This is low hanging fruit – it benefits end homes and businesses by saving money, it benefits utilities by reducing the need to build more capacity, and it benefits the environment. The three companies below are well positioned leaders in this category

EnerNOC, Inc (ENOC) helps commercial and industrial users reduce electricity use during peak demand, which can significantly reduce a company’s energy consumption. EnerNOC’s services include demand response, energy efficiency, energy procurement, emissions tracking and trading support. This Boston-based company recently won an auction for over $185 million in capacity payment in the PJM Interconnection capacity market for 2017/2018, which should bode well for its bottom line. ENOC is up 41% for the year, and over 220% from its lows in 2012.

Tetra Tech, Inc (TTEK) is a diversified company that provides environmental services, energy efficiency consulting, carbon management and other services. This large California-based company works on projects world-wide and brings in almost $2 billion in revenues annually. TTEK has been a component of the Paradigm Portfolio since its inception. We consider Tetra Tech to be trading below fair value at current levels in the mid-$20 range.

Ameresco Inc (AMRC) is a small Massachusetts-based company that provides a variety of measures to improve the efficiency of major building systems. These include heating, ventilation, air conditioning and lighting. Ameresco also installs small-scale renewable energy plants. AMRC had a solid vote of confidence by management, as CEO George P. Sakellaris recently purchased 85,000 shares in a month worth over half a million dollars. This positive insider trading activity brings his direct ownership to over $18 million.

Substituting high carbon generating plants with lower carbon generation

The case is now clearer than ever that coal will be phased out in favor of natural gas. Though substituting one fossil fuel for another may not be the ultimate solution to solving our climate problems, it is undoubtedly a critical short-term step to addressing base-load needs while reducing carbon emissions. Three companies have been selected which stand to benefit from this trend.

NextEra Energy, Inc (NEE) is a large, profitable Florida-based power company that generates more than half its power from natural gas. NextEra is in the process of completing a major development cycle where it is modernizing older, less-efficient fossil generation facilities and building more efficient, cleaner natural gas-fueled plants. For example, its Port Everglades plant was demolished in 2013 to be replaced with plant that should have half the emissions. Also, NextEra is developing a new natural gas pipeline to Florida targeted for completion in 2017. In addition, NEE generates 8,000 megawatts of electricity from renewable resources.

As a utility NextEra offers steady stock price growth with an attractive yield. With over 4.5 million customer accounts, NextEra Energy is well over the industry average in assets and earnings growth. We consider NEE to be above fair value at current levels, but it remains a good long-term investment.

Sempra Energy (SRE) Sempra Energy is a holding company that owns two southern California utilities, as well as energy assets in other parts of the United States, Mexico, and South America. This San Diego based company has over 17,000 employees and provides products and services to more than 31 million consumers worldwide. Sempra has a strong portfolio of natural gas pipelines, storage and generation facilities. As with NextEra, Sempra also has an array of solar and wind facilities that it manages. Sempra has had steady sales and strong earnings, but has a relatively high PE. It is deemed to be just above fair value, so is a good buy in the $85-$90 price range.

GreenHunter Energy, Inc (GRH) provides water management solutions for shale gas focusing on serving companies in the Marcellus, Eagle Ford and Bakken shale plays. Its services are essential to address environmental issues concerning hydraulic fracturing, or fracking, utilized in shale gas production. Though this microcap penny stock had a sketchy beginning, it has enjoyed a recent jump in its stock price due to increasing revenues leading to decreasing losses. Its earnings are still negative, though, so we consider this micro-cap to be a speculative investment.

Improved operations at power plants

Though many people may not consider it a renewable energy company, General Electric (GE) is a key player in many aspects of the energy industry. As a leader in power plant design and turbine development, GE will surely benefit from planned power plant retrofits and reconfigurations.

Sales and earnings for GE have been flat since the beginning of the decade, but it has had climbing dividends every year since 2010. Though we see GE as overvalued at current levels, this company can be a stable large-cap component of a balance portfolio. We estimate fair value to be in the low 20’s, so accumulate on the dips.

Summary

The Obama administration made a bold move to address climate change by issuing these carbon rules through the EPA. While the proposed regulations are still in a draft phase, there is no doubt that thechanges already occurring in the utility business will continue. Savvy investors well positioned in the proper companies and industries will be sure to benefit from this continued energy transformation.


DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC owned or controlled shares of NEE, TSL. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.


Remember to always consult with your investment professional before making important financial decisions.

Original Article on Roen Financial Report

Obama’s Climate Plan Is Leaking Methane

The Environmental Protection Agency’s new regulations aimed at reducing carbon emissions by 30 percent will no doubt lead to a cleaner economy. But the road there will be paved with methane. 

By requiring reductions in the energy intensity per megawatt-hour of electricity generation, utilities will have the ability to choose from an array of options for how to meet the targets. 

Energy efficiency will likely be the first choice. Renewable energy will certainly play a big part, as well. 

But one of the major ways utilities will comply with EPA rules is by fuel switching from coal to natural gas. By the EPA’s own estimate, coal generation will decline by 20 percent to 22 percent by 2020. That will create an opening for natural gas, which could rise by up to 45 percent, jumping from 22 billion cubic feet per day to 32 bcf/d. 

The Obama administration has bet its climate legacy on this trend, which was already underway before the EPA regulations. This is why the administration chose 2005 as a baseline, when emissions were near a peak. 2005 predated the shale gas revolution, which led to significant reductions in carbon dioxide emissions as cheap natural gas displaced coal. By 2013, the U.S. had already achieved about a 10 percent reduction in emissions since 2005 – meaning we are already well on our way to the 2030 goal. 

methane 

Since natural gas burns much cleaner than coal, producing about half as much carbon dioxide, making the switch from coal to gas can go a long way to achieving the rest of the remaining reductions, the administration seems to be thinking. 

The big problem is that we don’t know what’s happening with methane emissions. Natural gas, which is essentially methane (CH4), may burn cleaner than coal, but what happens when it isn’t burned? As a greenhouse gas, methane emitted into the atmosphere is more than 20 times as potent as carbon dioxide over a 100-year period. 

Natural gas production leaks methane along its entire supply chain – from drilling to storing, processing to distributing. The EPA estimates that methane emissions have actually declined over the past 20 years as technology has improved. And this needs to be true for the EPA’s assumptions to work out with its climate plan. 

The problem is that many scientists dispute those claims. Robert Howarth of Cornell University believes that methane leakage could be much higher than the government says, which would mean pushing utilities to switch from coal to natural gas may not be constructive. He has conducted studies that conclude methane leakage far exceeds EPA estimates. “Converting to natural gas plants, which is what this latest rule is likely to do, will actually aggravate climate change, not make things better,” Howarth told Bloomberg News. “It’s well enough established to suggest the EPA is on the wrong side of the science.” 

The natural gas industry has aggressively pushed back against Howarth’s findings, pointing to other studies that show lower methane leakage. But the problem is that the science just isn’t all there yet – we don’t know exactly how much methane is leaking. Nevertheless, the Obama administration is ploughing forward. 

In its regulatory analysis for the new carbon rule, the EPA recognized the methane problem, but has punted on the issue for now. “The EPA is aware that other GHGs such as nitrous oxide (N2O) (and to a lesser extent, methane [CH4]) may be emitted from fossil-fuel-fired EGUs…The EPA is not proposing separate N2O or CH4 guidelines or an equivalent CO2 emission limit because of a lack of available data for these affected sources,” the report said. 

Natural gas may still have a climate benefit over coal. And even if it doesn’t right now, methane leakage could turn out to be a very fixable problem, as engineers figure out how to plug the leaks in the supply chain. But for now, President Barack Obama’s climate plan hinges on this uncertainty. 

Source: https://oilprice.com/Energy/Energy-General/Obamas-Climate-Plan-Is-Leaking-Methane.html 

By Nicholas Cunningham of Oilprice.com

Will Chinese Pollution Ever be Under Control?

The recent bad weather we experienced over the winter has been blamed on everything from changing North Atlantic currents to the government’s support over same sex marriage. Whatever the reasons, it does seem clear that our weather patterns are changing, not just here but across the planet. These changes could have significant effects in the future, and many people are pointing to the greenhouse gases and pollution released in China as one of the major culprits of climate change. But does pollution from so far away affect the rest of us?

EMISSIONS

Until about 2000, emissions of carbon dioxide, the major culprit in global warming, stood at around 3,000 million metric tonnes in China. By 2009 that had more than doubled to almost 8,000 million tonnes, and China alone now produces 26% of the world’s CO2, almost as much as the USA and all of the European Union countries combined. As a comparison, the UK produces less than 500 thousand metric tonnes of carbon dioxide every year and this is only 1.5% of the world’s emissions.

woman wearing a mask uses her mobile phone

A woman using her mobile in the smog, in Harbin, northeast China’s Heilongjiang Province (STR/AFP/Getty Images)

TACKLING POLLUTION

Here in Western Europe we take climate change very seriously and have done for decades. We all recycle what we can, have got used to trying to reduce what we consume and big business has drastically cleaned up its act too, with experts pointing to success stories such as the river Thames supporting more wildlife than it has for the past 200 years. However there are no such controls in China, which as a nation has been more focused on economic growth and enabling its factories to compete with those in the West rather than controlling their activities and making sure that they do not pollute the environment. The major international agreement on pollution control is known as the Kyoto Protocol which was signed in 1997. In this treaty, countries are bound to make certain changes based on their economic status at the time. Western European countries, agreed to stick to pollution control targets, whereas nations classed as “developing”, including China, were given non-binding targets for tackling pollution. There is a school of thought that as Chinese industry has moved on so much since 1997, this treaty should be re-drafted.

Man pushes bike in smog

A man bushes his bicycle up stairs during heavy smog in Harbin, China. (STR/AFP/Getty Images)

SMOG

One of the most visible signs of the level of pollution in China is the blanket of smog which regularly engulfs Beijing. The smog causes huge health problems for residents and visitors to the city, and once the smog dissipates, it goes into the upper atmosphere and contributes to global warming and the reduction in the ozone layer. It’s not just a Chinese problem, and many feel that unless something is done to bring Chinese pollution controls up to Western European standards, the result will be more extreme weather conditions across the planet.

Chinese Pollution from Space

This terrifying satellite image depicts smog stretching 750 miles from Beijing (top centre) to Shanghai (bottom right) Source: Daily Mail

WEATHER PATTERNS

It’s not fully understood how pollution created in China, India or other developing parts of Asia impact on the weather for the rest of the planet. Research is ongoing, but computer modelling studies seem to indicate that high levels of pollution in Asia cause stronger storms to sweep eastwards across the Pacific into the United States and eventually on to us here in Europe. Along with the stronger winds, more rain is predicted, with experts modelling around 7% more rain when levels of pollution are high.

The Future of China?

Is this the future for China? Source: L17 Designs

FUTURE

There is no sign of the Chinese taking huge steps to reduce their pollution levels. Small steps focussing on individuals have been taken, such as stopping stores from giving out free plastic bags but the big issues such as emissions from factories, dependence on fossil fuels such as coal and water pollution into the country’s rivers remain untackled. 16 of the world’s 20 most polluted cities are in China, but at a time where the country is experiencing rapid growth and personal wealth at levels never seen before, there is just not the appetite from the ordinary Chinese to do anything about pollution. China is slowly opening up to the West and allowing more Western influences into the country, but until this process gathers pace and there is real willing from the Chinese politicians to tackle pollution, we can perhaps expect more extreme weather on the other side of the world.

Source of Images: Huffington Post | Daily Mail | Commons.Wikimedia and L17 Designs

Original Article on Greener.Ideal

Bill Gates Talks Climate Change

gates-nerd

In the March 27 issue of Rolling Stone,Jeff Goodell interviews Bill Gates on issues ranging from polio to Edward Snowden to climate change.

Goodell describes this world’s wealthiest person as perhaps also its most optimistic because he sees the world is a giant operating system that just needs to be debugged. The idea that animates his life is that the code for these problems can be rewritten and  errors can be fixed. “Huge systems – whether it’s Windows 8, global poverty or climate change – can be improved if you have the right tools and the right skills. The Bill & Melinda Gates Foundation, the philanthropic organization with a $36 billion endowment that he runs with his wife, is like a giant startup whose target market is human civilization.”

Here is the excerpt about climate change.

Goodell: Let’s talk about climate change. Many scientists and politicians see it as the biggest challenge humanity has ever faced.
Gates: It’s a big challenge, but I’m not sure I would put it above everything. One of the reasons it’s hard is that by the time we see that climate change is really bad, your ability to fix it is extremely limited. Like with viruses, the problem is latency. The carbon gets up there, but the heating effect is delayed. And then the effect of that heat on the species and ecosystem is delayed. That means that even when you turn virtuous, things are actually going to get worse for quite a while.

Right . . . we’re not virtuous yet, are we?

We’re not even close – we’re emitting more CO2 every year. In order to get a 90% reduction of carbon, which is what we need, the first thing you might want to get is a year of global reduction, and we have not had that. US emissions are down right now, partly because we buy more goods from overseas. But even if you invented some zero-carbon energy source today, the deployment of that magic device would take a long time.

Are you hopeful that global climate talks will lead to a solution?

Many climate change discussions are off-target because they focus on things like the $100 billion per year that some people believe should be spent by the rich world to help the developing world, which is not really addressing the problem.

At the same time, discussion about how to increase funding of research-and-development budgets to accelerate innovation is surprisingly missing. We haven’t increased R&D spending, we haven’t put a price signal [like a carbon tax] in, and this is certainly very disappointing.

I think it’s a real test of the boundary of science and politics – and an acid test of people’s time horizons. Before the economic downturn, attitudes in the US about climate change had become quite enlightened, and then there was a big reversal, which I believe was a result of people’s worries about their immediate economic situation. Talking about problems that will have a significant effect 30 or 40 years out just gets off the agenda, and there’s this shrill political debate that is distracting people. So we’ve made some progress, but you can’t take the progress we’ve made and linearize it – if you do, you really are going to find out how bad climate change can be.

Let’s say climate change was delayed 100 years. If that were the case, science would take care of this one. We wouldn’t have to double the Department of Energy budget, because there’s five or six different paths to go down. And 100 years, at the current rate and speed of science, is a long time.

We’re heading for big trouble, right?

Absolutely. That’s why I happen to think we should explore geoengineering.­ But one of the complaints people have against that is that if it looks like an easy out, it’ll reduce the political will to cut emissions. If that’s the case, then, hey, we should take away heart surgery so that people know not to overeat. I happened to be having dinner with Charles Koch last Saturday, and we talked a little bit about climate change.

And what was the conversation like?

He’s a very nice person, and he has this incredible business track record. He was pointing out that the US alone can’t solve the problem, and that’s factually correct. But you have to view the US doing something as a catalyst for getting China and others to do things. The atmosphere is the ultimate commons. We all benefit from it, and we’re all polluting it. It’s amazing how few problems there are in terms of the atmosphere. . . . There’s just this one crazy thing that CO2 hangs around for a long, long time, and the oceans absorb it, which acidifies them, which is itself a huge problem we should do something about.

Like cut carbon emissions fast.

Yes, but people need energy. It’s a gigantic business. The main thing that’s missing in energy is an incentive to create things that are zero-CO2-emitting and that have the right scale and reliability characteristics.

It leads to your interest in nuclear power, right?

If you could make nuclear really, really safe, and deal with the economics, deal with waste, then it becomes the nirvana you want: a cheaper solution with very little CO2 emissions.

If we don’t get that, you’ve got a problem. Because you are not going to reduce the amount of energy used. For each year between now and 2100, the globe will use more energy. So that means more CO2 emissions every year.

TerraPower, which is the nuclear energy company I’m backing, required a very long time to get the right people together, it required computer modeling to get the right technology together, and even now it’s going to require the US government to work with whatever country decides to build a pilot project – China, maybe. In a normal sort of private market, that project probably wouldn’t have emerged. It took a fascination with science, concern about climate change and a very long-term view. Now, I’m not saying it’s guaranteed to be successful, although it’s going super, super well, but it’s an example of an innovation that might not happen without the proper support.

Nuclear power has failed to fulfill its promises for a variety of economic and technical reasons for 40 years. Why continue investing in nuclear power instead of, say, cheap solar and energy storage?

Well, we have a real problem, and so we should pursue many solutions to the problem. Even the Manhattan Project pursued both the plutonium bomb and the uranium bomb – and both worked! Intermittent energy sources [like wind and solar] . . . yeah, you can crank those up, depending on the quality of the grid and the nature of your demand. You can scale that up 20%, 30% and, in some cases, even 40%. But when it comes to climate change, that’s not interesting. You’re talking about needing factors of, like, 90%.

But you can’t just dismiss renewables, can you?

Solar is much, much harder than people think it is. When the sun shines, electricity is going to be worth zero, so all the money will be reserved for the guy who brings you power when there’s no wind and no sun.

There are some interesting things on the horizon along those lines. There’s one called solar chemical. It’s very nascent, but it comes with a built-in storage solution, because you actually secrete hydrocarbons. We’re investing probably one-twentieth of what we should in that. There’s another form of solar called solar thermal, which is cool because you can store heat. Heat’s not easy to store, but it’s a lot easier to store than electricity.

Given the scale of problems like climate change and the slow economic recovery and political gridlock and rising health care costs, it’s easy for people to feel pessimistic about the way the world is going.

Really? That’s too bad. I think that’s overly focusing on the negatives. I think it’s a pretty bright picture, myself. But that doesn’t mean I think, because we’ve always gotten through problems in the past, “just chill out, relax, someone else will worry about it.” I don’t see it that way.

I think we will get our act together on climate change. That’s very important. I hope we get our act together on large-scale terrorism and avoid that being a huge setback for the world. On health equity, we can reduce the number of poor children who die from more than 6 million down to 2 million, eventually 1 million. Will the US political system right itself in terms of how it focuses on complex problems? Will the medical costs overwhelm the sense of what people expect government to do?

What do you say to people who argue that America’s best days are behind us?

That’s almost laughable. The only definition by which America’s best days are behind it is on a purely relative basis. That is, in 1946, we made up about 6% of humanity, but we dominated everything. But America’s way better today than it’s ever been. Say you’re a woman in America, would you go back 50 years? Say you’re gay in America, would you go back 50 years? Say you’re sick in America, do you want to go back 50 years? I mean, who are we kidding?

Our modern lifestyle is not a political creation. Before 1700, everybody was poor as hell. Life was short and brutish. It wasn’t because we didn’t have good politicians; we had some really good politicians. But then we started inventing – electricity, steam engines, microprocessors, understanding genetics and medicine and things like that. Yes, stability and education are important – I’m not taking anything away from that – but innovation is the real driver of progress.

Read the whole interview and a 2010 interview specifically on climate change:

Website: www.rollingstone.com/politics/news/the-miracle-seeker-20101028

Original Article on  SustainableBusiness