Australia

CleanTech Skepticism

Posted on by brettalan

Most readers of this blog are likely those we could call CleanTech “early adapters.” People who are excited about a technological breakthrough, especially when it is also economic and profitable. The demand for energy is mostly inelastic- and usually the game is to figure out a way to produce it cheaper, cleaner and more efficiently. If you can do this, you have a huge market. However new events are bringing to light a once less relevant issue amongst the CleanTech sector- customer acceptance and preferences (aka skepticism).

We discussed briefly some skepticism about CFL and LED lights here, but probably the best example of CleanTech skepticism is in the widespread deployment of smart grid meters. The deployment of the meters may come with a press announcement but many of the residents are unaware until the meter is actually installed. Significant news coverage has been given to recent ‘episodes’ where utility customers claim their bills doubled overnight due to the new meters.

Customers in Texas are organizing a group to fight smart meter deployment- claiming they inaccurately raised their utility rates. One customer is San Francisco refused to let PG&E install the smart meter- claiming Constitutional rights! This customer claimed, “It permits PG&E to actually come into your home at any time during the day and know what appliances you are using. This is corporate intrusion on your life.” Is he correct? Of course not. Does it still matter? Absolutely. Complaints about smart meters are not isolated incidents and have numbered in the thousands. Bakersfield residents filed a class action lawsuit against their utility. Worse however is that large utilities do not want negative publicity on a very important initiative that will reduce the need for meter monitors, inefficient peaker plants, energy consumption and evolve their business into the 21st century. What can be done legally? Utilities have the right to monitor energy usage and also the right to turn off service for customers who do not comply with monitoring capabilities. Clearly this law does not help to placate customers.

Validating smart meters

This is not just an American issue either- a $2billion program was halted prematurely in Australia due to rate hike concerns. Why is this happening? In February, 2010, a Harris Poll found that 68% of Americans have never even heard of a smart grid yet 67% said they would reduce their usage if they had higher visibility to their consumption rates. 22% did not want the utility company to monitor their hourly usage.

Research performed by IDC Energy Insights commented “[utilities] have not thought through the implications of new technology and products on customer relationships or the business process.” It noted that the smart meter fundamentally alters the relationship of the customer from once simply a recipient of a monthly bill to now an ongoing, active partner in an energy management role. If 2/3 of your customers have not heard what a “smart grid” is, implementing an active energy management relationship will be very challenging.

To be sure, there are multiple meter audits being performed to ensure the accuracy of the meters. If they are found to be inaccurate and consequently incorrectly billing customers it will be a big embarrassment for utilities. If the meters are found to be accurate, which is what this link from Texas is showing, it is further validation of the challenges of implementing a smart grid system. Consumer awareness is not enough, to make the full deployment of smart meters successful utilities will need: customer support, customer trust in the accuracy of the meters, ongoing communications and education programs. Utilities need to invest some of the cost savings they will realize from smart meters into customer support.

Real time pricing, which incites customers to move discretionary use to off-peak hours, may cause issues because some customers simply don’t want to change their behavior. These customers will pay more for power, and are of course more likely to complain. That doesn’t mean the smart grid isn’t working, it just means some folks are unhappy that it does.

The economics of Water

Posted on by S Klamp

Why do we worry about water so much? Even in the UK we talk about droughts a lot – just to get news on historic floods a day or month later. Isn’t water really a regional issue or should we trade water cross border thus water rich countries helping water scarce economies? We are positive that many people have never really thought about whether water is tradable like any other commodity. And, is it?

Who owns the right to water: the government, companies, or land owners? Generally speaking, governments own the rights to water. But water is tradable and the market distinguishes three levels of water permits. Below we will investigate what it means with respect to the pricing of water and how we can benefit as financial investors.

Source: ADB, 'Water rights and Water Allocation', 2009

Source: ADB, 'Water rights and Water Allocation', 2009

The three levels are tradable water abstraction rights, tradable rights to water-based resources and tradable water pollution rights. We kick off the article by assessing both how water is priced and which factors need to be considered. Before we start, we hope that our readers can generally agree that “water should have a price in order to achieve two objectives, namely recovering the cost of providing the particular water service and giving a clear signal to the users that water is indeed a scarce good that should be used wisely” (Van der Zaag, P. and Savenije, H.H.G. (2006) ‘Water as an economic good: The value of pricing and the failure of markets’).

Water Pricing in the EU
The European Environmental Bureau published a report on the pricing structure of water back in 2001. The EEB report opens by saying that “60% of European cities over exploit their groundwater resources. Along the coastlines in Southern Europe and on many islands, seawater is already intruding into the depleted underground aquifers, making them unusable as drinking water.” The issue of pricing water focuses on what to include in the total cost of water. The concept of Full Cost Recovery (FCR) includes various factors but ensures that (i) Operation and Maintenance Costs, (ii) Capital Costs, (iii) Opportunity Costs, (iv) Resource Costs, (v) Social Costs, (vi) Environmental Damage cost as well as (vii) Long-Run Marginal Costs (LRMCs) are included, at least in theory. Further, the ‘Polluter Pays Principle’ (PPP) ensures that it is the one who pollutes pays instead of the society as a whole. That way it is possible to create incentive structures for polluters to reconsider whether to pollute or to enhance the discharge to minimize pollution. So far the theory.

Fact is water is non-substitutable and irreplaceable which makes the calculation, in practice, challenging. For example, calculating marginal costs could be solved, or at least addressed, by smart metering although it would be near impossible to achieve a 100% service ratio.

How does the EU assess water pricing then? Essentially three levels persist: tariff structures and levels, charges and subsidies. Those are then applied across three sectors (a) households, (b) industry and (c) agriculture. Tariff structures enable utilities to collect a relatively stable revenue base and thus minimize their business risk. It probably does not inspire ‘market’ forces and the need for innovation is somewhat arbitraged away as revenues are surely coming in. Further, the issue of regional monopolies may impact the pricing behaviour of municipalities and utilities. We can distinguish between two charge systems: abstraction charge and pollution charge. The former collects payment at point of abstraction and aims to demonstrate that by minimizing leakage money can effectively be saved and the ecological benefit is obvious. Some countries trade in water abstraction rights (FAO, 2006). The latter does what is says on the tin: it charges a price for polluted waters. Germany is leading the initiative but many other European countries have adopted a similar concept. It is the closest to the Polluter Pays Principle. Subsidies prevail on many levels but the most obvious is tax reductions for new water treatment plants et al. Although the cost-benefit analysis is difficult, the water sector generally charges below its FCR principle.

Tradable Water Pollution Rights
In an report (2004) published by the Inter-American Development Bank the authors Andreas Kraemer, Eleftheria Kampa and Eduard Interwies conclude that “[e]xperience with tradable permits for water pollution control is accumulating primarily in Australia and the US, which are both advanced economies with long regulatory history in water management and pollution control. The introduction of trade for water pollution control has benefited in these cases from solid scientific understanding of the pollution problems in question, existing monitoring infrastructure and enforcement capacities”.

However, the market is still relatively young and the authors admit that it is too early to know whether the economic benefits can be explained systematically.

Conflict Potential
We are not in the position to comment on the various conflicts associated surrounding water rights. However we point out that whenever cross-country/cross regional water flows tangent on various jurisdictions, conflict is pre-programmed especially in water scarce regions. We suggest this paper by the Munk Center for International Business in Canada on issues surrounding the US-Canadian relationship on water. Other prominent research has been conducted around the River Nile and the water abstraction issues from countries further upstream. A very good report was published by the Asia Development Bank.

Further reading:
http://www.ucowr.siu.edu/updates/pdf/V109_A2.pdf
http://ageconsearch.umn.edu/bitstream/19790/1/sp02ha02.pdf
http://www.uwsp.edu/cnr/uwexlakes/economicsOfWater/documents/34_waterRights_weber_paper.pdf

The Great, Fake Lithium Supply Scare

Posted on by brettalan

“But there’s not enough lithium for all those batteries- and now you’ll switch dependency to a few lithium supplier countries!” That is the claim less informed journalists and hacks often make when they need a counter point to balance their first article on the emerging, electrified transportation sector. Why do we care? Because if true would significantly affect the battery, transportation, grid storage and electronic appliance sectors. Let’s try a fact check:

1) Claim: Dependency on 2-3 countries for lithium (similar to oil dependency)
Fact: False. This table from the USGS best answers this claim:

Country Reserves (000’s ton Li) Reserves Base(000’s ton Li)
Argentina 2,000 2,000
Australia 170 220
Bolivia NA 5,400
Brazil 190 910
Canada 180 360
Chile 3,000 3,000
China 540 1,100
Portugal NA NA
USA 38 410
Zimbabwe 23 27

Plus, ore deposits in these plus other countries bring the total to over 17.1 million tons of reserves.

2) Claim: Lithium is the sole material these sectors must have to advance.
Fact: Yes and no. Shorter term most known batteries for next gen autos and electronics will use lithium (bar the also popular nickel metal hydrides.) Longer term- let us not ignore 15 start ups that are readying ultracapacitor break throughs, 27 manufacturers and 29 other companies that have recently developed ultracapacitor technologies plus 52 research institutions working on advancing ultracapacitor technology. We do concede however that lithium will play by far the largest role for at least the next 15 years.

3) Claim: All of the suppliers in the world won’t be able to keep pace with demand & thus prices will skyrocket.
Fact: There are an estimated 17.1 million tons of contained Li in reserves worldwide. In 2008, total global demand was 100,000 tons and of course projected to grow significantly. Lithium can be recycled. Do the math with your own assumptions and it appears we have a few years before supply concerns arise. One may even want to account for new, future reserves of Li to be discovered.

Additionally- advances in nanotechnology as noted here, here and here are making the current battery chemistries that do incorporate lithium much more powerful, economic and robust.

Let’s make money: 77% of lithium carbonate currently comes from 3 companies which are SQM of Chile, Germany’s Chemetall and FMC of the USA. Talison Minerals, a private Australian firm, is the largest spodumene producer and accounts for about 23% of global contained lithium. However, only 15% of this production is sold into the lithium chemical markets via Chinese lithium carbonate converters. (Special thanks to Dundee Capital Markets for the above research, “Lithium- Hype or Substance?” October, 2009. )

Conclusion: If you are bullish on the technology advancing, you likely believe the improved economics offered by advanced lithium batteries will enable stronger investments in the related sectors of grid storage, consumer electronics, military applications and of course transportation. The sky is falling claims should not play a role in any related investment decisions.

China the New OPEC for Rare Earth Elements?

Posted on by matthewlim

If it is a daunting thought that the OPEC controls 40% of the world’s crude oil supply, think again. China has 95% of the world’s rare earth elements (REE) leading the late Deng Xiaoping to presciently remark that “the Middle East has oil, but China has rare earths.”

While oil gets a lot of attention, what does REE have in relevance to consumers? REE, which include 17 hard-to-pronounce names of chemical elements (e.g. praseodymium, yttrium, europium, dysprosium, erbium), are important ingredients in many high-tech devices and clean technologies. You need them in iPod, laptop, cell phones, TV, hybrid cars, batteries, wind farm facilities, military applications etc.

Until the mid-1980s, a single US mine was the world’s main source of REE. It was shut down due to environment concerns and low prices and China cornered the market. Outside of China, there are 3 big potential sources of REE – in California, Canada and Australia. The California mine has not produced since 1998, the Australian mine was due to start production in 2011 but has just lost its financing and the Canadian mine is aiming at 2011. Together their annual production could amount to one third of China’s.

It is no surprise then that Chinese companies have bought stakes in the Australian and Canadian projects but were so far unsuccessful in buying the Californian project. China’s State Council, or Cabinet, recently was considering tightening export restriction or even banning the export of certain elements and closing mines. While this will increase prices, secure supply for its own needs and create jobs for its own people, this will cause fear among foreign companies and governments as they may not have access to the metals and this will lure more foreign companies to the country to set up manufacturing plants there.

But foreign and Chinese industry sources doubt Beijing’s dominant goal is to create an Opec-like price cartel as China has flooded the world market with cheap REE for more than a decade. Now, Beijing needs to ensure that it has enough materials to grow its own advanced and clean technology industries, especially in Inner Mongolia where it contains 75% of China’s REE deposits.

However, foreign companies and governments know that if the supply is suddenly stopped, production outside of China will be stopped as well. While the Pentagon has raised alarm over the US military’s vulnerability in the event of an armed conflict with China, the US has been slow in focusing on securing the supply of REE as compared to its supply of oil. Meanwhile, the Japanese firms such as Sumitomo Corp and Toyota Motor Corp have begun developing alternative sources of REE in Kazakhstan and Vietnam. The Japanese has great incentives to explore new sources and diversify its supply risks because it imports over 90% of REE from China. It would be interesting to see how these countries’ resource strategies will work out in this new century.

Sources:
Will China Tighten ‘Rare Earth’ Grip?
China predicts rare earths shortage
Beijing may tighten grip on rare earths

FT: Which country has the greenest bail-out?

Posted on by matthewlim

There is an interesting interactive graphics posted on FT (Mar 2009, updated Aug 2009) about the countries with greenest bail-outs. It reported that governments around the world have committed over $512bn of the global economic stimulus outlined so far to green projects, with 22% to be spent in 2009, HSBC estimates.

While we know that this is good for green businesses, there are proponents of a green stimulus who claim that there will be serious consequences if the money is misspent and countries could be committed to a path that has already led to a growth in greenhouse gas emissions. Interesting argument as we know some clean technologies can be capital-intensive such as solar and biofuels – it can take a lot of energy and materials to produce them.

I am somewhat unsure about the title “greenest bail-outs”. Is it really bail-outs or is it really green investments/stimulus package? The authors did not give explanation for the title.

By volume, the “greenest bail-outs” are:
1. China ($218bn)
2. US ($117.2bn)
3. South Korea ($59.9bn)
4. Japan ($36bn)
5. EU ($24.7bn)
6. Germany ($13.8bn)
7. Australia ($9.3bn)
8. France ($6.1bn)
9. UK ($3.7bn)
10. Canada ($2.8bn)
11. Italy ($1.3bn)

By percentage, the “greenest bail-outs” are:
1. South Korea (79%)
2. EU (64%)
3. China (34%)
4. Australia (21%)
5. France (18%)
6. Germany (13%)
7. US (12%)
8. UK (11%)
9. Canada (9%)
10. Japan (6%)
11. Italy (1%)
FT greenest bailout

GE predicts tide coming in for water business

Posted on by matthewlim

Reuters reported on 11 Aug 2009 that General Electric Co predicted water purification could grow from a drop in the corporate bucket to a major growth driver within years, just as its wind unit did.

With an estimated $2.5 billion in revenue, the water business remains a sliver of the $156 billion in sales expected to generate this year. The unit’s small size has lead some investors to wonder if GE might prefer to sell it to focus on businesses where it can better enjoy the benefits of scale but GE said water has the potential to become a major profit contributor. “What GE tries to do is to align the company with some of the mega-trends, the mega-challenges of the world. Energy is one, healthcare is the other, and the third one is water,” said Heiner Markhoff, president and chief executive of GE Water & Process Technologies.

GE does not disclose the profits or revenue of its water business, but the unit has been hit by the global recession. In a conference call discussing the company’s 36% second-quarter profit decline, GE executives noted that service revenue related to the water business, which does not include equipment sales, fell 18% in the quarter. GE’s rivals include Siemens AG, Dow Chemical Co, Danaher Corp and Nalco Holding Co.

Some analysts think GE may soon exit the water business. “We think it is increasingly likely that GE may seek to divest its $2.5 billion water and process technologies platform over the next one to two years,” said Bank of America/Merrill Lynch analyst John Inch. In a June note to clients he noted that the water business has lagged GE’s typical profit margin and growth targets.

Below are five facts about GE’s water business:
* GE’s water business employs about 7,900 people worldwide and has manufacturing facilities in 50 countries.
* The unit generates the majority of its revenue, 63%, outside the US, with some of the strongest growth from the Middle East, Africa and Australia.
* GE technologies focus on the quality of water being released from industrial processes and municipal treatment plants as well as allowing industrial users to improve the quality of the water they are bringing into processes to prevent it from harming high-tech equipment.
* GE has set a goal of cutting its own water usage 20% by 2010, a move that it said will cut its annual operating costs by $15 million to $20 million.
* GE and the National University of Singapore in June 2009 opened a joint research center to focus on water, which employs 30 scientists and engineers from GE. (Note: This is GE’s first collaboration with a university in the Asia-Pacific. You can read further here)