Transcript from the Radio Ecoshock Show April 11, 2008
(transcribed by a fine volunteer listener to the show!)
Alex Smith (host) interviews an anonymous Wall Street inside trader, the proprietor of the “Climateer Investing” blog (at climateinvest.blogspot.com)
Started at 29:33 of the program.
<Alex>This is radio Ecoshock and I’m Alex Smith. We’ve just heard why we need solar but what is the business world doing about it? To find out, we are joined now by our Wall Street insider expert, the proprietor of the Climateer Investing blogspot. Listen up, this man is plugged into the places where hundreds of millions of dollars trade in alternative energy.
<musical interlude>
<Alex>Where is solar energy today? We are joined again by our Wall Street insider correspondent, the proprietor of Climateer Investing blog. Well welcome and thanks for giving us some of your valuable time.
<guest>Alex, what a great time to be alive.
<Alex>You bet.
<guest>I really mean that. When we left last time, you said well on that optimistic note, you’re absolutely right.
<Alex>Well let’s start out, I want to ask, is solar energy still a development project or is it becoming a real industry?
<guest>As to size, it’s still very tiny. We’ll get to that. First up, though, for your older listeners, I want to make a point. I know you asked me to not go into a lot of history. But what we’re going to talk about today is not what I think of as hippy solar. When I was a kid, the idea seemed to be that everyone would live in a geodesic dome and have a solar panel to run their techniques power amplifier and they’d have a light bulb so they could read the Whole Earth catalog. And thank goodness that’s all they did. They had very simple lives because those solar panels in 1975 cost $100 a watt. It’s down to $2 per watt and dropping right now. I mean, that’s an incredible drop 50-fold over the last 33 years. So it’s not what a lot of older folks, myself included, would think of as solar. This is beyond the cutting edge. And if we can take a moment here to go back to your original question, developed versus developing, one quick example of where the industry is right now, CleanEdge put out a report 3 or 4 weeks ago: the entire solar industry world-wide did about 27 billion dollars in revenues in 2007. One company in Canada did a bit over 21 billion. So they’re smaller than Canada’s largest energy company, much less an Exxon Mobile or a Chevron.
It’s still very very tiny but and this is the important thing. When I first came into business, there was a story going around about a couple shoes salesmen back in the 50s. They were sent off to Africa and told, “sell.” And so they get to Africa and one shoe salesman wires back “lousy market. Nobody wears shoes here.” The other salesman says “great market. Nobody wears shoes here.” And really is all in how you look at it. Coming from a 20 billion dollar base, the up sight is so big, that’s the reason that the big venture capitalists, the big investment banks are plowing really big money into this. The CleanEdge again in the report from earlier this month said they expect 3.5 to 4-fold growth, they expect about a 70 billion dollar industry 10 year out. That might end up being on the low side. Things are happening so fast, Alex, that well if you had any specific questions, why don’t you just jump it on in because I could go on with this stuff for hours.
<Alex> Well I’m quite willing to let you go on for hours because I think you know what you’re talking about but let’s start with this one. As you know southern California Edison just announced plans to build the country’s biggest solar installation. It’s going to cost 875 million dollars. That should give the American market a bit of a sign or a lift or a signal, don’t you think?
<guest>Oh my goodness, that one project is so large in scope, just the thinking behind it is what we call utility-scale solar. Again, it is not the little panels on the roof. This is meant to be competitive on a cost basis with coal fired electricity. And that is the holy grail. We’ll get into some of the subsidies and whatever that have made solar grow as fast as it has but the real goal of all of this and the Socal Edison, as you say, is just shy of a billion dollar investment, that’s a big bet. The fellows at Google, especially Sergey Brin, are backing a company called Nanosolar. Their goal is to get electricity out of nanosolar cells cheaper than coal-fired. They announced earlier this year or maybe it was late December, they had achieved $0.99 per watt cell costs, which means, usually you double the cost of the cell so let’s say, a dollar a watt, you double that to get your install cost of $2. This goes back to something we talked about the first time I called in. The last coal-fired power plant that I looked at was going to cost approximately 2 billion dollars to generate 1000 megawatts or $2 a watt for their fixed costs. Well it appears that Nanosolar has already achieved that goal of being competitive on a cost basis and with that, the sky really is the limit. There are so many approaches going on right now and maybe this would be a good time to just give a quick overview of the different type. Is that ok?
<Alex>Yes let’s do that.
<Guest> Ok. Right now in solar panels, the 2 main types are silicon-based, which is the stuff that has created the entire semi-conductor world we live in, and what’s called thinfilm. The advantages of silicon, a) it’s an established technology, the fabricators that actually make wafers of silicon know how to do this. And they are very good at getting the purity you need. What you’re trying to do is take those photons from the sun, excite the electrons in whatever material you are using as your semiconductor so that the electrons step up in energy phase and then create an electrical current. Doing it with semiconductor material is very straightforward. It’s been a problem for the last two years because the growth has been so fast, there have been acute shortages of silicon. That’s ending right now. This month and next month we’ll start to see new supplies come out of line. But it’s driven the cost of silicon through the roof. So that when it was already a more expensive process or approach, it really got expensive. The other major type is what’s called thinfilm where you’re applying a film which is going to be the semiconductor to some sort of substrate or backing.
Right now the leader in that area is a company called First Solar out of Phoenix. First Solar uses a combination of cadmium and tellurium. This Nanosolar that I had mentioned earlier uses a tongue-twister. I’ll just call it CIGS, because it’s a copper, indium, gallium, selenite, and I don’t want to have to keep saying that <laughs>. Ok with CIGS this compound of metals and chemicals is inefficient on a comparison basis with the silicon except just last Monday, and Alex, this is how fast the industry is moving, just last Monday, the Department of Energy here in the U.S., their National Renewable Energy Lab, the NREL, which has been a major key player in all of the development, announced they had achieved 19.9% conversion efficiency. The average conversion efficiency of silicon right now is about 20.3% so they’re within half a percentage point of matching silicon’s efficiency with a lot cheaper manufacturing technique. This is where it breaks wide open. That with the 2 types, even with the shortage of silicon, being solved in the new <<?????>> coming on, it looks like thinfilm is going to rule for the next few years at minimum.
<Alex> It almost sounds like a Bluray versus HD war where one comes out on top or will both be used extensively?
<guest> nope, one will come out on top and it will be a function of cost and price. And in this case, I think it’ll be the Bluray, I think it will be the thinfilm. The reason for that, and I don’t mean to get all philosophical, but there’s enough money to do anything but there’s not enough money to do everything. So as we go forward in solar we have to choose a standard to go with. Now there is a third type and this refers to these large utility-scale installations called concentrated or concentrating solar where rather than making the electricity directly by exciting electrons, the heat of salt brine to, I think it’s over 700 degrees, and use that heat energy to then power a standard turbine. That is going to be a very competitive technology. It’s just being scaled up right now. But for the foreseeable 3-5 years, it’ll be panels made with thinfilm, I believe.
<Alex> Well who are some of the big solar players and what have you heard about large installations overseas?
<Guest>Right now the largest manufacturer is Sharp Electronics using their expertise in semiconductors in 2006, they produced 25% of all the solar cells in the world. The second large player is a company in Germany called Q-Cells they did I believe it was on the order of 250 megawatts to Sharp’s 430 or 440. Then you have a Chinese company, Suntech, another Japanese company Kyocera, and <<Samuel???>>, so because they were using the silicon, the major players were the electronics manufacturers. That’s changing right now as I said First Solar is coming on. They had the most dramatic price appreciation that you can imagine. They came public at $20 a share within 13 months the stock was at $283. Better than 9-fold in just over a year. It was madness. And the stock subsequently dropped off into the 160s. It’s now back up though into the 210 range, 230 range. So the thinfilm is recognized as being competitive. But First Solar’s problem is with their cadmium telluride approach, they don’t have the efficiency. They have the low cost but they don’t have the efficiency. Companies like this Nanosolar out of California, which by the way is backed by the Google guys, I mean, very smart technology people seem to be gravitating to this. The venture capitalists, the ones that basically built Yahoo, Kleiner Perkins, are in the <<sense??>> also the firm that Al Gore recently joined, are in this up to their eyeballs. So it’s a very high tech approach, which is why I’m saying it’s not hippy solar at all anymore.
<Alex> Well even some big oil companies who have billions to invest are buying solar companies and use that in their advertising but it seems their actual solar production is pretty tiny. Or do you think that they could be sincere about getting into this new energy?
<Guest> Well it’s intriguing in that British Petroleum, BP, has been in solar since 1973. They were one of the largest but when Lord Brown was asked to leave as CEO and <<Lucy Gill?>> decided they were going back to their carbon roots. Shell was also a major player but they sold their solar, by major I mean they were in the top 10, they sold their solar business. So I think it’s as much PR and branding… I wouldn’t go so far as to say green-washing because they actually did produce product but I don’t see them going forward because a) they don’t have the technological expertise that Silicon Valley and Tokyo and now Beijing can draw on. It is a whole new world out there.
After recording our discussion last time, you asked me if I was afraid about something coming out of some lab that I had never heard of and just changing the ballgame? That was as an astute question as any non-investor I’ve ever heard from. The reason is, and here is just one example, there is a company called Kanarka that is developing a thinfilm that you can actually apply with an inkjet printer. I mean, if you can do that, it skips right past Nanosolar, which uses big reel to reel printers to lay down their ultra cheap stuff. Then there’s technology called quantum dots whereby applying a nano manufactured nano composite to the thin film, you extend the range of the spectrum that the light will absorb. With the quantum dot you can actually generate electricity from infrared, which means you could theoretically create electricity in the dark. And this is the kind of thing that really does scare me. As an investor in some of what are now the cutting edge technologies but that could be eclipsed by some fella in a small lab somewhere. It’s that dynamic.
<Alex> I appreciate that and but meanwhile I wanted to ask you one big question. You know, we’re told that the market system will take care of climate change somehow. But I wonder if there is a problem in the necessary medium of capital investment in solar… are people too nervous to get in or do you think it’s getting the investment it needs?
<Guest> Well no it’s not getting the investment it needs and one of the problems is the venture capital mindset it’s just too short-term and the reason for it is, yeah you can fund a genius software developer and have a product out on the street in 18 months and be generating revenues but with the energy stuff, you’ve got to be looking for longer-term paybacks and be aware of that as you go into it. So the venture capitalists on Sand Hill Road want to be there because they know that the pay-offs will be huge. But they don’t want to commit to 5-10-15-20 year payoff periods. Which is what you’re looking at in energy. I mean, even in oil and natural gas, from the time you discover a field to the time you’re actually producing can be 10-12 years, much less when you’re creating a brand new technology…and then going through the process of commercializing, going through the learning curve to bring down production costs, getting the stuff out there and actually generating revenues. So that there is a real problem. I mentioned the National Renewable Energy Lab from Department of Energy. They have been critical in the development, they work with FirstSolar and their cadmium telluride. If it hadn’t been for the NREL that would never have come to be. It’s going to have to be a public-private partnership. And here is where I differ from some of my capitalist friends, I think the public purse should either a) get a piece of the rewards down the road, not just in the form of societal benefits, I mean cash money or b) rather than subsidies, and I do want to get to those shortly, there should be grand prizes. I have this picture of what a 500 million dollar prize would do to stimulate research in the private sector. And it’d be a one-time payoff and that’d be it. There’d be no subsidies going forward. Here is where I have a problem with subsidies. As an investor, you are so dependent on the politician’s whim if they think the wind is blowing against subsidies, they’re gone. And then you run into the same situation the U.S. has had since the 1980s where you start rapid development, the subsidies go, and your legs are cut out from under you. This is happening right now in the U.S. although <<<some lady???>>, she says she’s going to bring up the subsidies for a vote on Earth Day coming up here in April. It’s find and dandy to have government approach it from the subsidy angle but as an investor, I’d much prefer some sort of incentive just to get the cost below that of coal-fired electricity in which case you want to <<be in right there?>>. Does that make sense?
<Alex> It does indeed and I also appreciate your idea of the public-private partnership where the public gets some reward for government money invested when this does pay off.
<Guest> I tell you, that does not fly on Wall Street but it really can work. There is no reason that the federal treasury cannot participate. When the U.S. bailed out Chrysler, they got warrants to purchase stock if the company succeeded. It did survive, the treasury was more than amply compensated for the risk that they took on guaranteeing the debt. So it’s not unprecedented. Going forward here, back to the subsidies, I want to approach this real quickly. One example of how politicians change their minds. Germany for the last 2 years has been the fastest growing market for solar. And that was because they had very substantial feed-in tariffs where once the stuff is on your roof, you can sell electricity back to the grid. Well late last year they decided they were going to shift the subsidies from solar to wind and that meant that all the solar infrastructure that had been built depended on subsidies and if that dependency thing is much of anything then that’s a problem. Well it was all the sudden left high and dry. And now wind is going to be developed. The Germans are doing this for strategic reasons. They don’t want to be dependent on Russian natural gas and coal so that they do have a reason for doing this but it’s a real problem as an investor.
It’s called rent-seeking and when you’re in a rent-seeking business, you better be aware of it. Because if you’re dependent on the politicians and you aren’t keeping your finger to the wind as to what the prevailing view is, you really could lose a lot of money. Right now, Ontario has the highest feed-in tariff in the world. I believe its $0.42 a kilowatt and that is driving the industry in Ontario but if that were to drop off, solar doesn’t make a lot of sense when there’s snow on the solar panel. And they might actually decide, ‘well maybe we should go with wind too.’ An example of subsidies gone crazy is Oregon where there are enough different programs where if you game the system just right you can put the panels on your roof and walk away with cash in hand. I think that’s nuts but that there should be some skin in the game from the person who’s putting the panels on the roof much less getting cash out of the deal on top of it but it’s just a philosophical thing going forward that the whole goal is to get the cost below the price of coal-fired electricity. However we get there we get there. It’s debatable going forward.
One other point I want to make I don’t know him but a man named Tom Conrad at Alt Energy Stocks, its another blog, had a very thoughtful piece earlier this month on whether subsidies are a wealth transfer from the poor to the rich and he came down after really laying out the arguments on both sides that, yes, the poor because they can’t afford solar panels, they can’t afford the upfront costs, but they do pay to subsidize those who can, it is a wealth transfer but the societal good is big enough. I have one example that I think is obscene. General Electric, largest company in the world, makes solar cells. The state of CT has a program that if you install solar on your roof, they will give you a grant to help subsidize it. General Electric applied for that grant and received it to install General Electric solar cells at the General Electric headquarters. Now on it’s face that’s ridiculous. What’s even worse, the city of Bridgeport is one of the poorest cities in the U.S., in fact I think it’s the poorest of its size in the country. Every rate payer in Bridgeport had to help support General Electric’s putting their own solar cells on their roof. And it’s stuff like that that just drives me nuts. If there’s a way to cut that kind of big business gaming up the system, I want to know about it and try to have a voice going forward here.
<Alex> Well despite these problems, what is your gut feeling? Do you think solar will be the primary energy source for civilization?
<Guest> yeah. You know Alex, just again, this stuff is so recent. 2 days ago an MIT professor said it’s the only way when you really look at it. If I was a lot younger and going to school right now, the 3 things I would do is a) I would learn Mandarin, because you’re going to have to know Chinese if you’re going to be on the world stage, b) I would get as broad of an education as I could because as we learn in ecology 101 everything is connected. The more data points you have, the more connections you can make. 3) I would keep up with my math skills because if you’re willing to do what other people aren’t willing to do, you’ll be allowed to live like no one else can live. It really is a heck of an opportunity. People are only at their best when the challenges are big and this is a big challenge and it’s going to bring the best out in a lot of people.
<Alex> Well once again, thank you for giving away your valuable insight. And listeners can get more of that everyday form climateerinvest.blogspot.com. I’ll let you go but I hope we can talk again.
<Guest> Alex, there’s so much more to this, I look forward to the opportunity.
<Alex> Alright this is Alex Smith reporting for Radio Ecoshock.