On Sunday, Cory Jenkins at Seeking Alpha told us about the next green energy phenomenon. The carbon offset space where credit origination is coupled with commoditization of what would otherwise be ‘waste’ (i.e. methane from livestock can be used to produce power instead of vented into the atmosphere) is a space I am very excited about. Some of you may have read the article in the December edition of Bloomberg Magazine on privately-owned Blue Source, and, if you haven’t, I’d definitely recommend it. I think the business model makes an increasing amount of sense the more whatever you initially capture (e.g. methane) can be sold directly for revenue. Bank most of the credits, wait for regulation to happen, and you may find yourself sitting on an asset worth a lot of money. Again, unlike the more complex tech plays in the cleantech space, I like this because I can actually understand what’s going on and can see a very healthy market develop for such services. On Monday, Jim Gillies at The Motley Fool told us about the worst stock for 2008 (drum roll): First Solar (NASDAQ:FSLR). One quote from this article pretty much sums up how I feel: “Never confuse a business with its stock.” Ratios alone will tell you that this story is over-hyped, and Porter’s Five Forces tell you that unless certain specific conditions are met at all times (and they are not in this case), it won’t be too long before something gives and your margins get squeezed. To be continued… On Wednesday, Xavier Navarro at AutoBlog Green informed us that the EU was ready to ban certain biofuels. The EU is citing false concerns to shield its grossly inefficient farmers from global competition. What’s new? What’s new is that we are now exiting a world where prices for agricultural commodities had been in steady decline in real terms for 30 years, and entering the brave new world of agflation. More than ever, the distorting effects of Western agricultural protectionism will be felt not only abroad but also at home. Concerns surrounding agricultural inflation driven by increasing demand for proteins by China and India’s exploding middle classes remains, in my view, one of the biggest risks facing the non-cellulosic ethanol sector. The Food Vs Fuel debate will become, in the years ahead, more real than ever. On Wednesday, Tyler Hamilton at Clean Break discussed the ugly side of next-gen energy storage. This story should serve as a cautionary tale to investors who get excited after one contract is signed or one milestone reached by a company working on the technology du jours. Many companies in the cleantech space are attempting to develop applications that will never make it past the lab’s doors. In times of credit tightness and equity market softness (i.e. now), the technology risks discussed by Tyler are compounded by financial risks, as many of these firms get wiped out after they burn through their cash and are unable raise additional financing. Right now is a good time, if you are holding stocks like this, to take a real close look at various measures of working capital. A balance sheet implosion would prove just as disastrous for an investor as a battery explosion. On Wednesday, Rob Day at Cleantech Investing gave one of the reasons why residential energy techs don’t get adopted. Add to that substantial behavioral barriers, and you start to get the picture. The residential market for green solutions offers the potential for high margins but the the hurdles as they currently stand make that space, in my view, unattractive from an investor’s standpoint. Building-related cleantech firms have a much better shot with commercial customers, but here the margins are typically lower.
