The following is excerpted from the October 29, 1999 edition of The Risk Factor.
Alternative Energy – Let’s Clean Up The Source Of Our Power
We are probably known best for our non-traditional philosophy of choosing stocks that don't fit the mold of conventional portfolio management. In 1983 we bought Compaq Computer instead of IBM because we were impressed with our portable computer that was faster and less expensive than the offerings of Big Blue. In 1988 after not finding a telephone in the Baja while on a whale-watching vacation we bought Telefonos de Mexico when we heard the Mexican government was selling off the government owned telephone company. And back in 1978, during the second oil embargo, we bought a bunch of solar companies because we felt we needed to do something to encourage the development of alternative power supplies.
In the past few newsletters we have written about one of our portfolio segments, water. This month we are highlighting alternative energy. Specifically power that is not generated by the burning of fossil fuels, hydroelectric dams or nuclear plants. We object to the burning of fossil fuels because of the CO2, CO3, and SO2 emissions, hydro because of the fish population decimation and destruction of river basin ecosystems, and nuclear because we haven't figured out what to do with the waste and the potential for disaster.
Talking about water is easy, either you are pumping it, or treating it. When we talk about energy we must distinguish between how dirty the source is and if it is worth the effort to produce as cleanly as possible. ALL sources of power have their downsides. ALL sources of power have their dirty side. All sources of power have their benefits. Coal, oil, natural gas, hydro, and nuclear are relatively inexpensive when we are only looking at the immediate cost. It is the longer-term expense that we as a society must address.
The term green power refers to electricity generated by renewable resources like wind, sunlight and even decomposing garbage in selected landfills. Unlike fossil fuels, the sun renews green power, so it’s environmentally friendly.
To begin with it is best to mention what kinds of alternative energy we currently have.
Geothermal – The production of power by drilling holes in geothermal areas, putting circulation pipes into the holes and extracting the heat to generate power through steam turbines. Discussion: There are several areas around the world where geothermal power is useful and efficient. The dirty part is what to do with the salt brine that must be extracted to put the pipes into the ground. Also, if you were to use geothermal power near Yellowstone National Park, what would be the effect on Old Faithful? There is another type of geothermal power that a homeowner can use, the geothermal heat pump. By drilling holes into the earth and piping either air or a fluid through you can cool an overheated house during the summer and warm a cold house during the winter by using the natural ambient temperature of the earth (around 55° to 59°).
Photovoltaics – Power from the sun makes a lot of sense until you consider that you must store the power for use later when the sun isn’t shinning. There is also the cleanliness/pollution factor in the production process of the cells. I have used power from photovoltaics for the past decade to run some of our incidental monitors and TVs. The price of photovoltaics has come down but is still too expensive for the average homeowner. Interestingly you can now buy shingles made of photovoltaics. The worldwide photovoltaic module market is estimated to be $1.2 billion in 1999 and growing to $3 billion in five years.
Wind power – The grain merchants of Holland used the idea hundreds of years ago. As the wind swept in from the sea they captured its power and converted it into mechanical energy to grind wheat. Most wind power is produced by the conventional wind turbine similar in design to those used in Holland. The dirty side of wind power is that it can be noisy and the old style of rotor blades kill raptors such as hawks and eagles. There is another type of rotor based on the principle of a cylindrical rotor similar to that used by Jacques Cousteau on one of his ships. Although still noisy at least it doesn’t kill birds. Neither is the type of power supply that you can conveniently put on top of your house.
The storage of power (i.e. Batteries) – Once you have produced the power as cleanly as possible, you then need to store it for use when it is needed. The best storage devices we have so far are batteries. The problem, batteries are NOT clean. One of the most difficult waste products to deal with in our society are old batteries. Acid, lead, and other hazardous chemicals are used to make most batteries. Have you ever read the warning labels on batteries? "Do not dispose in fire, recharge, put in backwards, disassemble…" When we recommend a company that deals with batteries, we know that they have a recycling policy that will deal with the old batteries so they don’t end up in landfills.
Passive solar – Or better put, if you build an efficient home in the first place you won’t use as much energy to light and heat it. The passive solar companies will be mostly dealing with building supplies. Manufacturers of films for glass and insulating products could fit under this heading.
Green fuel – Such as the burning of collected methane gas from decomposing garbage in a landfill. Although it is laudable to use decomposing garbage as a fuel source it must be remembered that our goal here is to not have to burn the fuel. One of our goals regarding garbage is to not produce it in the first place. Since we are interested in keeping greenhouse emissions to a minimum we will not be putting a lot of emphasis on green fuel to handle long-term energy needs. There are several companies that burn old tires as a mixture with coal, but again our goal is to reduce the dependency on combustibles.
Alternative fuels and cogeneration, including vegetable oils such as soy and corn oil, biomass, and fuel cells – Biomass is stored solar energy that can be converted to electricity or fuel. Probably the best known alternative fuels company would be Archer Daniels Midland, producers of fuel ethanol. Cogeneration is where all of the byproducts such as heat are used in the production of electricity. We are including both biomass and fuel cells in this category because they do involve some combustion. Fuel cells were invented in 1839 and act like batteries that need fuel instead of recharging. The cells generate electricity with a chemical reaction of hydrogen, stored in a fuel tank, and oxygen from the air. The problems are how do you get free hydrogen, and how do you store it? The fuel source (the free hydrogen) is the problem. Either you pump up with hydrogen at a filling station or you have to first remove it from another source. Before you start driving around with hydrogen in your fuel tank you might want to review old film footage of the German zeppelin Hindenburg as it arrived at Lakehearst NJ in 1937. Once the source of the fuel is figured out fuel cells will sweep both the auto industry and the home heating market. Because fuel cells are nonpolluting, powerful, noiseless, fuel-efficient and don’t require recharging they have the capability of becoming as commonplace as cell phones within the same short time.
And the general area of the instruments and controls necessary to regulate, monitor, and maintain alternative energy – There are several electrical and even plumbing components necessary in developing alternative power. Companies may qualify for inclusion even though they do not actually produce the end product. Ametek and Tyco International fall into this category.
Notes and Specifics on a Few of these Stocks (Charts courtesy of Yahoo Finance):
Ballard Power Systems Inc: Ballard Power Systems is the world leader in developing, manufacturing and marketing zero-emission PEM fuel cells for use in transportation, electricity generation and portable products. Ballard Power Systems' proprietary fuel cell technology is enabling automobile, electrical equipment and portable power product manufacturers to develop environmentally clean products for sale. The fundamental component of these end-user products is the Ballard fuel cell that combines hydrogen (which can be obtained from methanol, natural gas or petroleum) and oxygen (from air) without combustion to generate electricity. Ballard is partnering with strong, world-leading companies including DaimlerChrysler, Ford, GPU International, ALSTOM and EBARA to commercialize Ballard fuel cells. Ballard has also supplied fuel cells to General Motors, Nissan, Volkswagen, Yamaha, Cinergy and Matsushita Electric Works.
Enron Corp: This stock is a major player in the energy business. With their size, their clout and their resources, Enron has the capability to be a leader in a shift to a more sustainable energy industry. They have an entire division devoted to the development of wind power, and are working with alternative fuels.
Fuelcell Energy Inc: This is another company involved in the growing fuel cell industry. They are a world-recognized leader in the field of high efficiency fuel cells for electric power generation. Their "Direct FuelCell" technology takes the inherent attractiveness of fuel cells one step further by eliminating the external fuel processing to extract hydrogen from a hydrocarbon fuel. This results in a simpler and more efficient system compared with conventional fuel cells. FuelCell Energy is based in Danbury, Conn.
In the solar energy business we have Spire Corp, the world's leading supplier of photovoltaic manufacturing equipment and production lines, establishing local PV manufacturing enterprises in selected locations throughout the world. Also take a look at the impressive performance of Optical Coating Labs Inc., whose products control and enhance light by altering its various wavelengths to achieve specific effects such as reflection, refraction, absorption, abrasion resistance, anti-glare and electrical conductivity. OCLI is best known for its products being used in space, on spacecraft and telecommunications satellites.
William John Kuhn and Adam J. Coppock
History of the energy industry during the 20th century (source: Wall Street Journal)
1902-1904 – Ida Tarbell’s "History of the Standard Oil Company" is published in McLure’s magazine. The series of articles paves the way for the breakup of John D. Rockefeller’s Standard Oil Co., which then refined 75% of U.S. Oil.
1908 – Oil is discovered in Persia (now Iran). The find opens vast oil fields in the Middle East to exploration and production.
1911 – The breakup of Standard Oil: Under the Sherman Antitrust Law, the federal government splits Rockefeller’s trust into companies that mostly continue to thrive and grow into some of the world’s biggest, including Exxon, Chevron and Mobil.
1913 – The oil-refining process called thermal cracking is invented. The process of heating crude oil to make products such as gasoline becomes far more precise, enabling refiners to better meet growing gasoline demand.
1914-1918 – In World War I, trucks, tanks, motorcycles and airplanes replace horses at the front, and their internal-combustion engines consume gasoline and oil in quantities undreamed of earlier.
1933 – Tennessee Valley Authority is formed. The massive New Deal project brings cheap electricity to a huge portion of the U.S., making the TVA the nation’s biggest electricity supplier.
1935 – Public Utility Holding Company Act: The law reins in U.S. electric utility monopolies.
1938 – The first man-made nuclear fission, opening a new source of power.
1939-1945 – World War II: Fought partly for access to oil, as well as other natural resources, the war makes the U.S. the world’s dominant power and oil the world’s cheapest, most common fuel source, replacing coal.
1943 – First 50-50 oil deal: Venezuela demands and gets from Shell Oil and Standard Oil of New Jersey an equal share of the profits from oil pumped from its land. The agreement changes the economies of oil-rich nations and leads to widespread nationalization of oil-company operations.
1945 – Atomic Bombs dropped on Japan.
1947 – First offshore oil well: Kerr-McGee, Phillips Petroleum and Stanolind Oil & Gas set up the first drilling rig out of sight of land, 10 miles offshore Louisiana in the Gulf of Mexico.
1947-1954 – Oil, rubber and auto companies conspire to eliminate rapid transit from Los Angles.
1951 – First usable electricity from nuclear reaction.
1954 – Solar cells are demonstrated by AT&A, leading to the commercial development of solar power for generating electricity.
1956 – The Federal Aid Highway Act creates the U.S. Interstate Highway System. The new highways – an eventual total of more than 41,000 miles – make driving a national pastime and send oil consumption soaring.
1960 – Creation of OPEC: Its 11 members wrest control of oil production and prices from the big oil companies and begin to wield enormous power over world oil supplies and other nations economies.
1962 – Rachel Carson’s "Silent Spring" is published. The book ignites the environmental movement.
1970 – First Earth Day and the Clean Air Act; U.S. Environmental Protection Agency is formed: The change the way energy companies operate, forcing them to spend money cleaning up their operations and fuels.
1973 – Arab oil embargo. U.S. oil supplies are disrupted and prices skyrocket, setting off development of domestic oil supplies and alternative foreign sources.
1974 – The International Energy Agency in Paris is formed to coordinate oil sharing.
1975 – The U.S. creates the Strategic Petroleum Reserve to provide a guaranteed domestic oil supply.
1978 – Revolution in Iran: Oil prices soar as the world’s second-largest oil exporter cuts exports by 75%, leading to global recession.
1978 – The Amoco Cadiz tanker spills 1.6 million barrels of crude oil off the coast of France, still the biggest tanker oil spill ever.
1979 – Three Mile Island nuclear plant accident: The worst U.S. nuclear accident ever, it triggers cancellations of nuclear-plant projects nationwide and nearly kills nuclear power in the U.S.
1983 – Crude-oil futures begin trading on the New York Mercantile Exchange, creating a world-wide benchmark for oil pricing.
1986 – Chernobyl nuclear-plant accident in the Soviet Union: The world’s worst nuclear accident raises new fears of nuclear power.
1989 – The Exxon Valdez spills 262,000 barrels of crude oil off Alaska’s coast. The biggest U.S. oil spill ever, it leads to tougher rules for transporting oil.
1989 – The Berlin Wall fall, a precursor to the 1991 breakup of the Soviet Union, which opened vast areas, including the Caspian Sea, to exploration by Western oil companies.
1990-1991 – The Persian Gulf crisis: Iraq invades Kuwait, setting off the Persian Gulf war. Oil prices soar amid uncertainty over supplies before tumbling as the U.S.-led coalition defeats Iraq.
1992 – The Energy Policy Act lays the ground-work for deregulating the wholesale electricity market in the U.S., increasing competition by opening the business to all comers.
1997 – The Kyoto Protocol on greenhouse gases: signed by 171 nations, it’s the most comprehensive effort ever to reduce air pollution and greenhouse gasses, such as nitrogen oxides emitted from electric power plants and oil refineries.
1997 – Asian economic crisis damps demand for oil, resulting in a world-wide glut and the lowest oil prices in 12 years.
1998 – California offers consumers a choice of electricity suppliers; Pennsylvania and other states later follow.
1998 – Mobil and Exxon announce plans for a $77 billion merger, which, if approved by regulators, will create the biggest corporation in the world in terms of annual revenue and reunite two of the companies formed in Standard Oil’s breakup early in the century.