Energy Exchange

This morning two energy initial public offerings (IPOs) made their debut.  One of them was green and one of them was brown.  Unfortunately, the mainstream media missed the boat by characterizing the brown company as successful and the green one as a miss. We don’t see it that way.

The brown company is PBF Energy, a Blackstone-backed rollup of three refiners that were divested by Valero and Sunoco.  The company, like many refiners, is having its day in the sun as refining margins are currently wide due to technical market issues relating to the relative prices of Brent and WTI crudes.  The bottom line, however, is that demand for gasoline and diesel is unlikely to grow as CAFE fuel economy standards continue to tighten.

The second company, SolarCity, has been posting over 100% annual growth in solar installations since 2009.  Additionally, the company has been a leader in residential energy efficiency and EV charging stations, and has even begun to roll out a residential energy storage solution.

Unfortunately, SolarCity’s business model requires some complex accounting that ultimately hurt their valuation.  The vast majority of their solar photovoltaic (PV) installations are executed as leases or similar structures to take advantage of various tax incentives.  This reduces the accountants’ formulation of revenue, and also makes the business unprofitable.  As an example, imagine a solar company can construct a solar system for $16k and sell it for $20k, with $3k of overhead.  They would result in $20k of revenue, $4k of gross profit and $1k of net income.  Do that enough times and you have a pretty good business.

As a lease, however, they only recognize revenue as it is received through annual lease payments, which might be around $1500.  Assuming the $3k of overhead remains, then the company would post a loss of $1500 in year one.  Economically, this might be the same or better business, but through the eyes of an accountant, this is a harder pill to swallow as the profits must be realized over the long term of the lease.

SolarCity is a new concept for the public market: it is essentially the first high-growth cleantech company that relies on an equipment leasing model. Despite projected revenue growth, the solar IPO struggled to generate demand due to this complex accounting and priced well below the expected range. On the other hand, PBF priced at the middle of its range, and sold more shares than originally expected. Longer term, however, my money would be on the company with the meteoric growth rate.  So far today, the market seems to agree.  SolarCity is up 48% from its pricing while PBF Energy has gained less than 1%.

The results of California’s first ever auction for greenhouse gas (GHG) emissions allowances are public, marking the start of a new era for stimulating innovative solutions to combat climate change. Coincidentally, earlier today new atmospheric data was released by NOAA showing that 2012 is on pace to be the warmest year, eclipsing the mark set only two years ago.

By establishing a hard cap on emissions and creating a carbon price through a trading mechanism, California’s comprehensive GHG program complements, and is fine-tuned based on experiences from the world’s other climate change cap-and-trade mitigation programs. For example, lessons learned from the world’s largest cap and trade program in the European Union have shown that emissions of GHGs can actually decrease while the economy grows. Similarly, as shown by the Analysis Group’s report of the cap-and-trade program in the Northeastern United States, in addition to creating a strong signal for innovation, money generated through an auction can be invested in ways to cut GHGs even further.

Based on today’s results, California’s program is performing according to the expectations of economic experts and policy makers. The market price ($10.09) for credits that can be used in 2013 was slightly above the floor price of $10 dollars. Also, there were more bids for 2013 credits than credits sold, with 97% of allowances going to covered entities. Put simply, regulated businesses are taking this market seriously and believe they can cut greenhouse gas emissions even more cheaply than anticipated. This is a very good thing for California.

At the same time as the California carbon auction sold 23 million allowances for use starting in 2013, the market also sold 5.5 million allowances for use in 2015 and beyond. This is a clear signal that investors see this as a lasting program, and provides an important signal that the 9 billion plus dollars of clean tech investment made in California since 2006 has strong backing.

A California carbon price opens the door for cleaner energy and clean air, as we finally have an “official” cost of pollution. We are marching more resolutely than ever into an economically and environmentally sustainable future.

Living in New York City through a week of Sandy and her aftermath was a reminder of just how critical electricity is to our lives.

Electricity is the difference between feeling safe in well-lit buildings and streets, or vulnerable in the dark. Between food kept well-preserved in refrigerators and water pumping through pipes, or dinner spoiling and taps gone dry. Between communications and productivity, or isolation and economic losses — which are now forecasted, from Sandy alone, to reach $50 billion.

For some, electric power is literally life or death: heat on

(Credit: Master Sgt. Mark Olsen/U.S. Air Force)

a cold night, access to vital medical services.

The responsibility for providing these essential services rests on utilities. And the gravity of that responsibility – along with a reliance on long-lived and costly assets – has led to a culture of caution. One that has given the power industry pause in moving away from the tried and true methods it has used to generate and deliver power for the past 100 years.

But what the increasingly intense storms rolling across the country reveal is that – sometimes – what seems the cautious path is in fact the most risky.

With an estimated 9.5 million homes and businesses having lost power thanks to Sandy, the utilities faring best at restoring their customers to warmth and safety are those that have begun modernizing their grids with advanced information technologies, and using those “smart grids” to build resilience and reliance on community-based energy resources. I spoke with Bloomberg Businessweek earlier this week to discuss our outdated grid and the crucial need for modernization.

We’re already seeing proof these investments can reduce recovery time, keep crews and customers safer, and save lots of money. Thanks in part to federal stimulus grants, a number of utilities are embedding sensors, communications and controls across their networks. On the power lines that it has helped prevent cascading disasters like the one that knocked out power to 55 million people in 2003, when a single Ohio tree fell on a power line. Automated systems can detect a fault, cordon it off and reroute power flow around it.

Digital “smart” meters, capable of two-way communications, have also proved their worth: providing utilities real-time, granular visibility into their networks, without resorting to (often failing) phones or trucks dispatched on wild goose chases.  Programmed to send a “last gasp” signal when they lose power, those meters have enabled rapid diagnostics – pinpointing exactly which homes or blocks were out, where the break had occurred – and expedited repairs.

Baltimore Gas and Electric, for instance, has installed about 10 percent of its planned 1.3 million smart meters. Linked to a “smart command center” borrowed from sister utility ComEd of Illinois (with whom EDF has been working on developing a set of performance metrics for its grid investments), the meters are telling them when their power restoration efforts have been successful or when further troubleshooting is needed. Without smart meters, they’d have to phone customers to ask if the power is back on. In storm conditions, according to Jeannette Mills, BG&E’s VP of Customer Operations, two-thirds of those calls go unanswered, which means they have to dispatch crews block by block across the region. This time, they’ve been able to ping the meters, asking “are you on?” Mills reports “a much higher rate of success getting through to smart meters than we do reaching customers by phone” enabling far more efficient dispatch of crews.

Utilities with smart grids have also kept customers better informed. A Pennsylvania Power and Light customer described to Smart Grid News how the real time tracking enabled by smart meters allowed him not only “to check on repair status for my own home (with crew on site info and estimated time to repair) … but also remotely online check the status of our two rental houses without having to physically drive to each to check them out.”

One of the first utilities to demonstrate a smart grid’s resilience was Alabama Power, which was slammed in April 2011 by 30 tornadoes across 70 miles with winds up to 190 mph. The twisters left 400,000 without power and thousands of poles, wires and substations damaged or destroyed. But by using its 1.4m smart meters to locate the outages and prioritize repairs, the utility restored all of its customers within a week. It also drives 4 million fewer miles each year.

The security benefits of a smarter, more resilient grid have caught the attention of the U.S. military. It has begun installing smart grid technologies on bases so they can function as “microgrids”: decoupling from the commercial grid in the case of a natural or manmade disaster and maintaining vital homeland security operations. The bases will also become reliability resources themselves, capable of supplying power to the grid, or reducing demand, at times when the grid is stressed.

Most importantly, these smart grids will enable the military to meet its aggressive goals for shifting to low-carbon, domestic energy resources, particularly renewable energy on or near bases. Secretary of the Navy Ray Mabus has set a goal for the service to get half its power from renewable resources by 2015. A smart grid will be absolutely critical to enabling the integration of millions of smaller, regional resources, and for managing the on-again, off-again character of the wind and sun.

The Secretary’s leadership reflects his recognition of the greatest risks that come from sticking to our tried and true ways of making and delivering power:  the national security threats posed by climate change. These include the threats we’ve seen this last week, again, from rising seas and extreme weather, as well as the casualties incurred by troops having to protect vulnerable fuel supplies, and the acceleration of instability and conflict warned of in a 2010 DOD report. When it comes to power, the greatest risks will come from failing to be bold.

We launched a compelling video today that illustrates how clean energy is strengthening our economy, creating American jobs, allowing for energy independence and lessening our carbon footprint.

This video shows how clean energy is thriving and seeks to arm policymakers, entrepreneurs and clean energy advocates with success stories to back that statement up. The video features interviews with Helen Brauner, Senior Vice President of Marketing & Strategic Planning for Green Mountain Energy; Congressman Lloyd Doggett, U.S. Representative for Texas’ 25th Congressional District; and Stephen Frank, Electrical Engineer for Xtreme Power.

Like innovations in medicine and telecom, energy innovation shouldn’t be a political issue. But clean energy has suffered from some expensive negative attacks recently.  Not surprisingly, these attacks have mainly come from those who stand to profit from today’s fossil fuel industry – which receives 75 times more subsidies than clean energy sources.

Despite the fact that clean energy has become the “modern-day whipping boy,” it is indeed alive and thriving.  The clean energy sector now creates more jobs than the fossil fuel industry and, just last year, grew nearly twice as fast as the overall economy.

Earlier this year, EDF launched the Energy Innovation Series to promote the role innovation has played in the energy industry and highlight clean energy technologies and new business models that hold the promise of revolutionizing the way we create, transport, manage and use energy.  Throughout 2012, we have highlighted innovations across a broad range of energy categories, including smart grid and renewable energy technologies, energy efficiency financing, and progressive utilities, among others.

See the video and learn more at edf.org/energyinnovation.

After you’ve watched the video, please click here to ask EDF Clean Energy Analyst Colin Meehan any questions you may have. Colin will answer you via Facebook tomorrow, October 23^rd, from 4:30-5 pm Eastern Time.