Climate on the Brain is Powering Innovation to Create Climate Wealth

Three recent Commonwealth Club events on how our brains understand climate change, how to promote sustainable innovation in the energy sector, and how to create wealth from climate change prompted me to think about how they all tie together.  Notice how I strung the titles of those talks together to make the title of my own blog article.  Good artists borrow, and great artists steal, so yeah I'm taking a page out of old William Shakespeare's playbook.

George Marshall's Don't Even Think About It is heir to a long tradition in psychology that describes how the human brain has difficulty comprehending abstractions.  Emotion-based arguments usually overcome cognitive barriers in the majority of humans.  Appeals to authority also help.  This is why faith-based organizations like Alliance of Religions and Conservation and Catholic Climate Covenant will play a key role in winning conservatives over for the climate change argument.  Bernays' techniques matter in selling climate change to low-information, high-emotion masses with large cognitive deficiencies.  A "master narratives" study of how tribes communicate in the climate change debate would reveal much.  The human evolutionary bias to underappreciate risks for abstract things like climate change probably has much in common with behavioral finance's understanding of poor investor behavior.

Climate change is like any innovative concept, where early adopters form a beachhead that proves a viable market exists.  Social psychology and persuasive technology can produce enough compelling stories to reach the late adopter market in climate change.  The Citizens Climate Lobby should be an excellent channel for storytelling targeting late adopters.  Human interest stories matter more than narratives using facts or fear.  Talented national politicians have dropped names of average schmucks into their major speeches during the Internet Age.  Average people can see themselves in those average stories.

Once the narrative frames consumers for adoption, industry must have a minimum viable product ready for purchase.  Industry's problem is that it has offered few tangible moneymaking products addressing climate change.  Utilities invest in carbon capture because raw carbon is a viable feedstock in automobile tires, advanced fuels, and construction materials.  Scaling problems have hindered the promise of carbon capture.  Commercializing carbon ideas from government laboratories would be more successful if the tech developers follow the NSF I-Corps model.

Government research is more effective in powering energy innovation than government loans, as we all saw with the Solyndra debacle.  Some in government and the energy sector learned nothing from that failure.  BrightSource Energy got a $1.6B DOE loan guarantee for a solar thermal project that lowers the cost of capital for NRG Energy and Google.  What a sweet deal.  NRG also benefits from this $1.2B DOE loan guarantee for a solar PV project.  These loan guarantees are a central-planning approach to funding energy innovation.  The capital markets now have a better way to fund energy with the "yield co" publicly traded structures.

Large projects do not suffer from lack of funding with Google, Warren Buffett, and George Soros throwing money around.  Smaller projects still need a push from entrepreneurs seeking wealth.  Too much conflicting information on the risks and rewards of sustainable business models poses a problem for entrepreneurs.  Advocates of social entrepreneurship ignore the higher costs of capital and higher risks inherent in many community-based business models that will never scale up to address large markets.  NREL published several guides to community solar as good foundation references, available by searching DOE's OSTI archives.

Cleantech entrepreneurs need many baseline references because too many self-serving pontificators on both sides of the climate change debate have muddied the water.  I have heard "experts" claim at the Commonwealth Club that China and India value US carbon capture technology because they are still building coal plants.  I have also heard the Club's invited experts claim that China's prospects of "Peal Coal" and India's poor quality coal mean they will need expensive coal imports.  These positions are reconcilable if developing countries' energy plans balance increased generation capacity with increased resource exploration.  Give engineers and economists in those countries the credit they deserve.

The key to wisdom is understanding where each side in a debate gets their basic data.  Utilities constantly iterate their supply adjustments to meet demand, using real-time data and decades of modeling experience.  If coal and gas power plants cannot spin up turbines individually in sufficient time to smooth out "duck curve" evening demand in the US, then it makes sense for utilities to invest in transmission lines across time zones.  A true national grid would not allow gaps between the eastern and western parts of the US to limit supply flexibility.  Closing the gap is a matter of time, and in the meantime utilities buy energy futures contracts to hedge their demand forecasts.  Utilities also have a strong interest in grid storage, smart grids, and predictive analytics that together make smoothing the duck curve more efficient.  Anyone who shorts utility stocks in the face of the sector's incoming tidal wave of innovation has been reading too much gloom and doom literature.

I have argued before that hedging civilization's bets on climate change is much like Pascal's Wager.  The worst outcome of preparation is a more efficient use of limited natural resources, even if climate change proves to be groundless.  The best outcome is the preservation of the only known biosphere in this corner of the galaxy.  I trust our elites to get the programming correct so Spaceship Earth stays on the right course.

Alfidi Capital Examines Intersolar North America / SEMICON West 2014

I made my annual presence known last week at the joint meeting of Intersolar North America and SEMICON West in San Francisco for 2014.  I absolutely cannot miss the latest and greatest developments in solar power and semiconductors.  Go search Google if you want to see what I discovered in previous conferences.  You've already read my impressions of the Intersolar opening ceremony this year.  The rest of the joint conference was even more fun.  Those of you who are pressed for time can focus on my trenchant original observations in bold text.  I make being a genius so easy.

The opening keynote from Micron set the right tone.  Once I got past the corporate rah-rah about new tech converging with smartphones, I heard the news about evolving computing models requiring more power and reliability to knit logic and storage together.  I can't wait to see who emerges on top of the next wave of semiconductor sector consolidation.  I also can't wait for the quantum computing revolution.  SEMICON speakers on my agenda didn't mention quantum computing, but they should if Micron's estimate of the end of lithography walls means ordinary tech can't scale up power and speed anymore.  Micron has also caught the innovation bug I keep seeing in the startup sector, if they're serious about chip fabricators seeking partnerships in other verticals like packaging and assembly.

The DOE SunShot Initiative presenter reiterated their awesome multifaceted program.  DOE's EERE is funding the reduction of solar's cost per kWh and they even incubate startups.  I think EERE's Funding Opportunity Exchange might be a decent source of non-dilutive funding for startups if they can pivot to government's needs.  Here's a hint for aspiring solar entrepreneurs . . . basic color properties matter.  Black solar cells absorb more sunlight than other colors like blue.  That's so simple that everyone in solar should know it.  I was particularly impressed with the presentation from Bandgap Engineering, one of SunShot's incubated startups.

I kept busy in between presentations by browsing the expo floor.  Booth babes made rare appearances compared with 2013.  Shoals Technologies Group had the best babes by far at their Intersolar display.

I must have been distracted by something at their coffee bar.  Perhaps it was the soft pretzels they were giving away.  I should have grabbed a pretzel before they ran out.  I never turn down free food if I can help it.

You can see that I have my hands full with these babes.  They were just as soft as the pretzels and probably just as tasty.  Feast your eyes on the incontrovertible proof that gorgeous women cannot resist yours truly, Anthony J. Alfidi, CEO of Alfidi Capital.  

SEMICON's Silicon Innovation Forum featured Dr. Robert Metcalfe as keynote speaker.  This brilliant guy has created enormous value in multiple verticals and I was privileged to hear his insights.  I will add his mention of the Doriot Ecology and Christensen Disruption to my latticework of mental models (nod to Charles Munger here).  I learned a new acronym from Dr. Metcalfe:  FOCACA = Freedom of Choice Among Competing Alternatives, i.e. the state of affairs in a free market when consumers don't have to live with tech monopolies.  His formula for a successful startup in a Doriot Ecology combines an academic professor and talented students working with laboratory tech, a scaling entrepreneur who provides adult supervision, and venture capital.  I note with interest his preference for tech developed in university labs with government agency sponsorship, rather than tech from government-run labs.  Dr. Metcalfe thinks universities that compete with each other are more productive than federal labs, which show poor research output per dollar spent.  That throws cold water on my hopes for commercializing the federal government's science.  IMHO the missing ingredient from the government's commercialization efforts is competition that will sharpen the federal labs' abilities.  Analysts tracking tech innovation need more laws in their mental latticeworks . . . Shockley, Grosch, Moore, Rock, Cooper, Metcalfe, and maybe others I heard for the first time from Dr. Metcalfe.  He plugged NSF's US Ignite project to seek killer apps for the Gigabit Internet.  Hey entrepreneurs, there's your big hint about what's coming next after the social / mobile / Big Data convergence, and venture funding will follow a hot trend.  Dr. Metcalfe closed with some cautionary observations for would-be entrepreneurs.  He said Solyndra was a classic scaling mistake where a political commitment to job creation drove failure, and their tech had everything but silicon (uh, yeah, that would be pretty crucial to have in solar).

The Silicon Innovation Forum continued with a venture investing panel.  They were refreshingly candid, unlike some of the self-serving blather I tend to hear from VC panels.  They see very few good opportunities now but are looking for IoT to impact sensors and MEMS.  I believe any startup that can push back the limits of Moore's Law and Dr. Metcalfe's other laws above would be compelling.  I was pleased to hear these VCs say they look at a startup's supply chain when scaling it up to see where bottlenecks will appear.  I hope they apply that perspective to the IoT applications they claim to like in precision agriculture, because a farmer's subscribed sensor arrays assessing moisture and temperature all need power sources of some sort.  I wonder if a farm drone could power the sensors with wireless transmission of electricity at the same time it makes a recon overflight . . . hmmm.  They would all tie in together to optimize pesticide spraying and hydrology.  "Sustainable differentiation" was a common buzz phrase from this panel.  I don't think they mean that in the cleantech sense of sustainability, but in a scaling sense.

The game-changing startup success stories from Silicon Innovation Forum were mostly products of NSF SBIR funding.  Such early non-dilutive funding proves something to future funders by underwriting early research.  Competitive manufacturing costs and capital efficiency matter.

I missed the Center for Sustainable Energy talk on their Self-Generation Incentive Program (SGIP).  Solar entrepreneurs should give it a serious look.  It helps a solar sales pitch as long as it's fully funded.  CPUC is on board with SGIP.

Intersolar allowed me to attend their press breakfast on the second day because they recognize the value I bring as a sector analyst.  My reputation must be seriously growing if this very important conference series has let me into the tent.  I got some insights into the segmentation of the grid-connected storage market and the very versatile modularity of battery tech.  DOE's Global Energy Storage Database links regulatory policies to notable projects.  The National Alliance for Advanced Technology Batteries (NATTBatt) noted that batteries allow the solar sector to sell more product of higher quality by bundling storage solutions with solar production, and I wish I had attended their separate talk on strategies to reduce storage costs.  The California Energy Storage Alliance, California ISO Energy Storage Roadmap, and EPRI advocate public policies that will make the storage sector even more complementary to solar.  They need to address costs, especially since the economic losses of short-term outages make storage a compelling mitigation tool.  Storage factors of response range and speed enable storage solutions to be scaled and customized for local markets.  The battery sector can make its case effectively by linking storage costs to the range of battery materials that deliver different gravimetric and volumetric energy densities.

The next SEMICON keynote from Microsoft was the expected commingling of value chains and supply chains in connected networks.  I thought ERP was supposed to have solved that already.  Does any big strategic investor like Microsoft, Cisco, IBM, and others still believe that the mobile / social / cloud / Big Data fusion will drive value?!  That train left the station in 2013.  There's little room left for disruption in retail users' verticals.  Let's move on to IoT and M2M already.  I still hear too many business intelligence solutions sales pitches disguised as these multi-sector fusion case studies.  Microsoft does recognize the importance of enterprise security but I'm not sure where it resides in Azure or their other offerings.

One other product pitch mentioned NREL's calculations of site survey costs for solar installations.  I couldn't find the data on NREL's Open PV Project but a Google search reveals tons of data from NREL and others on soft costs.  Geographically precise data helps with lead generation and prospect qualification, especially when an integrated solar installer shows cost advantages from policy, taxes, storage integration, and soft cost savings.

The highlight of my Intersolar experience is always the Joint Forces for Solar series of presentations.  CALSEIA was first up discussing the West Coast market.  The California Solar Initiative (CSI) will end soon and it would be a shame to lose access to the valuable California Solar Statistics it generated.  A statistical void makes the market less transparent and homeowners will be inhibited from comparing pricing.  I liked the "duck curve" chart showing the daily production ramp that utilities want to moderate with storage.  I asked the presenter about the typical salvage value and recycling cost of a solar system at the end of its useful life, but I should probably look that up on my own.

I was all over the Joint Forces for Solar section on solar PV financing opportunities.  Chadbourne and Parke's Project Finance Newswire covers plenty of good info on financial innovation.  Securitization has come a long way since solar investors first started weighing the tax equity of a project.  The yield co model does for solar what MLPs do for hydrocarbon and pipeline projects.  Yield cos remind me of REITs but the difference is their securitization of cash flows from solar leases, not the physical system assets themselves.  Watch the Alfidi Capital blog for a whole separate article on how yield cos compare to other instruments, and how they can theoretically commingle with tax equity via inverted lease structures.  Property owners in special tax districts can still use property assessed clean energy (PACE) payments for solar upgrades.  I was delighted to hear that NREL data on solar performance can validate the credit default risk of solar securities.  I want to consider whether NREL's RReDC data can evaluate credit risk for yield cos in any renewable sector besides solar, and whether NREL's Solar APIs can adapt to publishing that data in formats usable to the finance sector.  I am intrigued by NREL's backing of Sunspec Alliance's Open Solar Performance and Reliability Clearinghouse (oSPARC), which may fill the immediate market need for solar performance data.  Anyway, the presenter for this session did mention that state-chartered green banks are emerging, along with green bonds and holding company loans as additional vehicles.  I searched around the Web for insights on those subjects.  The Coalition for Green Capital is pushing for more green banks.  The World Bank knows something about green bonds.  I haven't addressed these topics in a while but rest assured they are fodder for my future blog articles.  If NREL's Renewable Energy Project Finance site doesn't cover it, just watch for it from Alfidi Capital.

I left Joint Forces for Solar early to catch the SEMICON Bulls and Bears session.  Splitting my time between two sessions oriented to the finance sector is how I optimize Alfidi Capital coverage of major developments.  Anyway, the bull and bear analysts from major investment banks presented their thinking on cost and competition in the semiconductor sector.  Slowing demand all around was a major theme.  I can easily summarize everything they said.  Leverage points in a production process determine where semiconductor manufacturers have a competitive advantage.  Simple, low-cost supply chains matter.  The ability to continually make incremental improvements in a production process matters.  The Alfidi Capital official definition of the one thing that matters most is a durable competitive advantage (a la Warren Buffett) that generates the surplus earnings funding a constant search for the things that matter!  I suspect that such an advantage comes down to a mix of advanced material science and the ability to match chips to form factor changes.  I don't follow semiconductors as closely as I follow renewable energy, so I'll just have to wonder.  I also wonder why so many people attending the SEMICON Bulls and Bears session looked like total douchebags.  Maybe they were all Wall Street investment bankers looking for someone else's work to pass off as their own.  That happens in the bulge bracket all the time.

I sat in on a sponsor's breakfast forum on the final day of SEMICON West.  All I needed to know is that material science places the same limits on chip and circuit capacity as it does for energy storage capacity in batteries.  The cost factors of chips and their dies seem to multiply each other, especially as die area scales.  Mobile computing makes chip design complex because mobile sensors (like modems) are always turned on and processors for graphics and video have high workloads.

I switched back to the Intersolar track to hear a very attractive German woman present on the German storage market.  It should not surprise anyone that solar PV systems with a storage component offer a higher NPV for investment that stand-alone PV systems, regardless of feed-in tariffs.  Obviously, storage allows energy use in non-peak hours without any additional demand on the grid.  It also seems like installer scale matters if big players offer more added NPV.  More installers making proactive offers to add storage with their PV installation should expect more market penetration and more profitability.  That IMHO is the key for those solar installers who want to survive industry consolidation.  This technique should work in the US as well as Germany.  The big problem is that battery life is still too short for many household needs.

I went back to SEMICON for their expo floor panel on the 3D printing revolution.  You know something, I had mentioned 3D printing in passing to several exhibitors last year and they really didn't see it coming.  Now it has arrived.  Adapt or die.  If 3D printing is at the same maturity stage now as PCs were in the 1970s, then the sector needs a consumer product as elegantly simple to use as Apple's Macintosh.  The inevitable game-change is obvious . . Apple should launch a 3D printer!  The best part of this 3D maker panel was the presence of 3D engineering goddess Sandra Madrigal.  Oh wow, she was one hot babe.  She showed an image of a 3D printed version of her head she made as an experiment.  I'd like to see more 3D printed versions of her, if you know what I mean.  I say the 3D printing sector could jump start its growth by encouraging 3D printed molds of unclad female figure studies.  This gal really got me thinking.  I could have studied the LLNL material selection chart on the stiffness versus density tradeoff, but after watching Sandra Madrigal I was developing a mental tradeoff of my own.  Okay, let's get serious here.  I think alloying in 3D is solvable with some elegant nanotech.  It probably means using airstreams to bring metal particles down into a melt pool, or using electrolysis plates to to attract them into a honeycombed grid where they can be heated and set.  The first desktop device that does that will own the home market for cheap customization.  I suspect very few financial analysts follow the 3D printing sector.  That's why Alfidi Capital stands out.

I circled back to Intersolar for one last presentation.  NABCEP discussed licenses and certifications for solar system installers.  I recalled much of the material from past years at this show.  The key takeaways for the financial sector are clear.  Financial incentive programs for renewables support accredited contractors.  NREL's Solar Access to Public Capital (SAPC) standards make that clear.

I did make the rounds of the entire expo floors of both conferences as is my annual habit.  Nothing can stop me from cramming as much discovery into my schedule as possible.  John Perlin's book Let It Shine got special mention at Intersolar's opening ceremony and he sold copies on the expo floor.  TeamCalifornia supported the presence of California Go-Biz, SFCED, the East Bay EDA, and other regional advocacy groups at Intersolar.  My round trip of all the exhibitors scored me tons of market insights and plenty of free candy.  I informally surveyed some exhibitors on their most significant pain points.  The unscientific results of my exploration will be the subject of another future blog post.  Like I said above, you need to watch this space.

Intersolar and SEMICON West are always worth my time.  I don't attend merely for free candy and photos with booth babes, although those are certainly nice perks.  Entrepreneurs and venture investors need analysis of meta trends at the intersection of renewable energy and component manufacturing.  I may not be the only person on the planet who sees these connections but I'm definitely having the most fun doing it.  I'll see you all in 2015 for the next round of these combined trade shows.  

Alfidi Capital Checks Out SEMICON West and Intersolar North America 2013

I spent this past week hanging out at SEMICON West / Intersolar North America 2013 here in San Francisco.  I had a whole bunch of fun at this combined show in 2012 and I couldn't wait to go again.  Engineers and other nerd types probably went all gaga at the acres of gadgetry on display.  I'm a lapsed nerd who never got far enough into tech to make it a career, so I stick to the business-oriented panels and workshops at these types of events.

I only got the free expo pass but that's good enough for my needs.  The technical panels that required paid tickets were for industry practitioners.  I missed the opening day Intersolar welcome addresses from Gov. Jerry Brown and Mayor Ed Lee due to a previous commitment but I did hit up the welcome reception at the InterContinental San Francisco.  Man, that was some juicy turkey they carved up with my free drink.

The opening SEMICON West keynote was all about foundry-driven innovation in the mobility era.  I was impressed that the keynoter polled the audience and updated his poll result slide in real time as people were voting via texts.  I guess if anyone could pull that off, it would be a bunch of tech executives.  It was interesting to learn that the mobile market is driving increases in silicon consumption now that the PC market is flattening.  I attended Mobile Commerce World 2013 a couple of weeks ago.  I think the semiconductor industry will be pleased to know that the entire retail sector is about to make multi-year investments in WiFi, smart sensors, POS terminals, and other things that will inundate every store with silicon.  I also sense that smartphone makers will be challenged by the power consumption requirements that are key to smartphones' data management ability and screen resolution.  I had heard others at this SEMICON mention the likelihood that Moore's Law will slowly lengthen in time as processors reach physical limits.  These folks must know that MIT's Technology Review posited a connection between Moore's Law and Koomey's Law for the amount of electric power that can power devices, subject to the limits of battery chemistry.  The keynoter also noted that semiconductor manufacturing capacity gets strained when a new demand node for semiconductors (i.e., smartphones) debuts.  The number of high-volume semiconductor manufacturers in the world is very small, and I presume they forecast demand fairly accurately.  The keynoter made an interesting point about how the longer life cycle time of more advanced technology drives the complexity and cost of semiconductor products, with risk increasing and product life cycles compressing faster than ever.  I think the solution to this trap lies in the application of less complex technology that scales out in any increment, small or large, mass or custom.  I'm referring specifically to the open-source standard known as Arduino, something I discovered when I visited Maker Faire 2013.  There are product functions where complexity adds diminishing marginal returns past some point and Arduino is ideally suited to fill gaps between simple products and hugely complex systems.  The keynoter's final points about the complexity of the ecosystem supporting foundry labs actually reinforces my own point.  Open-source DIY solutions will fill demand for semiconductor products that cannot be profitably made in complex foundries.

I had every intention of alternating between SEMICON and Intersolar presentations.  I had to check out the SolarTech talk on leveraging DOE's soft-cost reduction programs.  "Soft costs" are anything not attributed to hardware in a solar power system.  Clean Power Research has found that even after large drops in PV panel costs, soft costs are not decreasing.  Lawrence Berkeley National Laboratory's Electricity Markets and Policy Group has studied the impact of soft costs such as city-level permitting costs.  RMI and Georgia Tech are studying the soft cost differential between the US and Germany.  DOE's SunShot program has found that costs decline as the number of installed systems increases, but that decline is probably due to economies of scale in hardware rather than any soft cost improvements.  That's why DOE's Rooftop Solar Challenge is testing methods for reducing soft costs nationwide.  DOE is also backing the Solar Roadmap of local soft cost reduction methods.  The Solar Foundation has counted 119,000 jobs in the solar sector, providing justification for politicians who need "job creator" cover for solar-friendly policies.  The Interstate Renewable Energy Council has developed Model Interconnection Procedures that encourage utilities to standardize their rules for installing solar power connections.

The SolarTech presenter mentioned that long timelines for "permission to operate" (PTO) mean that money committed to a purchasing power agreement (PPA) sits on a rooftop without generating energy.  I did some digging on PTO and found that some jurisdictions require a revised PTO application if the system configuration is changed.  An owner who wants to add panels needs a new application?!  Let's add wasted time to the soft cost of installation.  Third party ownership (TPO, not PTO folks) is changing the finance game by allowing investors to finance new solar systems independent of the properties where the systems reside.  Property owners can relax if another investor is responsible for submitting PTO applications and negotiating PPAs.  TPO isn't the only innovation in solar finance.  NREL's project finance team pushes a host of finance initiatives in credit enhancement and securitization.

My final note on the SolarTech keynote is that their Solar 3.0 program is alive and well but IMHO it won't be enough to push standardization of zoning, permitting, and connection rules.  The renewable energy sector needs to piggyback on the utility sector's smart grid movement if it wants to see standardization.  Smart grid adoption will drive harmonization of data transfer protocols that are crucial to energy metering.  Connectivity standards will follow naturally.  Renewable developers need a seat at the table when utilities make their push for smart grid adoption with municipalities.

I flipped the switch back to the SEMICON side of things and went to the Silicon Innovation Forum, with an awesome keynote from serial entrepreneur and semiconductor luminary Brad Mattson.  I can't find a link to the presentation he used so you'll just have to live with my recap.  Different parts of the silicon market are at different maturity stages.  I'm imagining executives at the silicon product makers plotting their BCG growth-share matrices with "mobile devices" in the Star box.  Innovation is hard in mature markets and a bi-modal corporate culture that splits creativity into a separate part of its structure is best able to handle the challenge.  Brad introduced the concept of a "design CEO" running an intrapreneurial research lab inside a big company, but IMHO startups will recognize it as an adaptation of the "scientific and technical founder" who developed the tech and then steps away from enterprise management.

Brad mentioned the tendency of VC money to travel in packs for economic reasons.  I don't know whether he meant they crowd into the same hot startups at once or just follow the same trends.  My new pet theory is that VCs chase similar deals because they also chase the same institutional pools as clients, and those institutions are themselves susceptible to falling for the same hot trends touted in popular media.  Too much money chasing a trendy but immature idea does not reduce risk, and Brad found that the best time to invest is during a sector's downturn to leverage a long gestation period for new tech.  He also contradicted something I had previously heard about VCs.  I had previously thought that VCs often replace a startup CEO with a COO to institute repeatable processes during a company's maturation.  Brad said VCs don't like to replace CEOs because it makes them look like they made a mistake.  Maybe it comes down to the reputation of some VC firms.  Some may like to bet on the jockey but fire him when the horse outgrows him, while others keep the match together.  Now I understand why startups with hot prospects are advised to "pick their VC" just as carefully as the VC picks them.  Those VCs that offer just the right "Goldilocks" combination of reputational capital and minimally dilutive investment must exist somewhere over the rainbow past Sand Hill Road.

The Silicon Innovation Forum expert panel had even more to say about VCs, from VCs themselves.  They think any potential slowdown in Moore's Law may be complicated by the semiconductor supply chain's inability to adapt and innovate.  Bottlenecks are opportunities to innovate; IMHO this cries out for startups who can carve out a disruptive niche.  VCs stick to their standard metrics of market size and amount of capital needed when they evaluate startups, but they also like a mix of strategic and financial investors who can collaborate to reduce risk.  I might as well introduce my own definitions here.  "Strategic VCs" invest because they want to harvest technology or product innovation; these are typically the venture arms of big corporations.  "Financial VCs" want pure play returns that fit their own expertise and deal history; these are the usual Sand Hill Road denizens.  Strategic VCs (according to the strategic VCs on this panel) tend to put more restrictions on the startup's outside partners to keep their tech away from competitors.

I didn't stick around for all of the startups in the Pitch Zone because I'm not professionally qualified to evaluate their prospects.  I'm a finance guy, not an engineer.  I'm also too cheap to pay for the Showcase and Reception, so if SEMICON wants my perspective in the room they should let me in for free.

Wednesday morning had me in the Business Continuity Planning seminar after a wonderful breakfast at the San Francisco Marriott Marquis.  I gotta tell ya, the Marriott Marquis has some really awesome breakfast sausages.  Anyway, the BCP folks touched on the triple bottom line that I've heard about lately.  IMHO the BCP function is an excellent candidate for a continual improvement process because the supply chain and environmental factors that affect it are dynamic.  Well, it just so happens that Alfidi Capital has a handy-dandy continual improvement process diagram that any C-suite can use for anything.

Okay, let's continue with the BCP workshop.  The pandemic and disease folks cited recent case studies to note travel restrictions, supply chain disruptions, and protocols for entering buildings that businesses will face.  They mentioned that little things such as handwashing and critical surface cleaning have high ROIs.  The environment, health, and safety (EHS) speaker advocated using a risk matrix to track those materials subject to increased regulation or outright bans.  Enterprises should monitor the EU REACH (Europe) and TSCA SNURS (US EPA) for changes in regulated chemicals.  Small businesses that outsource their supply chains can benefit from subscription services and trade associations to stay informed on what becomes prohibited.  The point is to make the supply chain robust by having a replacement strategy if some materials are unavailable.

The BCP critical materials speakers reinforced what I've been hearing at resource conferences about declining material grade discoveries worldwide; they further noted that exploration spending to offset resource depletion is well above historical averages.  Semiconductor material inputs are to small to bother primary producers; they need specialty firms for processing and quality control.  Recycling finished products is a more cost-effective method of metals extraction than mining.  It all makes me think back to my interview with the Gold Report in 2011 when I made a prediction about China's rare earth export policy that was proven correct in 2012.  I am a genius, but my readers already knew that.  The BCP workshop finished up with some case studies from companies with exemplary BCP programs in place.  I'll run down the good stuff in a checklist . . .

- Pre-designate members of a cross-functional crisis response team and hold rehearsals based on likely disruption scenarios.
- Have backup power and water supplies to keep production running.
- Collect damage and degradation reports from business units and cost centers, so the enterprise can prioritize its response if its resources are constrained.
- Assess the BCP annually in coordination with major suppliers.
- Have business units update their own BCPs that are nested within the enterprise's BCP.
- Have an automated messaging system for mass notification of employees.

This BCP panel wasn't done until we talked through some final hints.  One attendee said DHS has a federal regulation requiring self-identified "high-profile facilities" to have an anti-terrorist plan.  The only public source I could find for such a regulatory requirement is DHS's Chemical Facility Anti-Terrorism Standards (CFATS).  Another sharp player here mentioned the ISO's best practice, which I take to mean ISO 22301 on business continuity.  This stuff was extremely important and more people should have attended.  It was so important that I even learned a bunch of new acronyms . . .

Key enabling technologies (KET):  The EU's definition for really important tech.
Confidential business information (CBI):  The combination of IP and trade secrets that businesses may claim as exempt from reporting under the TSCA regime with EPA approval (not likely to get approval IMHO, but it's there just in case you get lucky).
Substance of very high concern (SVHC):  The EU's term for stuff they want to include in REACH control; i.e., the stuff you should plan to substitute in the BCP risk matrix you show your boss.

I headed back to Intersolar for the Joint Forces for Solar speakers and panels.  The PV energy market update was informative but the market for renewable energy certificates needs to be a lot larger if solar is going to grow. Some states have rolled out solar RECs specific to their RPS standards and DOE's Green Power Network has identified products and tracking systems to make the REC market viable.  SEIA and CALSEIA have plenty of data on how the market for solar is growing.  Take heed, solar installers.  If you want to boost your business, you need to connect to those two industry associations along with Joint Forces for Solar, and you need to review DOE's listing of REC products in your state.  One expert from the panel discussion had another hint for installers:  Hot climates seem to be good markets for parking lot solar panel farms.  I've seen quite a few of those even in the moderate climate of the San Francisco Bay Area.

The Joint Forces for Solar folks had a lot to say about finance, my favorite topic.  The cost of capital has now become the dominant cost of many PV systems because the prices of components have fallen so rapidly.  Private equity firms are now stepping in to fund projects that banks won't fund with loans.  More storage on the grid will mean more load-shifting capability from peak to non-peak hours, but the grid still needs upgrades to make it intelligent enough to handle bi-directional flows.  That means IMHO utilities and transmission line owners will need to spend massive capital just to keep up with growing demand for renewables.  The Edison Electric Institute has researched flaws in the traditional sales models of electric utilities, and private utilities are thus looking more closely into PPAs that get revenue from distributed generation.  The panel was concerned that scaling back "net metering" will threaten the business models of some solar producers.  I asked the panel about the impact of renewable energy MLPs and REITs once legislation makes them available, and the experts were in totally in favor of this development.  They told me MLPs and REITs will allow aggregation of multiple projects into a single portfolio.  The objective of securitization is to lower the cost of capital, which in turn will help enable more distributed generation.  I'd be remiss if I didn't mention a crowdfunding site called Mosaic that enables crowdfunded investments in solar projects.  This stuff is right up my alley.

I stayed with Intersolar events on the final day because I wanted as much perspective on the sector as possible.  NABCEP held a certification workshop on the credentials they offer to solar installers.  It's important to note that their certifications represent mastery of best practices; they are not licenses to conduct trades.  Those licenses are granted by state and local governments.  Just for kicks, I did a Web search for "renewable energy finance certification" and nothing came up except links to RECs.  Finance experts like Yours Truly thus have no credential to hold out to the world as proof of expertise in green finance.  That cries out for remedy, given the proliferation of financial tools such as feed-in tariffs, RECs, and tax equity that are made just for the green sector.  Okay, back to the NABCEP workshop.  I asked the presenter why NABCEP offered a Small Wind Installer certification and he said it had been suspended for lack of demand.  They will continue to offer small wind subjects as an entry-level exam.  That is IMHO a good move.  Even the American Wind Energy Association recognizes that small wind turbines are best suited for rural sites.   I learned from personal involvement with a small wind company that wind turbines don't work in urban areas.

The next workshop was on product differentiation in a commodified market, presented by Albie Fong, co-editor of Project Development in the Solar Industry.  He cited Greentech Media's ranking of top solar panel producers by revenue, which is good to know for any company supplying components to this market. NREL has found that solar system prices and gross margins are dropping.   I was surprised to learn that reliability has overtaken price as a product choice criteria.  I guess all of the news on China taking solar market leadership as a low-cost producer doesn't tell the whole story.  Buyers now want modules that are compatible with other parts of their installations and are resilient in local environmental conditions.  Product differentiation by geographic environment has emerged as a value-adding strategy.  One example Albie cited was that customers near transportation nodes and routes want PV panels with anti-glare glass.  I can see how reflective glass could be a navigation hazard near an airport.  I came away from this presentation convinced that Customer Development matters in solar!  It's not just for tech startups anymore.  It's for solar manufacturers and installers too.

The one thing I got out of the panel on maximizing system output via inverters was the importance of bankability.  A manufacturer's warranty on inverters and modules does not translate into a financially viable PV system.  Only performance data verifying the viability of solar PV installation defines bankability.  This is especially relevant for large-scale solar project developers.  Third-party testing consultants can analyze components for short and long term light availability, exposure degradation, irradiance and temperature coefficients, microclimate effects, and much, much more.

I kept thinking about bankability through the next panel from SolarGIS touting their databases and online assessment tools.  Developers should verify the bankability of specific sites just as manufacturers seek to prove the bankability of their components.  Measuring a site's irradiance data helps project developers assess its viability.  Global horizontal irradiance (GHI) is influenced by altitude and latitude.  SolarGIS has free downloadable maps plotting GHI all over the world.  Wow, that's almost like hitting the "easy button" for assessing a site's bankability.  That's just the beginning.  NREL maintains a National Solar Radiation Data Base (NSRDB) showing changes in solar data.  The National Weather Service's GIS Data Portal has downloadable meteorological data that developers can overlay onto GHI coverage maps.  Mastering GIS means taking the guesswork out of solar site selection.

The final workshop I attended on successful solar business was presented by a guy from Quick Mount PV who also has a leading role in NABCEP.  You can get the workshop's awesome slides yourself from Quick Mount PV's download page.  LLNL has cool-looking flowcharts on US energy use that show room for growth in solar.  The solar market is segmented into residential, commercial, and utilities.  Once a servicer has picked a segment they must get the proper licenses, and IREC maps out the training they need.  I noticed the solar sector has become so specialized that solar brokerage businesses now offer third-party consulting to property owners looking to install solar systems.  The solar broker performs all non-installation services in TPO-leased systems.

The EIA Annual Energy Review shows the most viable geographic markets for solar and wind systems.  It's buried in there among pricing and consumption data but solar installers need to know how to pick the most viable markets.  The guru recommended small wind as a backup supply for a solar system; my readers know how I feel about small wind but it's okay in rural areas with good data on wind speed.  I will always remember that the height of the tower and the size of the fan's swept area are the two most important factors in a wind turbine's energy capability.  I had to learn that the hard way so my readers can avoid pain.  I got to ask this speaker about the viability of small-scale geothermal systems as complements to a solar-wind combination.  He said geothermal systems in the form of heat pumps can be very cost-effective but dry climates pose a challenge with long payback periods, and they work well where water is close to the surface.

The speaker noted that Solar Energy International has online training consistent with NABCEP standards.  I discovered that SEI has a free online course as an introduction to renewable energy.  He touched on system viability just enough to mention the enormous degradation that even a small amount of shade will have on a solar installation.  I'll refer my readers to what I said about bankability above when evaluating a site.  Solar businesses have plenty of tools to help assemble proposals.  Find Solar will calculate system size and financial incentives, and the California Solar Initiative Incentive Calculator provides additional estimates.  Go Solar California lists components approved for incentive programs.  NREL's PVWatts calculator helps estimate solar energy production for hypothetical installations.  Once the solar installer has data in hand, they use OnGrid Solar and Clean Power Finance to generate proposals showing customers how solar incentives reduce their costs.

Financing a project is crucial to the solar system sales cycle.  Property Assessed Clean Energy (PACE) bonds use property tax assessments to fund loans for energy retrofits.  DSIRE's Quantitative RPS Data Project maps out details on state-by-state standards.  This is all a ton of stuff for a solar entrepreneur to master.  The one final thing installers need to consider is the coming shakeout in the industry.  Some components makers are going to disappear, so buyers who watch warranties should stick with PV system makers who will be around another 25 years.  I would add that the solar sector has seen some very large component makers go bankrupt in recent years, so market share is not at all an indication of longevity for a company that is artificially sustained by subsidized loans.  This is where I come in as an analyst.  I need to take a serious look at the financial viability of leading solar manufacturers.  You'll see my commentary here on this blog as the solar industry evolves.

I didn't spend all of my time listening to expert panels and workshops.  I got out on the trade show floors to see vendors.  I spoke with some of the minor components manufacturers about their impressions of 3D printing.  Just as I suspected, many of them are complacent about the threat to their product lines from DIY parts makers.  I believe the first vendors to fall to 3D printed objects will be vendors of testing and diagnostic devices.  Those are not subject to the pressure and temperature stresses that delaminate printed objects and their performance parameters are well known in open sources.  Once the 3D sector solves that delamination problem, ceramic molded components will be the next subsector to fall.  I truly hope the SEMICON West organizers put some 3D printing demonstrations on their extreme tech stage in 2014.

I'm also endlessly fascinated by the small number of third-party service providers that always pop up.  There were no finance providers this year.  The leading inventory managers and asset liquidators were in their usual places.  I liken asset liquidators to the insects and microorganisms in an ecosystem that break down decaying plant and animal structures into soil nutrients.  They are absolutely vital to capitalism.  It's also vital to have competition in permit review, so along comes the Institute for Building Technology and Safety to fill the gap.  Those folks are going to get really busy if more developers go with building integrated PV (BIPV) materials. The one vendor that impressed me the most this year was the IEEE Xplore Digital Library, with a searchable database of technical articles.  The search function revealed long histories of published research, and I'm convinced this tool offers hi-tech entrepreneurs access to knowledge of manufacturing and quality control processes that will save them time and money.

My final impressions of this joint conference include surprise that some of the seminars and panels I attended were not at full capacity.  I suspect many attendees are purchasing managers looking for product or engineers looking for innovations, so they would gravitate to the tech demonstration stages.  The panels I found most useful addressed enterprise-wide factors that a solar business must manage.

I cam away from SEMICON West and Intersolar North America with even more market intelligence than I collected last year.  I also collected memories of which exhibitors had the most attractive women staffing their booths.  I would have no objection to exhibitors using attractive men to draw female visitors, but that begs the question of how to get more women interested in solar and semiconductor careers in the first place.  That's a question for trade show organizers to ponder.  My focus is to keep hitting up those booths offering booze, food, and babes in between free workshops.  Check me out next year as I prowl for more knowledge.  

Nevada Geothermal Power (NGLPF) Running Out Of Steam

I feel sorry for Nevada Geothermal Power (NGLPF).  I saw them exhibit at the Hard Assets Conference in San Francisco when it was called the Gold Conference years ago (and then briefly the Resource Conference).  I never bought the stock because I couldn't figure out why a company that claimed it had healthy properties wasn't making any money.  Now the other shoe has dropped.

Nevada Geothermal Power is at risk of going out of business, according to its own auditors.  A federal loan guarantee of $98.5M was for naught.  The company will hold an emergency shareholder meeting on July 24 to discuss recapitalization and de-listing from the OTC exchange.  That is a sign of a drowning company.  Exchange listing costs are minimal for a firm with healthy cash flow, so de-listing is a desperate move to buy a month or two.  Recapitalization will probably require a debt-for-equity swap large enough to dilute shareholders into nothing.  The share price is already under a nickel, so a restructure will make the revalued share price not worth measuring on an exchange anyway.

There is good news for any vulture-oriented regional utility (hey, PG&E or Sempra) that wants to add some plant capacity at a bargain price.  NGP has about $124M worth of PPE on its balance sheet that could at least partially satisfy creditors' repayment in the event of bankruptcy.  On second thought, PG&E recently cancelled a geothermal power purchase agreement that would have cost more than 11.25 cents/kWh, so NGP's plants had better operate at less than that to be worth a look.

Geothermal is an awesome technology when dome right but even the biggest players have a hard time giving shareholders a decent return on their capital.  Thanks for trying, NGP.  Maybe they can still pull off a resurrection.

Full disclosure:  No position in NGP (NGLPF), ever.  No position in other companies mentioned at this time.  

Apple Throws Away Cash Hoard On Dividend; Smart Grid Would Be Smarter

Oh, for crying out loud.  Steve Jobs' ghost has barely begun to haunt Cupertino and his company has begun to risk everything he rebuilt in the last years of his life.  Apple has elected to start paying out its massive cash hoard as a dividend.  I hinted at my own preference yesterday but now I can be more forthright.  Paying such a large dividend now sets unrealistic expectations for later dividend increases at a time when consumer spending on tech worldwide (specifically in North America and Europe) is very vulnerable to another recession.

I could understand starting out with a token amount, say $0.01/share just to establish a dividend policy and leave room for future growth.  The danger in announcing such a large-scale payout is that, in any future downturn, Apple will be forced to consider cutting its hefty dividend to conserve cash.  Wall Street almost always interprets dividend cuts negatively.

Tech companies are not "widows and orphans" types of stocks because their monopolies are by definition based on technologies subject to rapid change.  Most true monopolies (like utilities and some Class I railroads) are geographic monopolies and are thus able to extract true monopolistic rents because their customers can't just pick up and move if they don't like rate increases.  Technology companies can't extract the same kinds of rents because there's always the threat of other upstart technologies just around every corner.  Monopolistic rents contribute to stable dividends more than anything else in a business model.  Just ask Warren Buffett.

Apple could have used its massive cash pile to embark on a truly monopolistic development.  It could have leveraged both its brand reputation for user friendliness and its knack for building robust platforms into a user interface for in-home smart-grid technology.  One growing roadblock to smart-grid adoption is the concern that Big Brother, whoever he is, could sweep up data on household electricity use into something nefarious.  The retail consumer's interaction with this "last inch" interface will determine its ultimate penetration.  An Apple interface on in-home smart grid meters could do wonders for enabling local energy conservation and for alleviating common fears about scary new technology.  It could also tie Apple permanently to to the monopolistic models of energy utilities, securing its dividend forever.

It's unfortunate that Apple is counting on many years of growth from a mobile computing market that is rapidly maturing.  It is about to bet its dividend policy on a curious business model.  Users trade in old iPads for new ones one-for-one; net income growth thus comes solely from higher prices in a fixed market while competitors introduce progressively lower-priced substitutes.  This is a recipe for a dividend policy that will eventually collide head-on with a mature market where easy substitutes are available from low-cost producers.  GM and Chrysler learned that lesson to their detriment.  My suggestion for "Apple smart meters" above is the kind of out-of-the-box thinking Steve Jobs would have eventually used if he had lived longer.  Maybe I'm channeling his spirit.  Call it the iGrid or iMeter and it's a winner!

Full disclosure:  No position in AAPL at this time.  

Algae.Tec (ALGXY) Growing Algae For Energy

Algae.Tec (ALGXY) has designed a prototype bioreactor that uses carbon dioxide and sunlight to drive algae growth.  The algae is supposed to be harvested for conversion into fuel.  Let's walk through their technology to see if their business model is viable.

One metric ton of algae has an energy content equal to seven barrels of oil, according to this company.  One Algae.Tec 40-foot container can produce 250 tons of algae per year (they claim).  The company's projections envision a configuration of 500 containers producing 125K metric tons algae per year.  That configuration will be difficult to reliably achieve due to the space required for sunlight collection.  Algae.Tec's parabolic solar collection system requires about 1/2 of a hectare to emplace the collectors.  Their business model envisions these container installations adjacent to existing fossil fuel power plants so the carbon dioxide captured from the plant's generation can feed the algae reaction inside the containers.  How many mixed-use power plants in the world have at least 250 hectares of empty real estate around their plants for the assembly of these containers and their solar collectors?  That, and the willingness of utilities to buy adjacent land for expansion, will determine whether Algae.Tec's plan is scalable.

Consider the potential financial returns.  Oil is now priced at about $100/bbl, so one Algae.Tec container can yield (7x250) no more than 1750 bbls/yr, worth $175K/yr in gross revenue.  That's the equivalent of a small oil well.  Algae.Tec claims an all-in cost of production at around $47/bbl (perhaps lower), so one container will yield ($53x1750) about $92,750/yr in net income at current oil prices.  It's important to remember that the oil will probably have to be trucked to refineries because most coal/gas power plants don't have petroleum pipelines leading out from their facility.  Trucking small batches of algae oil to refineries will be costly, unless the company can further refine the algae oil on site directly into biodiesel.  If the final product from these cogeneration facilities is biodiesel, it can be sold directly to local gas station franchises.  The amount of algae each container will yield also depends on regular sunlight and carbon dioxide inputs.  Power plants in cold northern climates will not have year-round sunshine.  Algae.Tec's facilities will thus be most viable in places like the American Southwest.

My analysis does not include the value of other products like animal feed that can come from this process.  That can add to the net income of $92,750/container.  Algae.Tec is thinking big by planning 500-container installations that can produce a net income stream of over $46M/yr by my math, but space requirements are everything.  Their pilot plant in Australia needs to prove that the whole integrated concept can work before they pursue cogeneration and carbon capture agreements with utilities.

This stock is very thinly traded for something with a market cap over $100M, with daily volume in the mere hundreds.  The inventors of their core technology hold 78% of the stock.  That makes it difficult for individual investors to exit a long position.  It appears that their Pink Sheet listing is brand new.

Frankly, I find this stock intriguing.  Most of its initial installations will be small and geographically limited to sunny climates but the income per container is valuable to utilities that need affordable cogeneration options and carbon capture tax credits.  I'm skeptical that the 500-module configuration will work everywhere, but as long as Algae.Tec keeps its costs low and has accurately estimated its production then the concept can attract the interest of utilities.  This one actually has some promise.  Let's see if they deliver.

Full disclosure:  No position in ALGXY at this time.  

PG&E (PCG) Pipeline Blowout Won't Destroy Company

Sometimes bad things just happen. Last month PG&E (PCG) got hit with a black swan when one of its natural gas pipelines exploded on the San Francisco peninsula and leveled a halfway decent neighborhood.


This accident will not sink the utility. PG&E has over $1B worth of insurance for catastrophes. The neighborhood damage claims are likely to come in far below that sum. The utility capitalized its initial claims fund with $100mm, but the company held over $800mm in cash and equivalents on June 30. Moody's hasn't downgraded the utility's credit rating, so it can continue to borrow at present rates with no material changes to its capital spending outlook other than replacing the destroyed section of pipeline.  This is the good news. 


The bad news comes from the ongoing financial results.  PG&E's five-year EPS growth rate is an atrocious -18.94%, far below the industry average of 14.15%. Negative EPS, folks.  Ugh.  Its five-year ROE growth is a respectable 12.25% but this falls short of the 14.83% industry average.


How can a local energy monopoly have such a hard time extracting excess economic profits?  On second thought, PCG investors don't need to worry about another pipeline eruption damaging the company. The company's internal fundamentals are doing enough damage to shareholder value.

Preferred shares tell a different story.  Observing one class of its preferred stock, specifically its non-redeemable Series A at 6%, shows us that its annual payout of $1.50 per share should give us a fair value (if we use the preferred's 6% coupon as the required rate of return) of $25 per share.  Today PCG-PA closed at $28.23.  Utility investors may value the security of the preferred's dividend more than any growth they hope to obtain from common shares. 

Full disclosure: No position in PCG or any of its preferred shares.