After The End Of Government
Governments around the world remind us of the movie “Honey, I shrunk the kids.” They are quickly decreasing in stature and importance, looking like a four year old in a grown man’s suit.
|Honey........ I shrunk the government
Years of overpromising and under-delivering are catching up with governments at every level – local, state, federal. Services are decreasing while taxes are increasing. The faith of citizens in their governments’ ability to supply basic services is constantly eroding.
People are asking themselves if the garbage will be collected, if their pensions will be worth anything, can the government defend them? Democratic institutions are under threat because of many decades of implementing the fatal flaw in democracy – politicians have to make unrealistic and reckless commitments in order to get elected.
The shrinkage of governments is a problem for renewable energy.
The development of clean renewable energy is not necessarily cost effective. Market forces alone would not have pushed renewable energy because in most cases, burning fossil fuels is still a cheaper source of power. The renewable energy industry has relied on governments around the world to nurture the business via tax incentives, subsidies, feed-in tariffs etc. These efforts have worked well and put the industry on its feet.
In some cases, governments are too big to function - gridlock. So smaller governments step in and do the job when big governments can’t.
There is no national energy policy in the US that requires implementation of renewable energy. But a majority of individual states have legislated a renewable portfolio standard – RPS. These standards force utilities to provide a certain percentage of the total of the state’s electricity needs from renewable sources by a certain date. For instance the state of Colorado has decreed that 30% of the state’s electricity must be derived from renewable sources by 2020 - one of the highest percentage requirements in the US.
Decision making might be even easier on the local level than on the state level, and this can work for renewable energy. The town of Sebastopol in northern California has a population of 7200 and already has 1.2 Megawatts of installed solar photovoltaic capacity. Sebastopol has just passed a bylaw requiring that all new buildings in the town include a solar energy array.
So governments can still make rules to implement renewable energy, even if they don’t have the money any more to provide funds via tax breaks etc.
But now the renewable energy industry, like everybody else, sees the future role of governments as fading. The industry is looking elsewhere for encouragement and for growth going forward.
The American Wind Energy Association (AWEA) is the wind industry lobby group. At their annual conference in Chicago two weeks ago, AWEA presented a general assembly discussion that included a possible post-government white knight for the renewable energy industry – Walmart.
The premise of the discussion was that a growing number of companies in the US are making it part of their corporate policy to use renewable energy to run their businesses. The list of these corporations include some of the biggest and brightest – Google and Walmart, among others. They are taking up the baton of renewable energy at a time when governments are not able to do more.
Google decides on the locations for future data centers based on a number of criteria. Data centers cost hundreds of millions of dollars to build and use multiple megawatts of electricity. Renewable power availability in the location is one of the main factors determining choice of location, according to Gary Demasi, who is responsible for data center location strategy for Google.
As an example, Google has invested well over $1 billion building data centers in Iowa - a state that is a big producer of wind energy. Google is working with utilities to develop a tariff for renewable energy to make it easier and more predictable for the company to buy renewable power. The company also buys renewable energy directly from producers. 33% of Google’s total electricity comes from renewable sources, and 13% of that amount is purchased directly from producers of solar and wind energy.
The practice of companies buying their electricity directly from producers via power purchase agreements (PPA’s) is hardly main stream. There were only 174 Megawatts of non-utility wind energy PPA’s last year – a small fraction of the total. But it’s a growing trend.
|Walmart Wind Turbine|
Walmart is a gigantic power consumer and the company’s stated goal is to supply 100% of the electricity the company uses from renewable sources by 2020. This is not a pipe dream or a PR stunt. Walmart is actively increasing its sourcing of renewable power to achieve that goal.
As of the end of last year, up to 21% of the company’s electricity came from renewable sources. One of the company’s distribution centers in California has a 1 Megawatt wind turbine on the property. Walmart recently signed a deal with SolarCity to put solar panels on 60 of the company’s stores in California.
Walmart is investing in utility scale wind projects, geothermal energy and solar projects. All told, Walmart has invested directly in over 280 renewable energy projects. 4% of Walmart’s total electricity needs are now met by its own renewable energy projects. Another 17% of the total is renewable energy supplied by the grid.
If Walmart wants to get to 100% renewable by 2020, the company will likely invest directly in many more renewable energy projects. That’s why the company’s initiative is so welcome to the industry that is watching government’s role shrink.
Walmart’s move to renewable power isn’t done for idealistic reasons. The company sees it as a good thing to do for the bottom line.
Greg Pool, Walmart’s senior manager for renewable energy, told the wind energy conference “Energy is our second largest controllable expense. If we can control that, it has a big impact on the profitability of our company.”
What’s more, Walmart sees the use of renewable energy as helping to maintain the health of customers and employees - also eventually good for the bottom line.
Google and Walmart are not alone. The biggest US corporate user of renewable energy as a percentage of overall use is Intel. That company has already achieved the goal of using renewable energy for 100% of its power needs. Microsoft is also big on renewable energy. The company uses 1.9 billion kilowatt hours of renewable energy annually.
Corporations are stepping up and taking responsibility for increasing the use of renewable energy and decreasing the production of greenhouse gases. They see this process as long-term good business. And as some of the biggest and brightest corporations lead the way, more will begin to catch on.
Geothermal First Quarter
The numbers are in for the first quarter and it’s a good time to review the performance of a couple of geothermal energy companies that we’ve discussed in the past.
Ormat is the big geothermal gorilla. The company has been in business since 1965. Ormat holds over 80 US patents in the realm of geothermal electricity production equipment, and Ormat manufactures and sells this equipment to third parties for their geothermal plants.
|Ormat Energy Converter|
Ormat also engineers and builds geothermal power plants for utilities and other power producers.
And finally Ormat builds geothermal plants for its own account and operates these plants. Ormat currently owns producing geothermal electricity plants in the US, Guatemala, Kenya, and Nicaragua. The combined capacity of these plants is over 600 Megawatts.
Ormat’s stock has done nicely since I wrote about the company in November of last year. The stock was $19 then, It closed at $23.57 on Friday.
Ormat released its first quarter results on May 7. The company’s profits excluding onetime items was 26 cents a share. Ormat opened a new plant in Kenya in the first quarter. This is the second plant in the Olkaria 3 complex and has a capacity of 36 Megawatts.
The company had about $105 million in working capital and $194 million in long term debt at the close of the quarter. This is a strong balance sheet and gives Ormat the foundation for more growth. EBITDA for the quarter was $45.7 million or about a dollar a share. Ormat is generating plenty of cash and this also helps finance future growth.
Ormat has steady, predictable income from its power plants. Unlike most other power producers, the company is not currently paying a dividend. Ormat thinks like a technology company. Rather than paying dividends,the company uses the funds to grow.
The market appears to like Ormat’s prospects.
Unlike Ormat, Ram Power is a new player in the geothermal business. The company started off with lots of ambition and investor money, working on a number of properties, exploring and developing geothermal projects at a hectic pace.
But Ram Power burned through investors’ cash and then accumulated debts. In the past year, Ram Power has been working hard to consolidate and gain a solid footing. The company released results last week, and it appears to have achieved a measure of stability.
Ram Power’s principal asset is the 72 Megawatt San Jacinto geothermal plant in Nicaragua. The second phase of San Jacinto went into production in December of 2012.
San Jacinto is still in the tweaking phase. More wells will have to be drilled to maximize production of steam for electricity. But the project is finally generating good cash flow for Ram Power. The company had $11.9 million US in revenues from San Jacinto in the first quarter.
Ram Power’s adjusted EBITDA for the three months was $7.2 million or about 2.4 cents a share.
Ram did a $50 million debt financing in the first quarter that brought down interest costs. Ram also completely re-organized its corporate offices and expects to save $4 million a year as a result.
But the market wasn’t overly impressed with the first quarter results. The stock dropped down after the news and closed Friday at 19.5 cents a share. The core of the problem is that Ram had $254.5 million in debt at the end of the quarter and is only now starting to flow the cash to take care of this load.
Ram Power has 296.5 million shares outstanding, which is a large number. However, at 19.5 cents a share, the total market capitalization is only $57.8 million.
|Ram Power 2 Yr. Chart: Source - Bigcharts.com|
Ram Power has a number of good geothermal properties in Central America and the US. There is potential for future expansion. The company now has more expertise than it did when it went through its early growth spurt. Ram Power has to continue to cut costs and keep its head above water. The trick will be to improve operations, be consistant, and generate cash to help fund future growth.
These opinions and analysis are based on data available at the time of writing, obtained from various sources believed to be reliable, complete and accurate. However, it may contain errors. No guarantee is made by the author as to the reliability, and accuracy of the information.
David Zgodzinski's opinions are his own, and are not a recommendation or an offer to purchase or sell any securities. David Zgodzinski is not a Registered Securities Advisor. Investing in any financial markets may involve serious risks. The author suggests you consult a qualified investment advisor and do your own due diligence and research when making any investment.
The author may from time to time buy or sell the stocks of companies mentioned in this publication.