The New Industrial Revolution: Do or Die
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Posted 14 June 2012 - 11:08 PM
I have written about the imperative for a new industrial revolution calling for a different energy model. This has variously been called the green movement, but I think survival movement is more accurate. Basically what I am suggesting is that fossil fuel is the definition of a late stage complex system requiring huge spending to even maintain. When you see components like refining in deep trouble, it means countries such as the U.S. could be affected given that long-integrated global supply chains (the supermarket model) could be disrupted. The core principle of collapse economics holds that in the energy-complexity spiral, complex systems thrive on cheap energy. Historically, this has been true of food, which is highly correlated. The Tainter complexity principle states that the status quo can only be maintained at enormous cost, with wealth used up just maintaining food production, water supply and hydrocarbon energy. Growth is nearly impossible.Unless one is a huge believer in human exceptional-ism, this idea that innovation will keep the conventional wisdom growth story alive is a losing bet. However, if one were willing to make the innovation as solution bet, then I would suggest a paired trade, the first is a bet against global growth along the lines I have already been using. The other pair would be to look at alternative clean energy, maintaining peak oil, and water preservation, because enormous sums will need to be spent there to merely stay afloat.Thinking of coal as the energy du jour is not correct. Coal-fired power plants in the US produce approximately 140 million tons of fly ash, scrubber sludge, and additional combustion waste. The average US coal plant is 30-40 years old and energy usage by type and water quality are strongly linked. Really only two countries use coal extensively any more, the US with old plants, the other being China.Some think India has potential as a coal consumer, but I have my doubts. That country’s domestic coal reserves are of relatively low quality, and the country has struggled to grow production because of government restrictions on land use. India’s transportation infrastructure also makes it difficult to deliver this output to the marketplace. Imported coal into India typically contains higher gross calorific value compared to India’s domestic coal. Power producers would have to incur higher costs to make some technical changes to the boiler units of their power plants to cater to a blended feedstock.It is very problematic to envision coal as a much of a global fuel of the future, or even as much of a transition fuel, and indeed US coal firms are in depression mode. There is only one source of US coal, the Powder River Basin, and really only one stock, Cloud Energy, that is low cost enough and clean enough to take seriously. It is a micro-story now selling at deep value, that I would like to buy even cheaper.Most other alternatives to oil — other than wind, hydro and solar PV – uses even more water. This particular negative externality is critical in understanding the big picture in the collapse end game. China and India have too much of a water challenge to be a heavy user of coal [See Water Roulette]. An example of far less complexity in the energy complex would be solar power especially in areas of the world where it is at “grid parity”, meaning competitive on an economic basis. Despite all the negative PR about solar grid parity is steadily improving.My sense is that clean energy and water initiatives will fail to stem the gap and, as a result, and as if debt overload was not enough, the global economy will collapse during the 2010s. If little effort is made because of impacts from sovereign debt issues, the collapse will come rapidly. The politics and budget for these initiatives in the US is lacking, so the US will go down with oil and there will be rolling crises. China, with horrific water and environmental troubles, is in do-or-die mode and will likely give alt energy a good run. That country, if it can come up with the money (and if their institutions can be trusted — a big if), is going to commit $750 billion to clean alt energy during the next decade. But if they don’t, turn out the lights.Alternative energy globally has built up to about 14% of the installed base of electricity led by wind power, 193GW, small hydro 80GW, biomass, waste to energy 65GW and solar 43GW. It is not a dead industry although you would think so from the stock prices. The costs of these energy sources are improving, but the bottom line is that energy during this decade will be more expensive.Chart source: World Watch InstituteIn the last year all the top stocks in the new industrial revolution have been slaughtered. Much of this is political gaming as if the system is bound and determined to stick with the complex expensive fossil fuel model, hell or high water. Perhaps the sistema wants to sink rapidly with this approach, but the extreme deep values in this sector are worth a bet, say 3% of my capital for now. Recommending them now will probably make me a subject of ridicule at worst or being ignored at best. But I think these could be long term twenty baggers from these prices.Besides GTAT [Fresh Look at GTAT], another company that represents a classic play on this is Power One (PWER) which is #2 in what is called power inversion, which is essentially tech that gets the power from solar and wind farms or rooftop on to the grid. Mostly to date this has been from large commercial “energy harvesting” investment.PWER is hardly a start up, is a real company having already scored $1 billion plus in revenues. Estimates are for 55 cents earnings a share in 2012 FY (against a $4 share price). PWER is currently manufacturing at only half of capacity, giving it excellent operational leverage. That means this business can easily and profitably ramp up new revenue. They are situated to manufacture in Europe, the US and China. The valuation of PWER in a word, is shockingly cheap, net cash per share is 1.85 a share bring enterprise value to two bucks. On an enterprise value basis it sells at about four times 2012 earnings. similar to GTAT. More background can be gleaned here. There is a cluster of insider buys, and I will sell July 4 puts when the stock slips below $4 to either take or pocket. IV is 57.
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