Mr. Roy: We focus on the transportation sector, specifically looking at natural gas vehicles in the United States. We are looking at Westport Innovations (WPRT), Clean Energy Fuels (CLNE) and Fuel Systems Solutions (FSYS), are the three main firms there. We also look at the idea of the next-generation grid, which is going to be interesting if it ever happens. But right now we have two companies in the United States, EnerNOC (ENOC), which is based in Boston, and FuelCell Energy (FCEL). And then we also cover the material side of alternative energy. The idea is for alternative energy you are going to need advancement in materials, so we cover two of the tool companies that feed into the materials business - that's FEI Company (FEIC) and then Veeco (VECO), both of those are making advanced tools for materials.
TWST: Why do you think natural gas vehicles are superior to some of the other
alternatives, like E85, hybrids or electric vehicles?
Mr. Roy: I used to cover ethanol about two and a half years ago. Our industry
report was entitled titled "E10, Yes, E85, Maybe." The problem is, from a scale
point of view E10 works - that is an additive to fuel through a replacement of
something called MTBE. So that works. The main issue there with ethanol was of
course corn. The corn input and the ethanol output were not commodities that
were tied together. So one quarter you can make a ton of money and the next
quarter you could be bankrupt. Actually both the companies that I covered at
that point are now both bankrupt. So for corn ethanol these are difficult times,
I think, for good reason. I think there were some recent articles also on
biodiesel having some issues, mainly because, again, the price of oil being low,
which dictates the price of diesel. So if you are looking at biofuels, biofuels
at this point with oil so low is not economically attractive for a number of
situations. In the future, though, you could have the reverse happen, but for
now it's difficult. If you look at the next type, which is the natural gas
vehicle, natural gas vehicles have been around for quite a while. There are
approximately 10 million across the globe that are already running. I put
natural gas and propane kind of in the same bucket, they're very similar. There
are some differences, but there are a lot of similarities in terms of they're
both gas, they both run fairly clean, etcetera. But the economies, in terms of
how much it costs to build the vehicle, are coming down. I should say coming
closer to the regular unleaded vehicle. So that's certainly a major factor. And
that's why I think that's definitely the winner for today. As we go far out -
and let's just jump to the other end of the spectrum, which is hydrogen. I'm not
sure we're ever going to see a whole lot of hydrogen in the United States,
vehicle wise. Certainly, fuel cells are an interesting technology, but over the
years people have found it difficult to make them in scale and make them at a
price lower. Even the U.S. government is trying to pull back some of its
hydrogen fuel cell research. The general thinking is that the one that's in
between on the maturity scale - plug-in hybrids and full-electric vehicles -
could do well long term. I believe those definitely are going to work, but its
going to be maybe in 15 years. Near term the plug-in hybrid approach, like the
Chevy Volt, has a problem is with its battery. The cost, size and energy density
are still not where they need to be. Depending on who you talk to, there is a
general belief that Chevy is not going to make a whole lot of money with those
vehicles. You look at some of the stuff like the Coda that's out there, that is
going to be on the market here pretty soon, you are looking at ranges of between
100 and 125 miles for an electric vehicle that cost $45,000. I'm just not so
sure that's enough to get a whole lot of people interested. It's a good - don't
get me wrong - it's good, it's certainly better than it was. But when you are
comparing to what you can do on the regular vehicle or a natural gas vehicle,
it's not there yet. In the United States, you've got 150,000 gas stations. We
have 2,000 propane and probably around 1,200-1,300 natural gas. As an example,
in Italy they have 2,400 pumping stations. So in Italy alone, it has the
infrastructure that supports propane. You can sell it to a consumer and they can
be somewhat reasonably assured that they are going to get the fuel they need. So
when I look at actually what's happening, it is the only one that seems to work
now; it's cleaner, it's non-oil and it is reasonably mature enough that natural
gas in the U.S. - and propane in other countries, again, they are similar. So I
like the idea of a hybrid electric vehicle because one of the things you
constantly hear about from both consumers and from fleets is the lack of
infrastructure. You have a plug-in hybrid, the Chevy Volt is a perfect example
of this, where you've got a vehicle that is basically an electric car with,
think of it as a gasoline generator attached on to it - it's not exactly that,
but it's close. So you run on electric as far as you can, and when you run out
then you run the gasoline engine and it charges the electric batteries, and then
you keep on going. Then of course you can do it while you're actually moving it,
certainly that's reasonable. The issue is that the cost of this kind of dual
system is higher than one system or the other, and also the amount of savings
you are going to get and the cost of the actual batteries to get a reasonable
distance is going to be tricky. Then you add on the issues of, okay, if I take
an electric car and charge it with electricity that comes from a coal plant,
it's not as clean as you want it to be. So the whole infrastructure - the
electrical infrastructure needs to be looked at, and certainly we're looking at
in the United States. So when we look at natural gas, natural gas certainly is
cheaper, it's not like they will continue to be a lot cheaper. The price of
natural gas is not going to vary necessarily with how much vehicle adoption you
have because the vehicle adoption is such a small percentage of what's used in
the United States. But the price of natural gas, unlike the ethanol situation,
is going to go up and down with oil pretty much. Yes, there is some volatility,
but the thinking is that those two will track together somewhat. You won't get
this kind of upside-down situation. When you look at that, it really does make a
lot of sense. So why aren't more people doing natural gas? You don't have enough
stations. That is one of the big problems. If you look at these companies, Clean
Energy Fuels is building stations, Westport is building engines, Fuel System
Solutions is building what you might call a conversion kit that allows you to
run two fuels or one or the other actually - it's not two fuels at once, but
it's one or the other. So you ride these vehicles, they are like regular cars,
right? You have to push a button, like Fuel System Solutions makes, and all of a
sudden now you are running on natural gas. You can't tell you switched. The nice
thing about that is, of course, you can run this idea that if I run out of
natural gas, I can now run unleaded. That kind of an idea of a stepping-stone
towards a full, dedicated alternative vehicle makes a lot of sense for consumers
in the United States, but that is longer term. All these guys are focusing on
fleets. The reason you focus on a fleet is because it has a return-to-base-type
function. You have got taxicabs, which are returning to the depot, a refuse
truck is always going back to the landfill to dump, a shuttle bus is making a
certain circuit. All these types of fleet activities are always coming back. So
you don't have to have this massive infrastructure built out to go wherever you
want to go. So that's why they are all focusing on fleet, because that's where
the adoption makes sense. The one thing that you do have is you still have a
situation where the technology, particularly on the truck side, is more
expensive. We were talking about how electric cars are more expensive. That is
an issue going forward, certainly for consumers and for the makers of the cars
themselves as well. If you look at a diesel truck today of a fairly large size,
it will cost you $110,000. A similarly configured liquefied natural gas truck,
LNG truck, is about $180,000. Obviously that is an issue. What happens is that
over time, that differential will come in as the volumes go up and as people
figure out more and more about how to build them, and they become less of a
specialty item. As an example, this is what happened with CNG transit buses.
Approximately 15% of the entire fleet of transit buses in the United States is
now compressed natural gas; 25% of all sales in 2007 were compressed natural
gas. One of the things that has happened since this whole effort started with
the transit business, which is probably about 15 years ago, the premium 15 years
ago was 50%. Now it is like 5%. So over time the volumes go up, people figure
out how to do it, price comes in. Initially though, it's a big hurdle to get
over and that's where you need the government subsidy. Right now the government
subsidizes, for that example I gave you, between $110,000 and $180,000, at about
$32,000. So now you're looking at $110,000 versus $150,000. Still it's a big
hurdle for a lot of people. There is an effort actually in both the House and
the Senate right now to do something called the Natural Gas Act - NAT GAS Act.
And that would actually double the subsidy to $64,000, which would bring it
basically to $120,000 versus $110,000. Add to that new diesel trucks next year
are going to be more expensive because of some of the regulations on emissions,
and so basically it would be $120,000 versus $120,000. And at that point you now
say, "Okay, you are buying the truck, what would you like, diesel or liquefied
natural gas?" It's the same price. All of a sudden, you could start to see
companies adopting it. Obviously, if I'm a person who is buying a truck, the
economy has to be good enough, in general, for me to buy a truck at all. And
that's one of the things we talked about as well - how economically sensitive
are the various companies in this sector? I think Westport is probably the one
that's most economically sensitive and, to a certain extent as the economy gets
better, it's going to have a little more juice because the stock has held back.
Westport has certainly moved the last few days since the Clean Cities Program
was announced, and we'll get into that later. But as far as Clean Energy, it's
less economically sensitive and Fuel Systems is probably in the middle.
Tickers included in this excerpt: ATT, CLNE, ENOC, FCEL, FEIC, FSYS, HMC, PEP, RDS.A, TFX, VECO, WMT, WPRT
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