Commodity Q&A: The World's Most Absurd Ads for Green Power

The Commodity Investor Q&A
With Matt Badiali
August 26, 2009

Q: You've said startup expenses make wind and solar uneconomical. Can you clarify? – J.M.

A: If you believe television commercials, darn near every car Chevrolet builds gets over 30 miles to the gallon. We should all run out and buy a new Chevy... for the environment.

It's a transparent marketing trick. Take the new Equinox, Chevy's midsize SUV. It will get 30 miles per gallon – but only if you buy the four-cylinder engine model and only drive it on the highway. Driving in the city knocks the mileage down to 21 miles per gallon.

Wind and solar companies make similar claims... and like the car ads, these "green power" advertisements are far more compelling than the truth. We need to be aware of the tricks, because green power is the next big bubble. If we can separate fact from fiction, we can make a lot of money here.

Let me show you what I mean with an example...

Canada's biggest alternative-power generator, Canadian Hydro Developers, generates 496 megawatts of wind and hydropower... theoretically. If its claims were true, it could power almost 400 average U.S. homes for a year.

In fact, this $720 million company's power supply is terribly inefficient. In the first quarter, the company only operated about 27% of the time from January to March. That means its true generating capacity was just 133 megawatts.

When we break down Canadian Hydro Developers' sales, we see that it earns about $82 per megawatt hour (which is one megawatt of energy supplied for one hour). That works out to about $720,000 per megawatt of capacity (hours per year multiplied by $82 per megawatt hour).

The company claims it will install another 185 megawatts of power this year. However, by its own estimates, those power plants will only produce about the equivalent of 66 megawatts of power. In other words, those new plants' planned efficiency is 37%... and will probably be much lower.

That puts the company's total paid power generation for this year at just under 200 megawatts. The company spends, on average, $8.5 million to build one paid megawatt of wind power and $4.8 million to build one paid megawatt of hydropower.

At $720,000 per megawatt of paid power generation, new hydropower plants will take almost seven years to pay for themselves. New wind plants will take almost 12 years to pay for themselves.

As you can see, the company must spend far more money than it will recoup in the near term. Canadian Hydro Developers' long-term debt soared 275% in three years... from $224 million in 2005 to $839 million today. That's about 10 times its estimated earnings for 2010, which is too high for my taste.

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In the end, it's not the gas mileage advertised or the megawatts on the marquee that matter. It's about how the car or the power plant performs every day.

If you crunch the numbers and only buy the best companies, you can make a fortune in green energy. If you believe the hype and invest in the best commercials... you'll get what you deserve.

Good investing,

Matt

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•	Manufacturing giant 3M hits new 52-week high.
•	Virtual banks surge higher... MFA Financial and Hatteras make new highs, Annaly not far behind.
•	Major Indian automaker Tata Motors at a new high.
•	Latin American banks Banco Bilbao and BanColombia spike 8% to new highs.

	Last	Change	52-Wk
S&P 500	1025.57	-0.05%	-20.63%
Oil (USO)	38.30	+0.18%	-58.61%
Gold (GLD)	92.34	-1.40%	+13.89%
Silver (SLV)	13.90	-0.14%	+4.83%
U.S. Dollar	77.97	+0.49%	+4.96%
Euro	1.43	+0.22%	-2.83%
VIX	25.14	+0.52%	+33.65%
HUI	354.67	-1.07%	+3.46%
10-Year Yield	3.49%	-0.06	-0.34

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Company	Sym	Industry
Hatteras Financial	HTS	virtual bank
Gymboree	GYMB	children's stores
Chico's	CHS	clothing stores
BanColombia	CIB	bank
Medco Health	MHS	pharmacy services
Capella Education	CPLA	for-profit ed
NewMarket	NEU	chemicals
Emergency Medical	EMS	medical services
Elbit Systems	ESLT	defense
Fidelity National	FIS	business services
Dr Pepper Snapple	DPS	soft drinks
Swisscom	SCMWY	telecom
SXC Health	SXCI	health IT
PHH	PHH	credit services
STEC	STEC	data storage
Scotts Miracle Gro	SMG	fertilizers
Lubrizol	LZ	chemicals
BMC Software	BMC	software
Turkcell	TKC	wireless telecom
Teekay LNG	TGP	shipping
Euronet Worldwide	EEFT	business services
Knight Capital	NITE	broker
Tupperware	TUP	packaging
Manpower	MAN	staffing
Ross Stores	ROST	clothing stores
Cognizant	CTSH	business services
TeleTech	TTEC	business services
Pegasystems	PEGA	business services
Tech Data	TECD	computers
Human Genome	HGSI	biotech
Dollar Tree	DLTR	dollar stores
Brasileira	CBD	grocery stores
Lorillard	LO	cigarettes
Cymer	CYMI	semiconductors
MedAssets	MDAS	health IT
MFA Financial	MFA	virtual bank
NBTY	NTY	health products
Makita	MKTAY	hand tools
Tata Motors	TTM	Indian autos
CH Robinson	CHRW	freight services
Banco Bilbao	BBV	bank
Patni Computer	PTI	business services
Health Management	HMA	hospitals
Bally	BYI	casino games

Company	Sym	Industry
HUGHES Telematics	HUTC	telecom
Hampton Roads	HMPR	bank
CDC Software	CDCS	software

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