TER: Do you consider the trend toward consolidation of smaller geothermal producers into new entities—such as Magma Energy Corp. (TSX:MXY) and Ram Power Corp. (TSX: RPG) and to some extent Ormat Technologies Inc. (NYSE: ORA)—a positive one? And do you expect more consolidators to emerge?

LR: It is absolutely a positive trend. The larger entities will have far better access to capital than would any of the small players on their own. That will enable them to take on bigger projects and in general reduce total production costs. Furthermore, larger entities will have better access to talent and be better-positioned to develop new technologies. There will be more consolidation. Magma's investment in Iceland is one example.

There is a sweet spot in any industry, when an emerging company reaches a critical size enabling it to compete with major players yet still retain an entrepreneurial culture. Magma is certainly in that space. We introduced Magma just as it went public, and it has generated good returns.

TER: So if we're looking for additional consolidation in geothermal, does the opportunity lie in investing in the juniors with an eye toward acquisition? Or is it a better bet to go with the consolidators who are bringing technology and talent to the table?

LR: The smaller players that will eventually get rolled into the bigger players will provide a good return for the shareholders of those companies, but it's a matter of picking the companies that have viable projects that will actually get rolled into the larger players.

I think you have a good balance between the speculative exploration companies on the one end of the spectrum and the major producers the other end—in companies like Magma that are already evolving as consolidators and they're going to realize increases in value as they bring in smaller players and increase their own production levels.

As I alluded to a moment ago, Magma has made a very, very big play in taking a significant position in a major geothermal producing company in Iceland. Magma's going to become one of the larger shareholders in that company, which will provide not only a lot more opportunities in Iceland but also give Magma the critical mass to move into similar situations.

TER: Should green technologies be viewed as part of an investor's speculative portfolio and, if so, what can be done to mitigate the risk inherent in speculative investments?

LR: Any company in the research and development stage is highly speculative and one of the best ways to deal with a risk in a particular company is to hold a portfolio of companies so you get some diversification.

Even in the depths of a worldwide recession, the sector is still getting a lot of attention. Government policy and public opinion are still mounting in favor of these technologies. The momentum favoring renewable energy around the world is so strong right now that it's almost impossible to imagine that momentum being reversed, but there is an important caveat.

There's no assurance that renewable energy is going to emerge as it looks like it will at this moment. There's a systemic risk that people have to be prepared to live with. While diversification reduces systemic risk, investors still have to recognize that these are definitely speculative investments.

Investors also could participate in this sector by going into the producers. For instance, companies that are developing wind farms and solar power generating facilities are less risky. The trade-off is that you won't get the big upside potential, because you're looking at more of a utility type of reward potential from the sector's producing companies.

TER: But probably more upside potential with a wind farm and solar than a traditional utility?

LR: An investor has to look very carefully at the revenue potential. A company that builds a wind farm or a big solar facility right now is counting on subsidies or feed-in tariffs or some other form of incentive to make the whole thing commercially viable. An investor has to understand how long-lasting those incentives are.

The ideal situation would be where the developer gets an incentive based on a rebate of part of their capital cost—in effect, an up-front subsidy. And then if they can bring their cost of production down, they can increase the margin over time. So just a caution that investors have to look carefully at the structure of the subsidies or whatever other incentive makes it commercially viable.

TER: What green technologies will emerge in the short-term that represent good investment opportunities?

LR: The real excitement for us is in the little companies that are developing technology enhancements. We've talked about Natcore. We also are looking a little company that has a device that can improve wind turbine efficiency by 5% to 10%.

Green energy production companies have potential for good returns, too, but as I say, bear in mind that the larger producers are effectively like utilities in that they will generate a decent—but not spectacular—return on capital.

TER: Should investors also look at technologies that reduce current consumption such as lights, refrigeration and smarter appliances versus those that provide a source of energy such as solar, wind, hydro or geothermal?

LR: Absolutely, investors should look at conservation technologies as well as resource technologies. Conservation is far more important than most people realize. The savings are immediate. Further, there is a huge shift toward popular opinion that favors companies taking positive action to reduce energy usage. Consumers want to see more social responsibility. Shareholders like the impact on profits by cutting energy bills. Government policy hasn't come anywhere near reflecting the full benefit of conservation. When you save one unit of energy, you avoid burning coal with more than three units of energy. The difference is the inefficiencies all the way through the electrical system.

TER: Can you give us any examples of companies with the emphasis on reduced usage or other means of conservation?

LR: GreenTech Opportunities introduced a little company, SmartCool Systems Inc. (TSX-V:SSC), which has come up with a way to improve the efficiency of refrigeration and air conditioning systems by up to 15%. A little add-on device that costs a couple of hundred dollars can save thousands of dollars in electricity charges.

TER: Any other examples?

LR: Carmanah Technologies Corporation (TSX:CMH) is another one. It's marketing stand-alone lighting systems that incorporate leading-edge photovoltaics with LED lighting systems. We just talked about Natcore. We are about to put out the next issue of the newsletter that introduces more companies like these.

TER: So there's clearly a lot of opportunity in the conservation, but not a lot of general marketplace discussion compared to wind, solar, etc. How does an investor begin to learn about these conservation opportunities?

LR: That's a very good question. In fact, before we started GreenTech Opportunities, we didn't really have a clear understanding of how many companies were out there. But once we got in the middle of it, we're finding a very large number of companies doing really, really good work and developing some very interesting projects. A few of them trade publicly, but a great many more are still in the private company stage. Over time, some of those private companies will become publicly traded.

TER: What do you mean by a few?

LR: Relatively few. Worldwide, we're talking perhaps tens or low hundreds, in contrast to 2,000 publicly traded companies involved in mineral exploration. But you can go to stockwatch.com, for example, and search for mineral resource companies with market value in a particular range. We haven't found anything like that in the green tech sector yet. I'm sure it will evolve. In the meantime, part of the rationale for GTO was to provide a vehicle to offer that information to investors who are interested.
I don't have a good answer as to how a typical investor finds out about these initiatives. There's no directory. There's no database or website to give you a list of all the companies in the space, so we weed through hundreds and hundreds of companies, pulling out those that are actually doing worthwhile work. I have a staff of people now working full-time rooting out these little companies and they're coming up with some great, great ones.

TER: It seems that it's a wide-open area that's going to expand and there aren't a lot of places to get information on some of these plays.

LR: I don't want to sound like I'm pumping the newsletter here, but that's exactly the reason we got into the space. We saw a very important emerging market that had no real service. There are some very good sources of information in a general way about renewable energy and certainly the major companies in the sector are well-served by a number of sources of research. But the small companies, these evolving technology companies, really, there's no good source of information on those that we've been able to identify so far, so we think we're filling an important need there.

TER: Any additional comments on energy?

LR: Just a bit of a recap. Whether it's driven by concerns over greenhouse gas emissions or by concerns about ultimately running out of oil, a huge shift is underway that will accelerate the move away from carbon-based fuels to other sources of energy and enormous profit potential for investors looking out a year or two in that sector.

By arrangement with: www.theenergyreport.com

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