Friday, June 15, 2007

Nukes and Potatoes

When most people think about alternative energy sources, corn fields and ethanol fuel or cow herds and methane gas come to mind. Few think nuclear power plants. However, Alternative Energy Holdings (AEHI: PK), is arranging an unusual marriage of biofuel production and nuclear energy.

AEHI has proposed the construction of a commercial nuclear power plant beside a biofuel plant in Idaho. The planned nuclear power plant is expected to be large enough to power all the homes in Idaho. Excess heat from the plant, which is normally sent through cooling towers and then vented off into the atmosphere, will be used to power biofuel production processes.

I find the proposal intriguing from a business standpoint. Natural gas is a favored energy source for ethanol distillation and that is a factor in the cost of ethanol. See the post “Fuel for Fuel,” on January 5, 2007, in which I discussed the impact of high natural gas prices on ethanol producers’ margins. AEHI proposes to use waste heat for power and thereby drastically reduce this cost factor.

Most of the other ethanol producers would probably scoff at such an arrangement. They preferred to local close to their feed stock source (corn) and ship in the fuel source (natural gas) because the bulky corn is costly to move around and the natural gas can be brought in pipes directly to the ethanol plant. That makes sense if you are using corn.

Yet here is another low-cost element of this arranged marriage that is interesting. AEHI proposes to use local crops and agriculture waste feedstock for its ethanol and methane production. Most people already know Idaho is a leader in potato production. However, the state’s number one and two agriculture products are dairy and beef, i.e. lots of manure generating cows. This makes Idaho look like the Mother Lode for biofuel inputs.

Most executives from corn-based ethanol operations would chuckle at the idea of using potato peelings as feedstock for ethanol. They would cite the high-starch and low-sugar content of potatoes compared to corn. This means a bit of extra work to convert the potato starches to sugar. This even AEHI is likely to concede this point. Yet potato peelings are a near-zero cost feedstock versus corn near $4.00 a bushel. It is easy to give up a bit of efficiency when the feedstock cost is so low.

Anyway the feasibility of using potatoes or many other crop or food wastes (waste beer, cheese whey) have been proven both in the laboratory and in the field. Canada’s
Centre for Excellence in Agriculture and Biotechnology Sciences in New Brunswick also completed a favorable study on potato waste. Boise, Idaho-based J.R. Simplot has already proven it feasible with its potato-based ethanol plant near Caldwell, Idaho.

The success of the Simplot ethanol plant probably already won over Idahoans on the merits of that side of the marriage. The nuclear power component may take a little more convincing. AEHI executives have already been on the road in Idaho, talking to local authorities near Grand View where the
Idaho Energy Complex is to be located. A tribal leader from the Duck Reservation recently offered the Shoshone-Piute tribes’ support.

For most investors, it is likely premature to take a stake in AEHI. It is a penny stock. It is non-reporting and that makes objective evaluation of its financial position next to impossible. Yet the willingness of management to think outside of the “cornfield” box is intriguing. We hope to see more creativity in alternative fuel business models that leads to cost reduction and profit enhancement.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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