Tuesday, March 11, 2008

Well to Wheel

Alternative energy investors have a steep slope to scale in terms of evaluating the myriad technologies from biodiesel to fuel cells to solar. The “well to wheel” concept is a good “apples to apples” way to evaluate the energy efficiency of the various alternatives. It is a simple concept, deriving from life cycle assessments.

Some might be scratching their heads right now, wondering where the well is for a solar cell. Think of it in terms of in-puts and out-puts. What are the in-puts required to create energy from a solar cell and how much energy is created?

Three years ago General Motors (GM: NYSE) scientists teamed up with the Argonne National Laboratory and the Air Improvement Resource group to produce a well-to-wheel study of energy use, greenhouse gas emissions and pollutant emissions. They looked at petroleum to gasoline, natural gas to methanol, and biomass to ethanol among other vehicle fuel production pathways.

The General Motors group calculated well-to-wheel energy use and emissions for 124 pathways. The winner: a non-hybrid, hydrogen fuel cell vehicle that reduced fuel consumption by 58% compared to the gasoline-equivalent. This is made even more impressive by the fact that the vehicle used for the test was a full-size GM pickup truck.

The study makes note of the fact that the fuel production stage (well-to-station) is usually the stage with the largest energy-efficiency losses. This was true for gasoline, diesel, hydrogen, ethanol, methanol and electricity. What enabled the hydrogen fuel cell to rank highest in the contest was that at the vehicle operation stage (pump-to-wheel) the fuel cell technologies enable large reductions in fuel consumption that more than off-set energy efficiency losses during production.

The General Motors study is over two hundred pages long and dense with scientific notations and engineering jargon - not very usable. Moreover, one study alone is not enough for investors to evaluate all technologies. There are other well-to-wheel studies, but understandably most focus on vehicle fuels.

My view is that the same input-output approach is helpful in looking at all forms of alternative energy. By its nature the well-to-wheel idea brings an element of objectivity to the fore that is sometimes lost in the food-versus-fuel debate or in the tax credit or carbon credit discussions.

Admittedly, I have a “long-play” bias. Only stocks underpinned by superior technologies are appropriate for such an investment strategy - i.e. those with high energy efficiency when all inputs and outputs are considered. The rest are targets for short-sale strategies!

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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