WUEG February 2016 Newsletter

whartonundergradenergy

February 2016

February 2016 Newsletter

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SunEdison’s Future Not Looking Bright

Arnab Sarker – Member, Academic Committee

Last summer, SunEdison’s stock hit an all-time

high of $33.45 per share, and they were primed to

start dominating the energy markets with their

solar energy systems. Everything seemed to be

lining up. The company was expanding, developing

products internationally, buying wind companies,

and purchasing a solar battery startup. It was even

named one of the smartest companies of 2015 by

the MIT Technology Review for its capability to

provide energy to so many parts of the world.

Unfortunately for SunEdison, all of this aggressive

expansion has backfired, and its stock prices have

fallen over 90% since the summer. They now stand

at less than $2.30 per share. The solar panels in

Japan, which were once incredibly profitable

because of the country’s ’s move away from

nuclear, are now being pushed away by Japanese

utility providers. SunEdison has sold its arm in

Japan to Bangchak, a Thai oil company, to prop up

the company.

Two of the worst hits for SunEdison this year have

been in the courtroom. Last May, SunEdison

walked away from a deal to acquire Latin America

Power, and the power company is suing

SunEdison. Earlier this month, they convinced a

judge to limit SunEdison’s transactions in hopes of

getting the $150 million they feel they have lost as

a result of SunEdison’s backing out.

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Billionaire David Tepper also tried to sue

SunEdison, and his dispute was over the

acquisition of Vivint Solar. Tepper’s company,

Appaloosa Management holds a 10% stake in

SunEdison’s yieldco, TerraForm Power. In the deal

to purchase Vivint Solar, TerraForm Power would

contribute $799 million of the $840.6 million

necessary to make the purchase, and Tepper

believed that this would be unfair to the

shareholders of TerraForm Power. Although

Tepper did not win his lawsuit, he did create

uncertainty in SunEdison’s shareholders, causing

the stock price to drop.

In fact, the deal with Vivint Solar was one of the

key events that sent SunEdison’s stock

plummeting. Last summer, as SunEdison was

peaking in its stock price, it attempted to close the

deal with Vivint Solar, but didn’t seem to have

enough capital to do so. This worried investors,

and the stock price began to plummet. The Vivint

Solar trade still hasn’t gone through, and even if

SunEdison does make the acquisition, there is no

guarantee that SunEdison will be in the clear.

SunEdison expanded too aggressively, and now it’s

facing the consequences. They only have $619

million in cash, and large amounts of projects,

amounting to nearly 2.9GW of energy, that still

require investment to be completed. SunEdison’s

struggles come in contrast to the rest of the solar

industry, where most investors are optimistic as a

result of America’s pledge to reduce emissions by

28% by 2025. SunEdison may have bit off more

than it can chew, and even if they get past all of

their lawsuits, they may be done for good.

Sources:

Fortune

MIT Technology Review

Wall Street Journal

Seeking Alpha

Ukraine’s Energy Grid Hack Renews Cybersecurity Fears

José Del Solar – Member, Academic Committee

Just before Christmas, hackers took down almost a

quarter of Ukraine’s power grid, jamming the

power companies’ phone lines so when customers

called to complain they got nothing but busy

signals. The hackers also sabotaged its

management systems, forcing workers to

physically go to the generators and manually close

breakers that the hackers had remotely opened.

Indeed, the power was back up in a matter of

hours, but the event rekindled fears about the

frightening havoc that power grid cyber-attacks

can wreak.

In 2007, the U.S. government demonstrated how a

power plant generator could be destroyed with

just 21 lines of code by running it hotter than

normal. Admittedly, this would be more difficult

than it sounds, as hackers would likely need to

discover flaws in the systems the power companies

themselves don’t know exist before they could

exploit them. The aging Ukrainian grid, although

far easier to hack, is the reason power was restored

in just a few hours; an attack on the United States

could last weeks. ISIS hackers are attempting to

exploit just this, as they have already tried many

times to take down portions of the U.S. grid. While

they have thus far proved inept, the consequences

of a complete shutdown of an airport’s power or of

the New York energy grid during rush hour, for

instance, are not to be understated.

Hacking Ukraine’s power grid itself was not

particularly difficult but the logistics and planning

were extremely sophisticated, which is why

experts deemed it a coordinated international

attack. Military spokesman Andriy Lysenko stated

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that "the control center of the server, where the

attacks originate, is in Russia," reports Reuters.

Cybersecurity firms have linked the attack to a

hacking tool known as BlackEnergy, commonly

used by a hacking group Sandworm with ties to

Moscow. The group, named after a fictitious

creature in the book Dune which it often

references in its malicious code, is known for

attacks in line with Russian foreign policy interests.

Researchers say that attacking Ukraine’s grid was

likely an attempt to convince the Ukrainian citizens

that their government is too weak to even provide

them with power.

Most grids across the world were built decades ago

without cybersecurity in mind. While some have

been replaced and some have been updated, there

is no doubt that the risk remains high. Given how

complex and fragmented most grids are, the true

threat lies in isolated local attacks. At the same

time, the general lack of due diligence around the

world because of the rarity of these hacks makes

the likelihood of future ones relatively high.

About 80,000 customers in Ukraine were without power

for about six hours because of Russian hackers.

Some believe the doomsday scenario has arrived

and others that the hack was blow out of

proportion. Regardless, governments must

acknowledge the threat that such attacks pose.

Power grid hacking is a relatively ignored tool in

terrorists’ toolkit, and the world must be prepared

to defend itself.

Sources:

Reuters

Wired

Bloomberg

Vice

NY Daily News

Oil & Gas

Iran’s Gamble to Reclaim Its Oil Market Share

Mark Rinder –Member, Academic Committee

Since last month’s easing of sanctions agreed upon

in 2015’s Joint Comprehensive Plan of Action, the

Persian Gulf state of Iran has seen its aspirations of

oil export preeminence reignite. Iran has pledged

to gradually increase its oil production by 500

thousand barrels per day in 2016 and recently

confirmed multi-million barrel sales to Spain,

France and Russia. To accelerate the process of

attracting European customers, Iran has decided

to undercut regional prices, listing its barrels $6.40

less than the regional benchmark. In response, the

Saudi Arabian Oil Co. lowered its prices by 20 cents

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February 2016

to a rate still $1.25 more expensive than Iranian

heavy crude. While some speculators are bracing

for an increase in the crude supply glut and ruinous

price competition, it is uncertain whether Iran’s

tactics will be impactful and sustainable.

Considering the sheer magnitude of oil production

among OPEC member states, Iran’s goals to

increase production will have relatively little

significance in global commodity markets. In

January 2016, OPEC producers maintained an

output rate of 32.33 million barrels per day, with

Saudi Arabia leading production. As OPEC’s fifthlargest

producer, Iran simply does not have the

output capacity to flood the market at a level

commensurate to Saudi Arabia’s recent behavior.

Iran’s domestic energy needs raise further

questions about the sustainability of its oil export

boost. Iran currently imports 10 million liters of

gasoline daily and has frequently reduced natural

gas exports to meet domestic demand. If Iran

continues to depend on foreign refineries for a

large portion of its consumption while exporting

large quantities of crude, the country will pay more

for its energy than if it kept and refined the oil at

home.

While cheap oil exports will clearly take their toll

on the success of Iran’s energy industry, the

nation’s substantial growth relative to sanction-era

levels may provide sufficient impetus to continue

down this path. After having its production stifled

under economic sanctions, Iran will likely

experience between 4 and 5.5 percent GDP growth

this year in large part due to its chance to step up

output.

Even if Iran were to pose a serious threat to the

already precarious state of global oil markets, the

nation simply may not be able to maintain its

cheap export prices for very long. While Saudi

Arabia has been able to keep up its excessive

production thanks to ample national reserves, Iran

lacks such a safety net. As Iran’s reserves are

depleted, the country will be forced to increase its

oil export prices and let Saudi Arabia win the

ongoing price war.

These conflicting forces—the faulty economics of

Iran’s cheap exports and the boost from an

overnight increase in production—make the future

of Iran’s energy industry uncertain. For the time

being, the country will most likely be willing to

take a financial hit if it means regaining a foothold

in the global oil market, but it is uncertain how

long the tradeoff will remain worthwhile.

Sources:

Financial Times

Al Jazeera

New York Times

Bloomberg

Saudi Arabia, Russia Meet to Discuss Production Freeze

Sheetal Akole – VP, Academic Committee

Saudi Arabia and Russia met in Qatar earlier this

month to discuss potential cutbacks in oil

production in an attempt to stabilize oil prices

after they have slid over 70% in the last 18 months.

The two countries reached an agreement to freeze

their oil outputs at January 2016 levels. This

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agreement comes over a year after OPEC decided

not to cut production to bolster faltering oil prices.

After continued refusal on OPEC and Saudi

Arabia’s part to react to the falling prices, the

freeze hints at the dire circumstances all oilproducing

nations are facing.

However, the deal is conditional on the

participation of other OPEC countries. So far,

Qatar, Venezuela, and the UAE are among 15

countries voicing their support; Ecuador,

Colombia, and Mexico are among other countries

considering signing on. Iran and Iraq, holding the

3 rd and 4 th largest oil reserves in OPEC respectively,

pose significant challenges to this potential

solution.

Markets have been expecting oil supply to

continuously increase as a result of the recent

repeal of sanctions against Iranian crude exports.

Despite Iranian exports only growing by a third of

previously stated estimates, Iran is aggressively

pursuing customers, especially in the UK, and is

unwilling to cut back production as they attempt

to regain their market share. Iranian Oil Minister

Bijan Zanganeh said that while he supports an oil

production ceiling, he finds it unreasonable to

expect Iran to curb its production after suffering at

the hands of the sanctions for so many years.

Meanwhile, still recovering from political turmoil

within the state and underinvestment in the

country’s oil industry, Iraq is also unwilling to

freeze production. The country’s oil industry

wishes to retain significant portions of its market

share; especially given it is one of the main,

reliable sources for government income. Some say

Iraq may be persuaded to join in on the deal; if Iraq

does not participate, however, it is unlikely the

freeze will take place, as many other OPEC

countries are also equally keen on maintaining

market share and adamant that all oil-producing

countries participate. Currently, willing nations

account for 73% of global oil production, which to

some indicates the “critical mass” required for the

agreement to go through.

Regardless of whether the agreement comes to a

fruition considering the Iranian and Iraqi

objections, market watchers continue to react to

the deal with skepticism; even if the deal were to

go through, it would not address the issue of the

current supply glut. Countries are currently

producing about 1 million barrels of surplus oil per

day. This has been driven mostly by the American

shale revolution, but competing OPEC countries

(Saudi Arabia in particular) boosted their

production in response to this in order to push out

American hydraulic fracturing competition.

January production was at peak or near-peak levels

for both Russia and Saudi Arabia, and freezing

production at this level without cutting production

would do little to aid oil price recovery.

Most acknowledge that the freeze deal will do

little, but insist that it is a step in the right

direction, and that the ‘verbal intervention’ is more

likely to influence the price than the deal itself.

Others believe that holding production constant

amidst an environment of falling crude demand

(primarily driven by the slowdown in growth in the

Chinese economy) will aid in stabilizing prices in

the near future.

Sources:

Reuters

opec.org

Bloomberg

CNBC

USNews

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February 2016

Linn Energy: Pushed to the Brink

Max Isenberg – Senior Member, Academic Committee

Few trends in the energy markets have caused as

much consternation for those in the business as

the prolonged depressed oil prices of the past year

and a half. For upstream exploration companies,

low prices have made their expensive capital

investments look terrible as only the most easily

extracted oil can possibly be sold profitably under

current conditions. Most E&Ps have slashed their

dividends, subsequently lowering their stock

prices. Few companies, though, have faced the

investor backlash as strongly as Linn Energy

(NASDAQ: LINE). The company’s share price fell

from a pre-crash high of over $30 to around 50

cents this week (a recovery from the February 8th

low of 33 cents). What precipitated Linn’s tumble,

and what specifically about Linn put it at such

dramatic risk?

The fundamental business structure of Linn Energy

made it very susceptible to exactly the sort of oil

shock the world has experienced since last year.

Unlike most E&Ps which are structured as

corporations, Linn Energy was started as a Master

Limited Partnership (or MLPs). This vehicle, more

often used by midstream pipeline companies,

avoids the double taxation of dividends that

corporations face, making them relatively

attractive investments.

This comes with a catch, however: MLPs are

required to pay out most of their profits as a

dividend. While this again reinforces interest of

yield investors in MLPs, any negative change to

cash distribution will very dramatically impact

appetite in units of the MLP. It makes sense for

businesses with steady cash flows (think pipelines

and energy transportation companies) to structure

themselves in this way, as they can usually keep up

with their planned dividends and thus keep

investors happy. However, the volatile nature of

upstream production, especially in downturns,

made those assets generally unattractive ones for

an MLP.

Just as one would expect, when Linn stopped

being able to make its distributions, its value

tanked. As Linn needed cash to cover its

operations, the company drew down its $900

million credit facilities despite recently trying to

deleverage. Facing a CCC rating on its debt and

with creditors knocking on the door, Linn has

entered restructuring talks with Lazard bankers,

and is expected to announce a plan that may

involve bankruptcy. Linn may also receive a second

painful penalty due to its structure. Due to legal

technicalities, partners have to pay taxes on

forgiven debt, which makes restructuring even

more difficult. This constrains Linn’s options even

more, and makes the possibility of a strategic

acquisition or liquidation more plausible. The story

of Linn Energy represents a cautionary tale to

those who looking to take the risks of a volatile

business and forcing it into a corporate structure

dependent on steady cash flows. The world may

very soon see the fad that E&P MLPs were from

the start.

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February 2016

Sources:

New York Times

Bloomberg

Seeking Alpha

Motley Fool

Science & Technology

Startup LightSail Energy Develops Storage Devices for

Renewable Energy and Natural Gas

Emma Dong – Member, Academics Committee

The clean energy industry is one of the most

quickly developing fields with over $330 billion

dollars of investments in 2015. The energy startup

scene makes up a large portion of these

investments because many young entrepreneurs

are creating new energy technologies that require

a lot of capital investment to sustain. Other

startups such as ones for software or app

development require little to no capital. However,

an energy storage startup, such as LightSail

Energy, needed over $70 million dollars to

complete the research and development phase.

Furthermore, once the product was developed,

additional capital of around $30 million was

needed to keep the business profitable. Many

clean energy startups have been experiencing

difficulty finding investors because the market

growth rate has declined steeply as oil prices have

plummeted. This leaves investors wary of the

payout of their investment in clean energy, and it

leaves entrepreneurs with antiquated and

irrelevant technology.

LightSail Energy is an energy storage startup that

has gained a lot of attention in the scientific

community for offering a scalable and cost

effective way of storing energy. It was founded by

Danielle Fong in 2009. Fong attended Dalhousie

University in Nova Scotia at the age of 12 and

graduated at 17. Then, she continued onto

graduate school at Princeton University where she

studied nuclear fusion before she decided to drop

out of graduate school and focus on LightSail

Energy. In 2009, Fong raised over $70 million

dollars from venture capitalists including Bill Gates

and Peter Thiel.

LightSail Energy is currently developing along two

paths. One is directed towards storing renewable

energy. This storage technology would be an

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alternative to batteries, and it would similarly work

to incorporate renewables into the power grid and

to fulfill consumer demand. The technology

behind efficient energy storage is in the process in

which the energy that is harvested from a windmill

or solar panel is converted to compressed air.

Energy from wind or solar farms is first used to

compress air to up to 200 atmospheres. The

compressed air is simultaneously cooled with

water that is sprayed into it. The water captures

the heat from the compressed air, and the warm

water is then saved. Lastly, the compressed air is

stored in carbon fiber tanks. When the air is

expanded, the warm water is sprayed into back

into the air, thus doubling the efficiency of the

energy transfer.

LightSail’s first energy storage system will take

place this year as part of the Liverpool Wind

Energy Storage Project (LWES) in Nova Scotia, the

world's first wind energy project using compressed

air storage. Currently, this method is capable of

storing energy in the order of half a megawatt;

however, to make a competitive difference in the

energy market, there would need to be storage of

renewable energy on the scale of terawatts. Fong

is still working on increasing the storage capability

of this storage technology; however, venture

capitalists in clean technology are less eager than

they were in 2009, when she founded LightSail. To

continue developing the storage tanks while

making profit, there would need to be a shift in the

market away from dependence on oil and coal.

The other path that LightSail Energy is working on

is the storage of natural gas and industrial gases.

These high-pressure storage tanks would allow

natural gas to be transported to areas with less

abundant supplies of natural gas, and would

therefore, provide fossil fuel dependent areas with

an abundant source of carbon free energy. Fong

recently announced that these storages are the

long term plan for LightSail Energy. She described

natural gas storage as the base camp for LightSail

while large scale energy storage of renewables is

the company’s “Everest.”

Fong’s energy storage technologies provide two

viable mechanisms for solving the large scale

carbon emissions problem associated with energy.

It is estimated that within the next four years, both

of these products will become commercialized and

contribute significantly to the global power grid.

Sources:

Wall Street Journal

Wired

Fortune

MIT Technology Review

LightSail Energy

Future vs. Fiction: Offshore Wind

Anika Ranginani – Member, Academic Committee

Wind energy has definitely been a large part of the

discussion on sustainable energy development.

When we talk about “wind energy” people can

easily visualize the stark white turbines turning

away in some remote rural landscape, but with wind

energy we can go beyond just land. The technology

for offshore wind already exists, so the challenges

to making offshore wind a reality lie in the

implementation and the need to reduce costs. The

potential to generate offshore wind energy

represents a huge increase in the potential capacity

of the wind energy market, one that nonetheless

comes with its own political and economic

challenges.

Conceptually, moving turbines to sea doesn’t seem

that difficult. All we have to do is take that mental

image of the wind turbine on some rural region of

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February 2016

America and put it offshore and into the see. At the

same time, what may be conceptually easy to

visualize may be a technical challenge. These

additional changes and innovations add additional

costs to the process of creating offshore wind

energy and make it more difficult to be a reliable

source of revenue. Out of the potential US regions

to develop offshore wind, 60% are in deep water

regions that require different foundation structures

than what are typically used. In addition, the

turbines must be particularly sturdy in order to

resist the corrosive damages of seawater. In terms

of technology, scientists definitely have the

capability to handle these challenges. Offshore

wind has already gained huge popularity in Europe.

Wind energy currently meets 10-12% of Europe’s

electricity demand. Within particular, Denmark has

made significant political commitments to offshore

wind energy. In some cases, the government

requires that grids connect to offshore wind

companies. Unlike the unreliable system of tax

credits awarded to these companies in the United

States, the system in Denmark allows offshore wind

companies to be seen as a necessary supplier of

energy. Transitioning offshore wind from a concept

and into a primary source of energy in the US will

require both political support as well as technical

skill.

Currently, Deepwater Wind LLC, an offshore wind

company, is looking into developing a Brooklyn

waterfront site off the south shore of Long Island,

but must first deal with the challenge of getting a

lease from the US government and then securing a

long-term contract with New York City. A few other

companies like Fisherman’s Energy have also

worked to develop offshore wind in the US.

Regardless of how particular companies succeed,

there are many potential spaces for investment

within the infrastructure of offshore wind. For

example, demand for the HV undersea cables used

as a part of the offshore wind process is projected

to grow at a higher rate than the supply capacity.

If all of the potential offshore wind sites in the

United States were developed, it would be enough

to generate four times what the national energy

need was in 2014. The upcoming decade will prove

to us how successful companies will be in

competing financially in the US energy market. In

the future, we can expect to see offshore wind play

a larger role in meeting US energy consumption

demands.

Sources:

US Department of Energy

Nature

The Atlantic

The European Wind and Energy Association

Bloomberg Business

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