Super Cheap Electricity – No Emissions

The impending success of the first Allam Cycle demonstration plant should be documented within several weeks, and it will likely be the biggest change in electrical power generation since nuclear power was introduced in the 1950’s. The system is highly efficient at 59% efficiency, more than any existing systems, which typically only extract about 42% of the power generated. Further, it produces NO EMISSIONS. And, only about 5% of the steam that rotates the turbine requires cooling each cycle, meaning less heat is exhausted.

Until recently, we had never heard of the Allam Cycle, named for 76-year-old inventor, Rodney Allam. Allam is no garage mechanic – he is the former head of technology development for Air Products (NYSE Ticker APD).

Essentially, the Allam Cycle uses super-heated CO2 … yes carbon dioxide steam as the driver of a single turbine to produce electricity. It is a closed system with the only byproducts being clean water and compressed CO2, which is sold for tertiary oil recovery at about 40% of the price of oil.

An adaptation of the above schematic (published by Modern Power Systems) is currently being built by NetPower in Texas and will be operational in about ONE MONTH producing 50 megawatts of power. NetPower is a consortium of Exelon, CB&I and 8 Rivers Capital.

Let’s take a step backward. Once Rodney Allam proposed this process and gained the backing of 8 Rivers Capital, it took eight years of engineering development by Fluor and Babcock & Wilcox to engineer the process on an industrial scale. The key component, a turbine that can burn superheated CO2 and natural gas, was perfected in 2014 by Toshiba under contract to 8 Rivers Capital.

Keep in mind, none of these players are lightweights. They are all major industrial giants.

Each cycle begins with the combination of 2.75% natural gas, 4.75% pure oxygen and 92.5% CO2 (the exhaust from the prior cycle). The mixture is heated to 1000 degrees Fahrenheit, turning the turbine, which generates the electricity. Clean water is one byproduct and about 5% of the 92.5% of the CO2 is extracted and recycled with 4.75% oxygen and 2.75% natural gas to begin the next cycle. To further clarify, the Allam Cycle system only exhausts about 3% of the CO2 used and a small amount of distilled water created by burning natural gas with pure oxygen. The CO2 is always held within the system and never released into the atmosphere; is easily cooled, compressed and piped out to be sold.

What about the cost?

First of all, the plant is in its final stages of completion and testing so the costs are reasonably well identified at $140 million for 50 megawatts, which is a small plant, 300 megawatts being the industry standard. However, building a small plant is not economical. Based on a February 2017 Forbes article, the cost of a standard 300 MW plant would be about $1000 per Kwh.

A full-size NetPower plant will generate 300MW and 800,000 tons of CO2 per year and cost around $300 million to build. “The plan is to build these in oil regions, then transport the power,” says Daniel McCarthy, head of tech investments at CB&I. “If you can generate power without carbon dioxide and with no economic penalty versus existing technology, why wouldn’t you do that?” It’ll take a few months of operation before NetPower can prove the stability of the cycle. Allam predicts his invention will soon sell itself: “In a year we will know for sure.”

Forbes Magazine February 2017

This would put it below the costs of all other fuels, based on January 2017 estimates by the US Energy Information Administration:

The US Energy Information Administration posted their 2020 projected all-in cost for one MW. Highlighted in green is NetPower’s estimated all-in cost.

As you can see, only geothermal, onshore wind and hydro are close to competitive. All of these are very limited in opportunity due to the scarcity of the site options. Also, hydro is also under heavy pressure from environmental groups, and onshore wind suffers from variability and is under siege by neighbors wherever it is proposed.

This is all exciting for the future of energy, but with NetPower being a private company how can one invest?

There are no pure plays in the Allam Cycle technology. And, though we are approaching the moment of truth on its validity, it may not be totally proven for several months. Nevertheless, there are public companies that will benefit. Toshiba will certainly benefit, but it has a multitude of other problems so it would not be our first choice. Exelon is an enormous utility and will benefit by the early deployment of the technology, but it may not be visible within such a large organization until or unless it spins off its interest into a separate stock. Fluor and Babcock & Wilcox will reap the engineering and construction contracts because they are the only ones with the unpatented expertise to engineer and build the plants, but they are already involved with electric utilities regardless of their fuel or systems. That leaves Chicago Bridge & Iron (NYSE CBI) – historically CBI has been the builder of refineries and natural gas liquifaction/deliquifaction processes. They own the major patents of natural gas liquefaction, deliquifaction, compression, processing, etc.

CBI has the most to gain because utilities are not major customers of theirs, and the addition of the utility industry to their list of petrochemical giant customers should be significant. But they have had problems in the past with under-bidding jobs, which have created inconsistent profit performance. Beginning with 2017, CBI has made one change that should smooth out their results. They will no longer enter into guaranteed price contracts where they cannot use their own company employees to build the projects. This policy change eliminates the largest contributor to its past problems.

A further complication with CBI is that it’s stock price tracks closely with energy issues. Over 20 day smoothed periods, it has a correlation of 0.84 which for the layman, is very high and might as well be the energy index.

CBI stock is also in a secular downtrend. Although we love the technology, timing is far too important, so we are going to wait until either energy prices begin to move up and/or when CBI begins to show marked relative strength against the S&P Energy sector index … so STAY TUNED!!

One other issue that we have already experienced: The Media must hate this idea! Otherwise, we would have heard about it many times already. The Allam Cycle removes any urgency to add more solar, wind or renewables in general. We have enough natural gas for hundreds of years, why push the renewables? The plants are cheap to build, and do not require subsidies, so there are no political plums to pass around. Congress loses its leverage with various vested interests and our representatives may not wish to see their cookie jar emptied. This process and its development have not used government grants or resources. Solar, wind and biomass will be yesterday’s fish if this process proves itself.

If we witness a change in the media coverage on this project, that may also be a signal to buy CBI.

Meanwhile, we are digging into the project to identify smaller companies that are providers of key components. These may be great investments and they should also be the canary in the coal mine because it takes much less capital invested into a small company to drive prices up than it takes in the major companies.

We have thousands of readers now – if you know something about this project or any suppliers, we would love to discuss this further!

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