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Which Way to Go With Alternative Energy Stocks
Earth, or plant life, already has a significant impact on alternative energy. The role that plants play is significant in terms of cleantech and renewable energy. The biofuels subsector of cleantech is certainly the largest use of plants in alternative energy. As fossil fuel prices continue to rise and governmental regulations tighten, biofuels will become even more prevalent. The type of biofuel that most are familiar with is ethanol; together, Brazil and the U.S. produce 86% of the world's ethanol by fermenting sugarcane and corn respectively. This process is generally referred to as first generation biofuel technology and is typically used as a replacement or admixture for gasoline and gasoline powered vehicles, most commonly used for personal transportation. Although many are familiar with the first generation of biofuels which primarily use food crops to create ethanol, not many are familiar with the next generation of biofuels which primarily use non-food crops and bio-waste to create biofuels. Examples of the sources are waste biomass and leftover stalks of corn, grain, and grass. These biofuels can be refined into jet fuel and diesel, powering aircraft, heavy trucks, ships, and trains; thus, the future of biofuels lies in commercial transport.
There are already a few deals in the works for large scale
plants producing biofuels for aircraft. One such deal is the joint
venture between Australia-based Qantas (QUBSF.PK) and U.S.-based
Solena for a $300M facility that will convert agricultural and
industrial waste into jet fuel. Similarly, the U.S. military has
indicated a need for biofuels to lessen its dependence on foreign
oil and considers the change a matter of national security. Another
piece of the second generation biofuel equation is the opportunity
for chemical agents that transform sugars into alkanes which can
then be refined into diesel fuel. The leader in this technology is
a publically traded firm called Codexis (
); Shell (RDS.A) and Brazilian ethanol producer Cosan (
) have a roughly 15% stake in Codexis already - all three are
strong additions to your energy portfolio. Many of the algal or
third generation biofuel technologies have been proven in a lab and
are now in the phase where they are proven on a large scale
operation. As noted earlier, third generation biofuels are a fossil
fuel alternative that requires no modification in the existing
infrastructure, some call it "green crude." There are a few
well-financed operations heading this route including Algenol
biofuels, Sapphire Energy, Seambiotic, Solazyme, and Solix
Biofuels. All claim to have a working process and plans to go large
scale, thus all make good investment candidates as they are the
leaders in the 3G biofuel technology. As personal transportation
moves towards hybrids and EVs, the future of biofuels is in
commercial transport; look for opportunities in biofuels serving
Wave energy is a dependable and abundant source of energy that is currently being explored. The idea is fairly basic, wave or tidal motion moves an object that turns power generators, which create electricity. The technology is attractive because waves and tidal activity are nearly constant and can be predicted. Thus, utility companies can accurately forecast and rely on the cyclical electricity generated by waves and tides. The issues lie in the ROI and governmental approvals. The fact that nearly 2.4 billion people live near coastal areas solidifies the demand portion of the equation, the problem is now to make the technology efficient. Many well known companies including Lockheed ( LMT ), DuPont ( DD ) and Scottish wave generation company Pelamis are active in this area.
Pelamis is the world leader in the technology, having installed
the first generator that connected to the grid; it is currently
working on half a dozen projects, the largest of which is a
proposed 50MW project in Scotland. Pelamis has the technology,
investors and experience to make this technology move forward.
Iberdrola SA (IBDRY.PK), the Spanish renewable power giant recently
announced that it will invest $97M through its subsidiary
ScottishPower Renewables Ltd in wave and tidal power, purchasing
wave generation units from Pelamis. If you have an opportunity to
get in on the action from Pelamis, take advantage of it, if not,
look at Iberdrola, they are active in over 40 countries and focus
on renewable energy and are vertically integrated. Another firm
focusing on wave technology is Oceanlinx, rather than using buoys
that move with the waves, they utilize a column of water that moves
with the waves and a fixed cylinder to create air pressure which
turns a turbine. Oceanlinx is currently negotiating a 15MW facility
off of the coast of Oregon; again, Oceanlinx is privately held, but
would be worth looking investing in if the opportunity arose. The
bottom line is that there will be significant growth in wave power
generation; the current play is to invest in companies with
indirect exposure to capitalize on the growth. Some of these
companies are DuPont, Lockheed, and Iberdrola.
In terms of wind power, most of the new farms going forward will be outside of the United States; wind power in the U.S. has been highly dependant on subsidies and state regulations forcing power generation from renewable sources. The 30% tax credit for constructing wind farms expires at the end of 2011 and many feel that without the tax credit or federal energy law reform, wind farm construction will die down. Wind power installations in the U.S. were down significantly in 2010 in anticipation of the tax credit ending, a trend likely to continue with subsidies ending and natural gas prices expected to stay low for years to come. On the other hand, wind farm investment is increasing around the world; China has committed to doubling its wind power capacity by 2015. In all, many contractors and investors in the wind farm subsector feel there is a significant amount of uncertainty surrounding future investment in wind energy. If you are interested in investing, global leaders in this subsector are Enercon, Gamesa (GCTAF.PK), GE ( GE ), Siemens (SI), Suzlon and Vestas (VWDRY.PK). However, even though wind power will continue to grow, it is unclear how strong its growth will be in the US. For investing and growth opportunities I would look to other subsectors in the cleantech industry.
Solar power has always been a popular subsector of alternative energy. Solar power generation can generally be split into two major categories: photovoltaic ((PV)) and solar thermal. PV converts light into electricity where solar thermal power collects and concentrates light into heat for heating or to turn a steam generator. PV technology has been around since the late 19th century but has only recently seen advances to the point at which efficiencies are high enough and technology is cheap enough that it can be used in far reaching applications. When those advances combined with government feed-in laws to offset the installation cost, a radical increase in PV panels occurred. An example is Germany and Spain, in only a few years time they have installed over 7GW of PV panels. When ranked by PV panels installed, China is ranked 8 in the world, yet it is the largest manufacturer and it has created strong competition for manufacturers around the world in the U.S. Some U.S. manufacturers are moving manufacturing to China, including third largest panel manufacturer Evergreen Solar, some slowing expansion, and some are closing down plants - all of this amid a booming worldwide market for solar panels. Some think that China is violating free trade rules by providing subsidies to solar and other cleantech manufacturers prompting an investigation by the WTO. Regardless, China will provide stiff competition for any U.S.-based manufacturer; I would be cautious of investing in any U.S.-based manufacturing company that has direct competition from a Chinese firm.
A better bet is investing in installers and innovators;
California based SolarCity Inc has over 10,000 installations and
recently acquired east cost based Clean Currents Solar. The largest
US based PV manufacturer, First Solar (FSLR) is also an installer.
With the famed 2GW project in China it seemingly landed last year,
First Solar was looking very attractive. However, as they put the
deal together, it became apparent that First Solar's role in the
project would be significantly diminished, and it would not be the
installer. It looks like China may simply be using First Solar to
glean information as it will require them to "share technology"
with their Chinese partner; keep in mind that First Solar uses a
unique technology in their manufacture of solar panels - cadmium
telluride, not the industry standard c-Si wafers. Alternatively,
look for innovation in PV technology as an investment opportunity,
most PV innovations revolve around reducing waste and increasing
efficiency. There are hundreds of groups researching this
technology, but my favorite is Sharp (SHCAY.PK). They are hardly a
startup, but they are committed to driving innovation; they also
have vendor relationships, a strong brand name and exposure to
markets that will see future growth. Sharp has invested over $500M
in the past two years in its solar segment. They will increase
their production more than 40% over the next two years.
Unlike PV, the major growth in solar thermal is predicted to be in utility scale operations. California has issued licenses for over 4.1GW of solar thermal energy in the past few years; but at least one of the licensees sold its project, the buyer K Road Power, announced it would be changing from solar thermal to PV. This may be a sign of things to come for solar thermal manufacturers and installers; PV prices have come down over 50% in the past three years and prices are projected to continue falling. Solar thermal technologies may win out when taking into account lifetime maintenance and replacement costs, but I recommend waiting for hard evidence before investing. There will always be room for solar thermal technology, but PV will be the most widely used form of solar power.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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