Alternative Energy Industry Outlook

Assuming that GDP growth is slightly negative for the next 3 to 4 quarters while the credit markets gradually strengthen, let's consider the outlook and opportunities for the Alternative Energy industry over the next 6 to 12 months. Many companies engaged in the solar power market offer profitability with strong average long-term annual earnings growth expectations of approximately 40%, stock price valuations significantly discounted from their recent historic highs, and a favorable political environment.

Industry Outlook for Alternative Energy Stocks: Speculative - Bullish

The electric power industry is one of the world's largest industrial segments. With a global market share of approximately 25%, the United States is the leading producer of electricity, followed by China, Japan and Russia. Total global electricity consumption volume grew at a CAGR [compound annual growth rate] of 3.1% from 1980 to 2006, the most recently available information, according to the Energy Information Administration of the United States Department of Energy.

Meanwhile, over the same period, total global installed electricity capacity increased at a slower rate of only 2.8%. Given industry forecasts of continuous increases in demand, this supply shortfall must be met by additional energy sources. Worldwide demand for electricity is expected to increase from 14.8 trillion kilowatt hours in 2003 to 27.1 trillion kilowatt-hours by 2025, according to the United States Department of Energy's International Energy Outlook. (Source: Energy Information Administration, US Department of Energy)

Investment in electric generation, transmission and distribution to meet growth in demand (excluding investment in fuel supply) is expected to be approximately $11 trillion by 2030, according to the International Energy Agency. However, the desire for energy independence, fossil fuel supply constraints, infrastructure limitations and environmental concerns all pose challenges to meeting this growing worldwide demand for electricity.

Electricity generated by burning fossil fuels such as coal, natural gas and petroleum accounts for approximately 80% of commercial power production, nuclear reactors produce approximately 9% of commercial power, 6% is contributed by conventional hydroelectric conversion, while renewable resources such as solar, wind, biomass, geothermal, and hydroelectric power generation supply the remaining 5% of commercial power.

In recent years, however, the use of renewable resources in the U.S. has been increasing in response to the growing concerns over reliance on fossil fuels. As opposed to fossil fuels, which draw on finite resources and may eventually become too expensive to retrieve, renewable resources are generally unlimited in availability. Legislation in several states seek to require power production from renewable sources to be approximately 15% of commercial electric power. Bipartisan support for weaning the U.S. off its dependency on foreign oil is led by President-elect Barack Obama's pledge to create five million new jobs by heavily investing in renewable alternative energy sources. (Sources of Electricity in the US [2006] - Energy Information Administration, US Department of Energy)

The alternative energy industry includes solar panel manufacturers and wind farm operators, as well as software designers working on "smart" power grids and electric utilities with solar, wind, hydro and/or geothermal assets. While hydroelectric power generation currently has the largest installed base, solar and wind power generation have emerged as the most rapidly growing renewable energy sources.

While wind power has a promising long-term future with frequent proposals for new wind farms, there are very few publicly traded wind power companies. In the case of ethanol, high and rising corn prices have brought ethanol stocks out of favor with investors.

Solar Energy

Solar energy can be used to convert sunlight into heat, called solar thermal energy, or directly into electricity, known as photovoltaic (PV) energy. Solar thermal applications can be distributed, such as roof-mounted systems for heating swimming pools, or can be centralized where sunlight is concentrated to heat a medium that drives a turbine to generate electricity in large scale plants.

Electricity generated from solar thermal electric power plants requires large concentrators and turbines, which are not suitable for residential locations. We refer to solar power as the use of interconnected solar cells, as opposed to solar thermal technology, to generate electricity from sunlight. The interconnected cells are packaged into solar panels, which are mounted in areas with direct exposure to the sun, such as rooftops.

Solar power technology has been used to generate electricity in space program applications for several decades and in commercial applications over the last 30 years. Increasingly, government incentive programs are accelerating the adoption of solar power. Since 2001, the global market for solar power installed capacity has grown at a compound annual growth rate of approximately 40%, driven by strong growth in Germany, Spain, and the U.S.

According to SolarBuzz (a research and consulting firm), the global solar power market, as defined by solar power system installations, generated $17.2 billion in revenue in 2007 (the most recently available information), up 56% over 2006 global revenue. Such total global solar market installation revenue is expected to be within a range of $18.7 billion to $31.4 billion by 2011. On a generation output basis, 2007 global solar cell production also increased 56% year-over-year to 3,436 megawatts (MW); meanwhile, worldwide installations grew 62% to a record high of 2,826 MW. Germany is the global leader for PV installations (1,328 MW in 2007), followed by Spain (640 MW), Japan (230 MW) and the United States (220 MW).

OPPORTUNITIES

Compared to other renewable energy technologies, solar power's benefits include:

• Environmental Advantage: Solar power is one of the most benign electric generation resources. Solar cells generate electricity without air or water emissions, noise, vibration, habitat impact or waste generation.
• Fuel Risk Advantage: Unlike fossil and nuclear fuels, solar energy has no risk of fuel price volatility or delivery risk. Although there is variability in the amount and timing of sunlight over the day, season and year, a properly sized and configured system can be designed to be highly reliable while providing a long-term, fixed price electric supply.
• Location Advantage: Unlike other renewable resources such as hydroelectric and wind power, solar power is generally located at a customer site due to the universal availability of sunlight. As a result, solar power limits the expense of, and energy losses associated with, transmission and distribution from large-scale electric plants to the end users. For most residential consumers seeking an environmentally friendly power alternative, solar power is the only viable choice because it can be located in urban and suburban environments.
• Retail Rate Benchmark Advantage: Unlike biomass, geothermal, hydroelectric and wind power generation, which are location-dependent and sell primarily to the wholesale market, solar power competes with retail electric rates as it is customer-sited and supplements a customer's electricity purchased at retail rates from the utility network.
• Peak Energy Generation Advantage: Solar power is well-suited to match peak energy needs as maximum sunlight hours generally correspond to typical peak demand periods when electricity prices are at their highest. These characteristics increase the value of solar power as compared to other renewable resources that do not align with peak demand periods.
• Modularity: Solar power products can be deployed in many sizes and configurations to meet the specific needs of the customer.
• Reliability: With no moving parts or regular required maintenance, solar power systems are among the most reliable forms of electricity generation.

We favor companies offering photovoltaics (PV) and large-scale concentrated solar power (CSP) and nuclear systems over other forms alternative energy such as biofuels, geothermal or hydropower. Alternative energies plays such as Entergy (ETR), FPL Group (FPL), Energy Conversion Devices (ENER), Evergreen Solar (ESLR), SunPower (SPWRA), Verasun Energy (VSUNQ.PK), Canadian Solar (CSIQ), First Solar (FSLR), and JA Solar (JASO) appear favorable to Hoku Scientific (HOKU), Aventine Renewable (AVR) and Raser Technologies (RZ).

WEAKNESSES

• The global economic crises will temper alternative energy sales and earnings growth.
• The immediate concerns over economic weakness likely takes the short-term focus off progress toward a new energy policy.
• Continued weakness in the debt and equity markets, for as long as it lasts, will raise costs of capital for firms in this emerging sector, and may prevent project financing, working capital requirements, and new research and development. Federal funding for a new energy policy will largely dry up.
• Alternative energy stock prices generally rise and fall in direct proportion to the price of crude oil. While in times of high oil prices this may also present an opportunity, it also increases volatility in the sector.

Comments

[David G.:]

You should also consider the transmission of that electricity. You'll notice that most of Obama's stimulus bill is going to sources other than solar. Like wind and energy transmission.

CPTC makes the most efficient transmission/distribut... cable in the world. In fact, they just increased capacity for making this cable (they now can make 18,000 km of this transmission cable per year). That's $200 million of cable they can produce this year. Last year they doubled sales to $33 million. This is high growth. Obama wants a new national grid. This stuff is made from a composite core surrounded by aluminum. So it can deliver twice the current over a transmission line the same size as a conventional transmission line today.

CPTC also makes wind turbines.

CPTC trades for .29 a share and both transmission and wind is being promoted by Obama's stimulus package.

Jan 15 03:59 PM

[dan-d:]

Solar has the least impact on the environment and will continue to gain efficiency over the next several years. The solar industry is still in its infancy and the investment opportunities risk/reward ratios are very heavily leaning towards major rewards over time. The industry has the potential to create tens of thousands of jobs that will stay in country. It is the investment of choice for those with vision for the future. My personal favorite is ESLR beaten down by financing difficulties with Lehmans but has billons in contracts over the next 3 years minimum. The pvp they make are the state the art for efficientcy, cost, and reduced environmental impact. Going forward, with government money available to achieve the goal of creating jobs and energy independence, as well as reducing environmental negatives, financing should not be a major hurdle for this company to overcome. Also of note Evergreen Solar panels have been utilized by the whitehouse for the past 7 years with excellent results. Strong buy at current 3 - 4 dollars range and according to the 4 star morningstar rating a target short term of 6. I believe this is a very conservative estimate. GLA

Jan 15 05:07 PM

[tc1:]

Given the author's first point in the "Opportunities" section, namely: solar's "Environmental Advantage," the author and readers should be aware of an enlightening and disturbing article:


*** "Solar Energy's Darker Side Stirs Concern: Cells contain toxic materials that could end up in landfills. Some firms are taking steps to help keep the industry's reputation green." (by Marla Dickerson, L.A. Times, Business section, January 13, 2009).


Notably, ***FirstSolar (FSLR) was singled out as the ***one*** company that has already become an industry model for greening itself by already having a panels- and materials-recycling program in place and a business philosophy of "extended producer responsibility"-- "taking responsibility for the cradle-to-grave environmental effects of their products."


Because of such concerns, and as a DISCLOSURE, i went long on FSLR back in mid-December, the only solar company i presently hold.


With 1) FirstSolar's current major contract with privately-held SolarCity to install solar panels for rooftops (thus instantly allowing anyone to be able to draw on solar power for most or all of their energy needs without paying anything upfront and having lower monthly electric bills); 2) their
winning the first two contracts with Southern Calif Edison for the planned 250 MW "business rooftop leasing solar plan"; 3) the defection of Solyndra's top scientist to First Solar; and 4) the coming Obamanomics green-tech-spending, First Solar looks ready to pop, even in a major recession and banking crisis.

Jan 15 05:07 PM

[dan-d:]

Tc-1, I looked at First Solar and was going to buy it but the cadmium telleride utilized in their pvp manufacturing put me off. The panels did not gain a foothold in europe because of the strict environmental and human toxicity rules. By your statements it sounds as though the toxicity problem has been resolved. Is this so?? I thought that this toxicity was one of the reason First Solar has not been used in residential area up until ? now.
I know haz-mat did not like them and there were concerns over disposal at end of usage have these added costs and enviro concerns been resolved as well for the first several years of the products production.
Thanks for providing answere if possible to my concerns.

Jan 15 07:57 PM

[gebby:]

fslr technology is different from other poly based. you shouldnt use fslr as a basis for tarnishing all solar. but you are correct about fslr and its toxicity of its cadmium based technology


On Jan 15 05:07 PM tc1 wrote:

> Given the author's first point in the "Opportunities&amp... section,
> namely: solar's "Environmental Advantage," the author and readers
> should be aware of an enlightening and disturbing article:
>
>
> *** "Solar Energy's Darker Side Stirs Concern: Cells contain toxic
> materials that could end up in landfills. Some firms are taking steps
> to help keep the industry's reputation green." (by Marla Dickerson,
> L.A. Times, Business section, January 13, 2009).
>
>
> Notably, ***FirstSolar (seekingalpha.com/symbo...) was
> singled out as the ***one*** company that has already become an industry
> model for greening itself by already having a panels- and materials-recycling
> program in place and a business philosophy of "extended producer
> responsibility"-- "taking responsibility for the cradle-to-grave
> environmental effects of their products."
>
>
> Because of such concerns, and as a DISCLOSURE, i went long on FSLR
> back in mid-December, the only solar company i presently hold.

>
>
>
> With 1) FirstSolar's current major contract with privately-held SolarCity
> to install solar panels for rooftops (thus instantly allowing anyone
> to be able to draw on solar power for most or all of their energy
> needs without paying anything upfront and having lower monthly electric
> bills); 2) their
> winning the first two contracts with Southern Calif Edison for the
> planned 250 MW "business rooftop leasing solar plan"; 3) the defection
> of Solyndra's top scientist to First Solar; and 4) the coming Obamanomics
> green-tech-spending, First Solar looks ready to pop, even in a major
> recession and banking crisis.

Jan 16 08:55 AM

[gebby:]

the authors section on weaknesses almost all center on credit crisis and general economic weakness and competitive aspects of other old energy sources (oil). investment in solar is an avenue to renewed economic growth, solar presents an opportunity to address our economic situation. the world is suffering a global climate change crisis threatening life on the planet. it really is. we need solar and other no fossil based fuels for the future. this need and the economics of no investing in solar far out weigh the relative cost of oil in the short term.

i see no valid arguments for weakness in solar as an investment. and considering the urgency of economic and climate crisis i expect the bet on further solar investment is extremely high. remember governments will step in as the lender of last resort if the banks dont make money available for a build out in clean energy technologies. A new energy economy is on the horizon and government has a new role to play in insuring its realization. bet it will happen and pick your favorite solar plays.

Jan 16 09:02 AM

[billp37:]

Fast Nuetron of Santa Fe's comment deserves thought

"From actual experience, wind farms produce 1.2 watts per square meter. Solar Thermal and Photovoltaic methods capture 5 to 6 watts per square meter. There is no economy of size in either technology. Dividing the watts you need by those values gives the land area in square meters needed to produce the juice. The numbers are astronomical"

when considering the future of solar and wind electricity generation.

Energy is an area of INTEREST for us, not one of expertise or ability, so we don't know whether fast neutron's data are accurate or not. But the statement attracted our interest.

Jan 16 09:31 AM

[Fred W:]

Toxicity has nothing to do with First Solar's lack of use for residential applications. Its low efficiency does not lend itself well to the limited space of residential applications (you need much more unshaded space to produce the same amount of electricity that a Sunpower module (16-20%efficiency) or other high efficiency modules require. Also FSLR's cost advantage is much greater for large scale projects due to the fact that the solar modules are a larger portion of the cost of the system--for residential systems labor and interconnection work are much greater cost components.
There are more reasons but I don't have time to go into them here.


On Jan 15 07:57 PM dan-d wrote:

> Tc-1, I looked at First Solar and was going to buy it but the cadmium
> telleride utilized in their pvp manufacturing put me off. The panels
> did not gain a foothold in europe because of the strict environmental
> and human toxicity rules. By your statements it sounds as though
> the toxicity problem has been resolved. Is this so?? I thought
> that this toxicity was one of the reason First Solar has not been
> used in residential area up until ? now.
> I know haz-mat did not like them and there were concerns over disposal
> at end of usage have these added costs and enviro concerns been resolved
> as well for the first several years of the products production.

>
> Thanks for providing answere if possible to my concerns.

Jan 16 10:40 AM

[frflyer:]

The story about solar cells needing to be recycled was mostly pointing out that the computer and semiconductor industries were slow to deal with similar issues, and the suggestion was that the solar industry not make the same mistake, and should nip the problem in the bud by setting up programs for recycling now.
Not a game stopper or huge problem.

As far as the topic of land for wind and solar, I think this is a red herring. For example, the land used for crops for biofuel can produce something like 10,000 to 18,000 miles per acre of fuel.
Wind can produce 180,000 miles per acre of electricity assuming electric cars or plug ins. Solar can produce 2 million miles per acre.
Wind turbine farms don't actually use most of the land where they are sited. They need to be spread out so each turbine has clean air flow. I think the numbers I saw was about 2.5% of the land they are sited on. This means they can coexist with agriculture.
Large Solar thermal projects are more densely packed on the land than wind, which partially explains why solar can produce so much per acre. The huge tracts of land needed have to be put in perspective. It's said that these plants could power the whole country, using less land than now used for coal mining and coal power plants. And look what coal does to the land.

Jan 16 11:57 AM

[Misha:]

Can some one comment on the rational for a less favorable opinion on geothermal (e.g. RZ)?

Jan 16 12:36 PM

[Stockguy456:]

It does not matter if it is 1 year, 5 years, 10 years or more. There will be new forms of energy to make fossil fuels extinct!

Jan 16 01:11 PM

[Chris B:]

Misha,

I'm intrigued by Razer too, but I have serious concerns about management. Just go to their website to see what I mean. They have 2 divisions: geothermal electricity and manufacturing electric motors. These two industries have nothing to do with each other and no apparent synergies - strike one.

Far worse, they claim that this electric motor is so efficient, that they can build a 100 MPG full-size SUV hybrid with it - as in a friggin' Suburban. Miraculously, GM, Ford, Chrysler, Honda, Nissan, Toyota, Proton, Tata, Hyundai, Chery and Caterpillar have all failed to beat a path to Razer's door despite their own struggles to make a 50 MPG mini-car hybrid. They won't sell this miracle motor to you, and to objectively test it or even look at it you have to sign a legal agreement that exposes you to the risk of a lawsuit. To a lot of investors, this gives the appearance of being a bogus claim, which is why the shorts have been attacking from the start. Look up the history of Zap! automotive for an idea of what they see in RZ - a company designed to do little more than absorb the dollars from a wave of green retail investors.

If they are overstating their technology, what else are they overstating?

Further, the energy conversion devices they utilize are purchased from United Technologies (UTX) and anybody can buy them, so there is no competitive moat or technology ownership. US Geothermal (HTM) uses a different design produced by industry leader Ormat (ORA) to do the same thing. I wish Ormat was priced more reasonably. I can't force myself to pay 25 times earnings for a utility.


On Jan 16 12:36 PM Misha wrote:

> Can some one comment on the rational for a less favorable opinion
> on geothermal (e.g. RZ)?

Jan 16 05:02 PM

[tmilarry:]

I think most people associate wind and solar as the more "glitzy" technology. Everyone has a fundamental concept of sun and wind while most don't understand the way geothermal works or the temperatures needed to make it practical. There is a company called Raser Technologies that is doing some pretty interesting things in the geothermal field. They are utilizing modular, quick deployment power generating equipment from United Technologies United Power group that allows them to go from start to finish in about six months time. Raser's website has some interesting videos that explain how it works. Take a look and see what you think.


On Jan 16 12:36 PM Misha wrote:

> Can some one comment on the rational for a less favorable opinion
> on geothermal (e.g. RZ)?

Jan 16 05:03 PM

[lefty37:]

Misha;
Too simple, too easy! We have to complicate everything.

Jan 17 06:19 AM

[Misha:]

Hi Chris B. and others,

Thank you for your comments. The starting point of my interest in RZ was, in fact, Ormat (ORA) and, like you, I cannot bring myself to buy it, though I am really intrigued by geothermal and apparent lack of interest in it from major players and experts/pundits.

Low T geothermal makes very good sense to me. Though in most cases you would not be able to build a mayor power plant around, it should be possible to supply good part of local energy demand in many locations, especially in the Western states (www1.eere.energy.gov/g... ; see also www.msnbc.msn.com/id/2.../ as an example of geothermal for local use). The question is how to act on geothermal potential.

I have the same concern with Razer. If you listen to www.rasertech.com/medi..., you will likely conclude that Patrick is an idiot and the company is a joke. There is no real connection between the two business segments, as you correctly pointed out. There is no IP to speak of. The whole well-to-wheels thing really stinks. It is not clear how they even stumbled into geothermal line of business.

All these said, why am I still interested in RZ? Because I am yet to find a better alternative.

The way I see it, geothermal is currently underappreciated (maybe for a good reason; thus my original question). The basic technology is well established. Surprisingly, this may be a benefit for Razer with apparently little in-house technical expertise: you can simply buy the equipment (which is apparently what they are doing with UTC) and outsource technical execution (design, drilling, construction, etc.) There are two more possible reasons to be interested in Razer. First, you can view them as an exploration/ mining company that was lucky to find a resource and secure promising leases. Second, they are early in the game (I believe they are only the second entity to install UTC’s low-temp generators).

With little barriers to entry and no technological advantages, there is no doubt in my mind that longer term RZ is a local payer (UT, NV, ID) at best. However, in the current climate of interest in renewable energy that may be followed by real state and federal development incentives and the first mover advantage that will initially help with visibility and new project, RZ may be of an intermediate term interest.

My mind is not set yet, so all opinions are welcomed, including technical perspective.


On Jan 16 05:02 PM Chris B wrote:

> Misha,
>
> I'm intrigued by Razer too, but I have serious concerns about management.
> Just go to their website to see what I mean. They have 2 divisions:
> geothermal electricity and manufacturing electric motors. These
> two industries have nothing to do with each other and no apparent
> synergies - strike one....

Jan 17 11:10 PM

[JohnWinstonL:]

I agree with you. After ESLR gets through the first or second quarters of '09, they will do quite well. They have their proprietary "String Ribbon technology" and I believe they will get a nice share of the stimulas. I have compared the solar companies in depth and I think they are the best.


On Jan 15 05:07 PM dan-d wrote:

> Solar has the least impact on the environment and will continue to
> gain efficiency over the next several years. The solar industry is
> still in its infancy and the investment opportunities risk/reward
> ratios are very heavily leaning towards major rewards over time.
> The industry has the potential to create tens of thousands of jobs
> that will stay in country. It is the investment of choice for those
> with vision for the future. My personal favorite is ESLR beaten down
> by financing difficulties with Lehmans but has billons in contracts
> over the next 3 years minimum. The pvp they make are the state the
> art for efficientcy, cost, and reduced environmental impact. Going
> forward, with government money available to achieve the goal of creating
> jobs and energy independence, as well as reducing environmental negatives,
> financing should not be a major hurdle for this company to overcome.
> Also of note Evergreen Solar panels have been utilized by the whitehouse
> for the past 7 years with excellent results. Strong buy at current
> 3 - 4 dollars range and according to the 4 star morningstar rating
> a target short term of 6. I believe this is a very conservative estimate.
> GLA

Feb 14 01:52 PM