Alternative Energy's Sunny 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).

T. Boone Pickens & the "Pickens' Army"

In President Obama's Inaugural Address on January 20, 2009, T. Boone Pickens, Texas oilman, Chairman and CEO of BP Capital and Director of Clean Energy Fuels Corp. (CLNE), along with millions of Americans, heard our new President Obama pledge to transform U.S. energy policy. Mr. Pickens is committed to this goal and believes that the president's goals are bold yet achievable.

Mr. Pickens has inspired over 1 million volunteers, known as Pickens' Army, to pressure government for a change in energy policy. In addition, his role at Clean Energy Fuels is committed to convert commercial fleet vehicles to natural gas. Clean Energy Fuels Corp. (Clean Energy) is a provider of natural gas as an alternative fuel for vehicle fleets in the United States and Canada. The Company offers a solution to enable customers to run their fleets on natural gas. It designs, builds, finances and operates fueling stations, and supplies customers with compressed natural gas (CNG) and liquefied natural gas (LNG).

The Obama Administration has already begun working with Congress on a stimulus plan to create more new jobs and return to economic growth by investing heavily in renewable energy sources such as solar and wind power, rebuilding the U.S. electricity transmission grid and ultimately reducing U.S. dependence on foreign oil and ending oil.

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

[Chris B:]

Solar's big disadvantage is that it is considered the most expensive electricity available. The common complaint is that massive solar expansion would require (a) a 3X increase in electricity costs, or (b) massive taxpayer subsidies.

However, to ensure comparability, let's consider how we "socialize" the costs of other energy sources:

Oil: Trillions of dollars and thousands of dead soldiers to secure oil supplies and routes, tens of thousands of cancers caused by carcinogenic gasoline, dictatorships propped up, periodic and inevitable oil spills, economy crashes every time the price rises.

Nuclear: Government pays most costs for security, inspection, safety regulation, research, waste transport, waste storage, lawsuits from waste storage, cleanup of any disasters, etc.

Coal: We all accept higher levels of mercury, arsenic, etc. in our air and water as a tradeoff. Occasional coal ash spills, cleaned up by taxpayers.

When one looks at TOTAL costs, not just costs to companies, solar, hydro, geothermal, and wind power are quite competitive. I would say that solar and geothermal have the most potential for technological advances. When solar cells can be made as cheaply as roofing shingles or when geothermal is developed to function at lower temps or deeper depths, there will be a revolution in how electricity is produced. Progress is continuing at a fast pace, but adoption is being held back by only looking at part of the numbers.

Mar 09 10:21 AM

[tc1:]

This article was all over the place, offering the same good news for alternative energy that we've heard in other articles and reports, but the author(s) does not spell out, for instance, why nuclear is to be favored over, say, geothermal.

Chris B: i really appreciated your well-stated synopsis of the horrific, grievous costs of conventional power-sources.

As for the price of solar, surely you and the Zack's group must be aware that the company First Solar, in the eyes of Mark Bachman, an equity analyst at Pacific Crest, as reported in mid-Dec. 2008, has "already made it to grid parity." The "12.6-megawatt system installed by First Solar for Sempra Generation showed that the system can produce electricity at below the price of conventional power in the United States."

Btw, FSLR is also the "greenest" behaving of all the solar players, according to Marla Dickerson's Jan. 13, 2009 Los Angeles Times' article on the "not-so-green" side of the solar industry.

Disclosure: long FSLR, Vestas Wind, GE, Cree (specializing in l.e.d. lighting, which is already saving energy for govts, municipalities, universities, et al., with its amazing lights), CPTC.OB (check out its energy-saving ACCC cable), etc.

Mar 09 11:28 AM

[dan-d:]

While FSLR has a marketable product and, due to great deep pockets, got the jump on its competitors, I still think that the carcinogenic material used in the manufacture of its panels will eventually be the achilles heel of this company. Disposal, litigation, and eventual EPA restrictions could make for major financial headaches. I would approach FSLR with caution at this juncture. I would however watch for a change in the composition of the panels possibly aquiring a superior product through a buy out. That would mitigate future problems considerably and allow FSLR to maintain its customer base.

Mar 09 12:01 PM

[frflyer:]

Chris B

If anything you are being too kind to fossil fuel and nuclear power, as they both have more problems and hidden costs than you list. Like the absurd subsidies oil has gotten for 90 years, the impacts from coal mining, the danger of nuclear power leading to nuclear weapons, nuclear's long lead time to build new plants, etc.

The long lead times for new coal nuclear plants favor solar and wind, which are much quicker to build.

"The time to plan and construct a coal-fired power plant without CCS equipment is generally 5–8 yr. CCS technology would be added during this period. The development time is another 1–3 yr. Thus, the total planning-to-operation time for a standard coal plant with CCS is estimated to be 6–11 yr. If the coal-CCS plant is an IGCC plant, the time may be longer since none has been built to date."

"..... based on the most optimistic future projections of nuclear power construction times of 4–5 yr5 and those times based on historic data,64 we assume future construction times due to nuclear power plants as 4–9 yr. Thus, the overall time between planning and operation of a nuclear power plant ranges from 10–19 yr."

"The median construction time for reactors in the US built since 1970 is 9 yr."

"For CSP, the construction time is similar to that of a wind farm. For example, Nevada Solar One required about 1.5 yr for construction. Similarly, an ethanol refinery requires about 1.5 yr to construct. We assume a range in both cases of 1–2 yr. We also assume the development time is the same as that for a wind farm, 1–3 yr. Thus, the overall planning-to-operation time for a CSP plant or ethanol refinery is 2–5 yr. We assume the same time range for tidal, wave, and solar-PV power plants."

www.rsc.org/delivery/_...

Wind power maybe should be given more credit for it's low cost and low environmental impact.

"Wind power's ecological footprint is so small — a million times smaller than ethanol's — that if all the cars driven in the United States were battery-electric, they could be fueled by wind turbines whose total land footprint, not counting spacing in between, takes up less than 1.2 square miles, Stanford University environmental engineering professor Mark Jacobson found."

"To fuel the same number of battery-electric vehicles with cellulose ethanol would require an amount of land equivalent to eight Californias – literally a million times more land and equivalent to the amount of land harvested in the U.S. in 2003."

solveclimate.com/blog/...

"Currently, wind power – at 7 cents per kilowatt hour – is half as expensive as new nuclear power, which costs 14 to 15 cents per kilowatt hour. The cost of nuclear power continues to increase while solar electricity -- currently at around 20 cents per kilowatt hour dramatically decreasing; Dr. Arjun Makhijani of Institute for Energy and Environmental Research (IEER) predicts that in a few years, solar and uranium electricity will cost the same amount per kilowatt hour.13 Lovins calculates that efficiency is seven to ten times more cost effective than nuclear power at reducing greenhouse gas emissions."

www.beyondnuclear.org/

We are often told that we should look to France as an example of the success of nuclear power.

"France's decision to reprocess reactor fuel has contaminated the seas as far as the Artic Circle and may have led to leukemia clusters near the reprocessing plant. Its decision to try breeder reactors was an expensive failure. Its plutonium fuel program has not reduced its surplus stockpile of plutonium which is calculated at greater than 80 metric tons sitting in tens of thousands of vulnerable containers and with no disposal option. France has no radioactive waste repository."

"In the summer of 2008, France experienced a cascade of accidents at its nuclear facilities. While leaks and spills, including uranium that contaminated groundwater, caused a ban on drinking and bathing and local vintners to change the labels on their bottles, Areva downplayed the gravity of the releases. But the black summer of radioactive leaks and spills shed doubt on the nuclear industry's - and in particular Areva's - ability to uphold fundamental safety standards according to an article in the International Herald Tribune."

"A new video - Everything you always wanted to know about nuclear power...but were afraid to ask - found on the Alliance for Nuclear Responsibility Web site, debunks various nuclear myths including the notion that France "recycles" its radioactive waste. "
view here:
www.everythingnuclear....

"Read here about Areva's 40-year uranium mining track record in the Niger and support the collective"Areva Shall Not Make the Law in Niger" of which Beyond Nuclear is a member."
www.beyondnuclear.org/...

Mar 09 12:27 PM

[John Petersen:]

In a recent essay on McKinsey & Company's What Matters website, Secretary Chu wrote:

“It’s important to understand where we are now. Existing energy technologies won’t provide the scale or cost efficiency required to meet the world’s energy and climate challenges. Corn ethanol is not a sustainable or scalable solution. Solar energy generated from existing technologies remains much more expensive than energy from fossil fuels. While wind energy is becoming economically competitive and could account for 10 to 15 percent of the electricity generated in the United States by the year 2030 (up from less than 1 percent now, according to the US Energy Information Administration), it is an intermittent energy source. Better long-distance electricity transmission systems and cost-effective energy storage methods are needed before we can rely on such a source to supply roughly 25 percent or more of base-load electricity generation (the minimum amount of electrical power that must be made available). Geothermal energy, however, can be produced on demand. A recent Massachusetts Institute of Technology (MIT) report suggests that with the right R&D investments, it could supply 10 percent of US power needs by 2050 (up from about 0.5 percent now).”

So at least the view from the Potomac is pretty clear.

On balance, I would read Secretary Chu's remarks a bullish for geothermal energy, thermal solar and storage.

Mar 09 12:36 PM

[PeteK:]

Just wait for oil to reach $100 and then talk about Solar.
Right now, who cares ?

Mar 10 12:45 AM

[Alphameister:]

Thanks for an excellent overview of the bullish case for solar power, and kudos to several commenters who added significant value with their contributions: Chris B. and frflyer especially.

Mar 10 09:34 AM

[Fred W:]

The fact that Geothermal now can claim a 30% ITC rather than a 10 year PTC is a game changing event for Ormat and other gt firms. The drilling boom is coming as soon.


On Mar 09 12:36 PM John Petersen wrote:

> In a recent essay on McKinsey & Company's What Matters website,
> Secretary Chu wrote:
>
> “It’s important to understand where we are now. Existing energy technologies
> won’t provide the scale or cost efficiency required to meet the world’s
> energy and climate challenges. Corn ethanol is not a sustainable
> or scalable solution. Solar energy generated from existing technologies
> remains much more expensive than energy from fossil fuels. While
> wind energy is becoming economically competitive and could account
> for 10 to 15 percent of the electricity generated in the United States
> by the year 2030 (up from less than 1 percent now, according to the
> US Energy Information Administration), it is an intermittent energy
> source. Better long-distance electricity transmission systems and
> cost-effective energy storage methods are needed before we can rely
> on such a source to supply roughly 25 percent or more of base-load
> electricity generation (the minimum amount of electrical power that
> must be made available). Geothermal energy, however, can be produced
> on demand. A recent Massachusetts Institute of Technology (seekingalpha.com/symbo...)
> report suggests that with the right R&D investments, it could
> supply 10 percent of US power needs by 2050 (up from about 0.5 percent
> now).”
>
> So at least the view from the Potomac is pretty clear.
>
> On balance, I would read Secretary Chu's remarks a bullish for geothermal
> energy, thermal solar and storage.

Mar 10 09:37 AM

[billp37:]

Alternative Energy's Opposition:

"Formed in 2000 to develop astroturf support for coal-based electricity, Americans for Balanced Energy Choices (ABEC) promotes the interests of mining companies, coal transporters, and electricity producers. ...

"Because they recognize the essential role that electricity from coal plays in protecting the environment while providing over half of the electricity used each day in the U.S., America's coal-based electricity industry (producers, transporters, and electricity generators) have provided the primary initial funding for this worthwhile project." [2]

In 2008 ABEC was merged with the Center for Energy and Economic Development to form the American Coalition for Clean Coal Electricity which represents the interests of coal producers, transporters and utilities. ..."

www.sourcewatch.org/in...

We were alerted to ABEC by phone contact March 9, 2009.

Mar 10 10:12 AM

[Road Runner:]

Just another article talking about the great future of solar. We know this people! This is nothing new! Eventually solar will be huge. It's obvious. And, when we reach grid parity...

I'm going back to sleep. Wake me when the solar finally takes off.

Mar 10 11:06 AM

[samwise:]

Good to see the ups and downs, but it's not proportional. for example your government is saying through this massive and obese federal "stimulus" that this collapse in the global financial system means Uncle Sam will be the only game in town when it comes to paying for anything. that seems to overwhelm investmenst in anything right now. you do have cap and trade which will cause prices to rise and in theory could make solar more competitive. the usual response when governments do these things is that the exact opposite happens and we become EVEN MORE dependent on the coal producers because now NOBODY can afford solar. it is possible that Uncle Sam could be the buyer of first resort and simply give these solar power systems to every American in the name of creating a "smarter grid." Certainly is no worse than giving 300 billion to AIG! Having said that and perhaps unfortunately I see no plan for that on the drawing board. (P.S.--the whole idea that we have to go war for oil is laughable. We're the third largest oil producer ourselves and don't even have a state oil company! What isn't laughable is the inflation that wars generate and represents the REAL reason we go to war. Hence be wary of ecnonmists bearing words like "depression." This whole boondoggle STILL has to do with "saving wall street." unfortunately, so does the "solar play." Invest with T. Boone--ride the wind. Nancy Pelosi is a prime investor and she's as greedy as they come--plus more than likely she'll get paid.

Mar 10 02:51 PM

[Biggonmv:]

No doubt solar is high up in the mix, but there will be lots of consolidation as time goes by. Just because FSLR is the favorite current "name" doesn't assure them any real cache, as other disruptive technologies gain traction. (See DSTI, Daystar Technologies -disclosure: long) Plenty of power players can enter the game big with deeper pockets than any of the present lead names, once the economic case for solar is compelling enough. Don't think it is there yet.

Mar 10 05:56 PM

[jksisco:]

Blue Sky warning! Until Lithium Crystals are discovered, fossil fuels are still the big kid on the block. Total Solar and Wind renewables account for about 1% of energy demand, BHO has set a goal of doubling that in 3 years, the current volume of oil equivalents for solar and wind are 76,000 bbl's per day, America uses 47.4 million bbl's per day of oil equivalents. I realize a journey of a thousand miles starts with the first step, however, big profits from renewables are somewhere down the line for the average investor.

Mar 10 08:04 PM

[Amitabha Mu...:]

In our mad rush to change things we often forget that if we seriously look at the universe we will clearly find that God is engineer of the engineer. I am writing this from my experience in the area of designing solar power plants based on tower methods back in the seventies I was hurt by the comments made by a group of technocrats that this era in future may be recalled as an era of solar madness. But now I realize how coorect that statement was. The energy density is so low in case of solar energy that apart from space based power plants its future is not that bright. The future belongs to coal power and uranium power and more on uranium power so long we have not acquired the technology for building fusion reactors.
All these problem of excessive carbon dioxide generation can be easily solved if all the countries of the world can make a commitment for planting an additional one billion big trees which will take care of all the excess carbon dioxide in the atmosphere. Later when these coal reserves would dwindle these additional trees will give the supply of carbon by production of wood charcoal.It is being proved in an experiment in Brazilian rain forest that in the presence of excess carbon dioxide released from tanks the growth of the trees was more to absorb the extra amount of carbon dioxide.
So my line of argument is that most of the times we are driven by emotions rather than correct technical thoughts and create sense of emergency which may be avoided altogether.

Mar 11 02:32 AM