Don't Bet on a Big Rally for Alt Energy Stocks This Year

Last week, Jefferies & Co. held its Global Clean Technology Conference. Unsurprisingly, the tone wasn't as optimistic as in previous years, with cash and funding worries top of mind. Nearly two months ago, I discussed some tangible signs pointing to looming problems in the industry. However, despite all the gloom, it seems as though several firms (and investors!) are expecting the American Reinvestment and Recovery Act [ARRA] to provide the industry with a lifeline. But will this really be the case?

For one thing, the major environmental spending programs in the ARRA are relatively targeted (i.e. smart grid, storage, clean transportation) and, although a broad range of companies could benefit from measures such as an extension of the production tax credit, direct government cash payouts will not be forthcoming for all.

What's more, it now looks like Obama's plan for a cap-and-trade system, which would have provided a major boost for clean power, will be scrapped. This is something I discussed a little while ago: while I do believe a cap-and-trade program will one day be part of the the U.S. environmental regulatory landscape, it's a very tough sell at best - and political suicide at worst - in the midst of an economic slump that is leaving millions of unemployed in its wake. Whether environmentalists like it or not, the general public still sees greenhouse gas regulation as a negative-sum affair.

Can the ARRA single-handedly prevent the sector from going through a massive shake-out that will see many of the smaller firms wiped out or taken over? That's highly unlikely. Like any industry, alt energy's lifeblood is financing, and no legislation can fully make up for dysfunctional capital markets. At this point in the game, with many world governments having declared their unconditional support for clean energy, there's still one key ingredient missing: it's the banks, stupid! (At least according to Vestas' CEO in the interview below)

Given the slow pace at which normal credit conditions are returning and enduring doubts about the viability of many banks, I don't expect a broad-based rally in alt energy / cleantech stocks on the back of the ARRA this year. While certain select stocks will most certainly do well, the potential beneficiaries of the ARRA have by now mostly been identified.

Those who expect a rapid return to the days when cleantech stocks outperformed just by virtue of being cleantech stocks are in for a nasty surprise; a general rally in equities, if it does occur in 2009, might pull the good (i.e. operating profits, free cash flows, high current ratios and low total debt levels) alt energy firms up but will leave the sketchy ones behind. This is a new era, and investors are a lot more risk-conscious than they used to be.

Disclosure: None

Comments

[tplinston:]

If not renewables then what else will suppliment the energy gap. New large scales coal has been looking dead in the water for sometime and new nuclear will be as hard if not harder to finance than wind. That leaves us with gas. The volume of new gas CCGT going in globally is set to cause a rapid price spike. Canadian supplies are in decline, as are those in norhern Europe, that leaves us with Iran and the bits of the Middle East we still like. As gas spikes the marginal cost of electricity spikes and hey presto wind is back, no?

Will this happen in 2009, no. Will investors notice the inevitable surprise on their door step and the knock on for scalable renewable energy technologies in 2009, in my view yes. I would see a rally in leading wind stocks and a rise for leading renewable focused IPP's with balance sheet strength, flexibility and pipeline in 2009.

Mar 26 09:08 AM

[aquaculture:]

How can you say that? Sentiment can change quickly.
Just a few tidbits.

About a hundred new coal fired powerplants are put on hold. Regulatory uncertainty reigns: always an opportunity.
Existing sulphur-free coal mines (for blending) are almost depleted. New coal plants need 50 years guaranteed supply.

Solar grade silicon prices are coming down fast. ASP's falling futher below California peaker rates.

Blackrock inc. BLK is investing big in peak electricity storage at 15 locations, through full backing of aquabank, Riverbank.
That's 15GW of storage but allows a multiple factor of Economical Wind/Solar power to come online throughout the U.S.
So the big players are moving.

Every banking crises has been resolved in the past.

Stock markets always look far ahead, not back.

Mar 26 12:12 PM

[Alphameister:]

Do my 40%+ gains today in TSL and YGE count as a rally? What about my 20% gain in APWR?

Mar 26 12:38 PM

[bbowen7:]

Good news - this defeat of the plan to foster the less cost-effective "clean energy" by crushing the coal-fired energy states and banning nuclear expansion.

Mar 26 01:01 PM

[carbonates:]

I am still of the opinion that not only is financing a major impediment, the natural gas market could easily displace most alt energy based on economics for decades to come. Only the artifice of political barriers to natural gas and some of the logistical challenges to natural gas transport will prevent this. I for one, will not invest where there is significant political risk, so alt energy is still off the table for me.

One comment above suggested natural gas is in decline in Canada and Europe, but is very much incorrect. The reserves discovered in British Columbia in the Horn River and Montney are huge (hundreds of Tcf's), and any increase in price for natural gas will result in production increases. Similar reserves are being found in eastern Canada, the Marcellus, the Haynesville, and currently Europe is the next new frontier for gas shales. Even the Middle East is getting in on the action, with Saudi Arabia beginning to explore its shale resources. Africa, China, South America, and India are still waiting to be explored for shale gas with this new paradigm. World supply of natural gas is not at all similar to oil, and will not be in decline for decades. Even EIA is predicting that over 50% of US natural gas supplies will come from gas shales within the next 4 years. The world will soon follow that trend.

Don't count on alt energy having a smooth ride up. Existing energy resources are still cheap and abundant and will continue to compete strongly with alt energy, even if carbon taxes are added to the cost. The cost of drilling a gas well is still less than the cost of building a windmill, and the resulting energy resource is still larger.

Mar 26 02:46 PM