By Lara Crigger
From biofuels to peak oil, from wind power to solar "picks and shovels," we've been talking quite a bit about alternative and renewable energy on Hard Assets Investor lately. That's why we decided to get the lowdown on the latest developments in clean energy from Alt Energy Stocks' Tom Konrad, Ph.D., CFA.
As a writer, consultant and financial analyst, Tom Konrad is one of the investment community's best-known experts in renewable energy and energy efficiency. He's a prolific writer, both for Alt Energy Stocks and elsewhere, and armed with a Ph.D. in mathematics, Konrad brings his signature academic perspective to the often hype-filled alt-energy space.
Recently, Hard Assets Investor associate editor Lara Crigger spoke with Konrad about clean energy, including the similarities between clean tech and the Internet, Exxon's leap into biofuels, and the smart- grid free lunch.
Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): Last week, BusinessWeek discussed whether the clean-energy economy could become the "next Internet." What's your take?
Tom Konrad, financial analyst, Alt Energy Stocks (Konrad): I think the resemblance to the Internet is somewhat superficial. I mean, certainly clean energy will dominate investment headlines for quite awhile. But clean tech investment tends to be extremely capital intensive. Internet investment is very capital-light; you can start up a company in a garage. You just can't do that with clean tech.
So I think the properties of the clean energy boom are going to be much different. It will be slower. The real drivers of clean tech are very long-term economic drivers, whereas the driver of the Internet was technology, a cheaper way to do things.
But clean energy, generally speaking, is driven by several things: rising fossil fuel prices, climate change and its political reactions, and the realization that as fossil fuel prices rise, clean energy will someday be a cheaper way to do things. Because there are several drivers, the boom should be longer and more sustained.
Crigger: So we won't see a few wild years followed by a huge bubble burst, like with Internet.
Konrad: I don't think so. Certainly, we could see another stock price burst. In the recent bust, clean tech stocks took a bigger hit than others, mainly because they have high betas. Investor attitudes come and go, and we'll see busts along the way. But I think the proportion of speculation and investor enthusiasm compared to reality was higher for the Internet than it is for clean energy, so the relative volatility will be lower.
At the same time, there's a lot of hype. In fact, there may be more of that in clean tech, because it's hard to put together something real.
Crigger: Speaking of hype, are there certain sectors or technologies that investors should be wary of?
Konrad: They should be wary of anything that's really exciting. Personally, I tend to push the least exciting ones, like energy efficiency. Only maybe 1% of the companies in energy efficiency are hype, because it's just so boring.
If you were a hypemonger, you'd do solar. Solar's got a great story, but everybody knows it. And when everybody knows it, that's when you have to watch out.
I think algae is another one to be wary of, especially now. It's the flavor of the moment, but it's a very immature technology. I wrote an article recently about advanced biofuels, in which I detailed each of the three public algae companies, and they really have no particular distinction or advantage over the private ones. Why should these three out of dozens survive? Why should any of them survive?
Crigger: What about Exxon's recent announcement of a $600 million deal to develop algae biofuel? Will this be the trigger that sets off the algae industry?
Konrad: Well, it's a step along the way. Long term, I have a lot of faith in algae. It's the one biofuel feedstock that has the potential to displace a large fraction of our liquid fuel needs. But we're talking 10 years, most likely, before anything is commercially available. That's beyond the range of a stock market investor.
It's one of these things that, because the story is good, people are all excited about it. But there isn't anything that's going to save us from the drivers of climate change. Peak oil is going to happen. And algae is not going to displace oil, because it's going to be very expensive. Look, there's no free lunch. It's all going to be hard work.
Crigger: Does the price of oil have to rise dramatically before something like algae-derived biofuels can take off?
Konrad: With algae, a lot of it is technology. It's going to be a function of two things. The price of algae will drop, but it's pretty capital intensive, so it's always going to be expensive.
I come back to the energy return on investment, or, how much energy are you putting in to get some out? And for most renewable - wind, solar, etc. - you only get 3 to 5 times as much energy out as you put in. Now historically, with oil, that's been as high as 100. But these days, it's dropping into the single digits. So as those two numbers come to be about the same, then you'll tend to reach price parity too.
Crigger: Why is algae the only biofuel that has a chance to displace oil on a large scale? What about ethanol?
Konrad: Ethanol is limited by corn. There's an upper limit on corn ethanol because there's an upper limit on corn production. We're near it already, and once we hit it, that's it. That's all you're going to get, unless you plant more corn - which we don't have land for. Maybe there are some efficiency gains to be gotten, but the change would be marginal.
But just because it's not a significant portion of your energy doesn't mean it's not a good business. Ethanol is not a solution to the climate problem; it's never going to fix that. But it is a national security help, and a way to deal marginally with peak oil.
If the producers of corn want to sell it that way, then they'll be able to fix their image problem, because then, they'll just be like any other business. They're a chemical business. They're turning biofeedstock into a liquid fuel. It's just another commodity business.
Crigger: You've written quite glowingly about the smart grid sector. Why do you like it so much?
Konrad: I like smart grid because it's a free lunch ...
Crigger: Hey, I thought you said there weren't any free lunches.
Konrad: Yeah, yeah (laughs). But there is a free lunch, and it's energy efficiency. Because there's a free lunch whenever markets are not functioning well, and the electricity market is very dysfunctional.
Someone once described the way we deal with electricity as "going out to a restaurant every day of the month, getting a menu without any prices, and then getting a bill at the end of the month." The smart grid hopes to actually put prices on that menu, and bill you at the time. So if you think about how you'd eat if that were the case, you'd be much more reasonable about what you order, and you'd still be happy with your meal. In fact, you might be happier, since you wouldn't be surprised by a $1,000 bill at the end of the month.
So you would get as much utility out of your electricity as you were before, but there will be a lower cost, because you'll be choosier. There's the free lunch: spending less on energy because we are using our energy more intelligently.
Crigger: So as an investor, what are some smart ways to approach this "smart grid?"
Konrad: It's hard, since it's a very early sector, but I like the more established technologies, like demand response, or working to make the upstream part of our electricity distribution system more efficient. It's less sexy, but it may be something that may pay well for investors.
Crigger: Should investors examine clean energy stocks differently than they would other energy stocks, or even stocks in general?
Konrad: No, I don't think so. But you do have to remember that it's the most exciting sector out there. So there will be more startups just out to collect investors' money, who will never go anywhere. But that's true in all sectors whenever they get hot.
The other thing to remember is that no stock, no company and no technology is going to save the world. And there are a lot of promises of that. But they can't. Energy is just going to be hard work.