It has been a decidedly mixed year for the performance of solar, wind and most clean tech equities. The clean tech market requires huge amounts of capital and venture investors have been willing to pony up tens of billions of dollars in the funding of clean tech over the past decade. Such funding is starting to dwindle according to Ernst & Young's latest analysis, which shows investment in clean tech plummeting 44% to $1.1 billion in the second quarter compared to the same period last year. We just have not seen that huge “Netscape” moment (Netscape’s IPO is largely credited with kicking off the internet boom), that ushers in that concoction of confidence and greed necessary to truly give the industry momentum.
That billion dollar moment that venture capitalist Vinod Khosla (Khosla Ventures has been instrumental in many early stage "clean tech" firms) has alluded to as a necessary prerequisite hasn’t happened, but it doesn’t mean that it won’t. The factors necessary for a boom in clean energy remain intact: high oil prices, sustained evidence for global warming, and governments and a consumer class that are awakening to the true costs of a carbon-based energy policy. Those who envisioned the road to a clean energy future were perhaps deluding themselves that the road would be any less bumpy. But the reduction in values in companies in the renewable energy space shows that some have all but given up on the promise. Let’s look at the mixed results in performance of the leaders in solar, wind and the electric vehicle and battery marketplace:
|Company||Industry||Market Cap||YTD % Performance|
|Sunpower (SPWRA)||Solar||$1.4 Billion||28.37|
|FirstSolar (FSLR)||Solar||$8.08 Billion||(30.56)|
|Suntech Power (STP)||Solar||$934 Million||(33.63)|
|Vestas (OTCPK:VWDRY)||Wind||$3.95 Billion||(51.57)|
|Tesla Motors (TSLA)||Electric Vehicle||$2.38 Billion||9.04|
|A123 (AONE)||EV Batteries||$502 Million||(42.21)|
For the solar industry, deployments for commercial and consumer are on a tear as price drops in solar panels are serving to offset a reduction in subsidies in the developed world. But how do you justify a company that produces a product for more than it sells for? You can’t. Still, a transformative shift is underway in this market that should support the industry in future years: a combination of more efficient panels and price drops for solar panels are starting to approach “grid parity” - the point at which production costs approach conventionally derived energy. Should solar energy production approach grid parity, solar would become ubiquitous in the right geographies and cost savings derived from economies of scale will likely render the industry very profitable, for those solar companies that have the best technology.
It is the value added producers with the most efficiencies and best technology that will be most rewarded and those that fail to make the transition will probably fail. Be careful about throwing away the baby with the bathwater. US firms Sunpower and First Solar have been most adept at staying ahead of the value curve, through advanced technology that renders them the most efficient producers in their segments (Sunpower is a leader in photovoltaic panels and First Solar is a leader in “thin film” semiconductor technology). The Chinese solar manufacturers (Suntech Power & Trina Solar (TSL) among others) are substantially discounted because they are viewed as producing a commodity with much lower margins.
The case for wind power may become a tougher sell as policy risk heightens due to large deficits in the developed world. The feed-in tariffs that support wind power are essential government subsidies that may become a line item in debates to reduce deficits. Factor this with the broad adoption of cheaper natural gas derived power and the case for wind power becomes weaker yet. The market seems to be recognizing these challenges but may be missing the forest for the trees. HSBC reports that as of 2011 the combined order backlog for manufactures Vestas, Gamesa (OTCPK:GCTAF), Suzlon and Repower (OTC:RPWSF) has essentially doubled.
This guarantees a revenue stream for the foreseeable future and should serve to support widely discounted share prices in a market that seems to be missing the fact that structural long term demand for wind remains intact. It is the developing world that is likely to pick up the slack as their quickly growing economies, budget surpluses and growing industrial base will support a premium for clean energy. This goes for most forms of renewable energy, of course.
The Electric Vehicle (EV) market
While Solar and Wind take are the two industries at the core of renewable energy, there are advancements being made in the Electric vehicle market that should have a huge bearing on the adoption of renewable energy. The implications of a successful and growing EV marketplace are huge. Imagine the benefits to a society that is increasingly propelled by non-carbon emitting vehicles that require little or no carbon fuels. Billions have been invested by the likes of Nissan (NSNAY.PK), Ford (F), GM (GM) and Toyota (TM) to produce new lines of automobiles. The Nissan Leaf, GM's Chevy Volt and Toyota Prius are signature names in this movement and the impact on share prices for these respective companies is negligible in the short term as they have huge and dominant franchises in the traditional auto and truck segments.
Longer term these investments will bear fruit for the large automakers as consumers and policy makers are eager to reduce emissions and demand for fossil fuels. For pure play providers and manufacturers like Tesla Motors, Fisker Automotive and battery makers A123, the stakes are very high. While Tesla has generally retained value its post IPO value, shares of batter maker A123 have been hammered. I expect a strong rebound in both issues as the technology becomes deployed at scale. This will serve to drive down costs and increase profits.
Disclosure: I am long STP, AONE.