Alternative Energy for Investors: High Volatility, Great Promise

click to enlarge image

Looking at the alternative energy market, the industry's growth rate is between 20% and 30%. Every day you can read about a new technology, a new type of solar cell or a new way to produce electricity from sea waves. This sector is promising. On one hand, after the US Presidential elections, we could see an impulse to renewable energy sources initiatives. Political incentives could influence the industry. On the other hand, growing energy demand will continue in the next years. The oil industry will invest more to increase output, but it will take time.

However, many make assumptions about a peak oil and the fact that increased production, even if possible, would never manage to meet increasing demand. In this context, we have to expect an energy supply crisis in the coming years. Some say it has already started. And renewable sources of energy could help limit the consumption of fossil fuels. Should oil prices remain high or even rise more, renewable energy would become more competitive.

This industry is attractive to investors with an appetite for risk. In the medium term, returns are promising, but volatility is quite high. After the initial phase, when many new companies enter the market, a process of selection begin and only the strongest survive. Since January, renewable-energy companies have been very weak compared to the performance of companies involved in the oil industry.

In fact, as an example, the PowerShares WilderHill Clean Energy Portfolio (PBW) in the figure, has lost about 35% from its high of December 2007. I cannot explain the reason for this poor performance. I would have expected the opposite, actually. One reason could be that, as the economic climate becomes difficult, investments in new technologies could decrease. Most of these companies are still losing money and many could not manage to continue operations. However, I do believe that the sector is quite interesting

Disclosure: none

Comments

[cjwirth:]

Paolo Pettuzzti makes important points about alternative energies: they don't yield much energy and they are costly in a time of shrinking captal. I have examined all of the prospective alternative energies in a free 48 page updated downloadable report that can be copied, website posted, and emailed to anyone: www.peakoilassociates....

2008 Jul 06 09:22 AM

[fireball:]

cjwirth, thank you. that is helpful in a practical way.

2008 Jul 06 12:53 PM

[Alex Filonov:]

Article should be named "High costs and no promise". There is no altenergy which is profitable in the next 30 years, without government subsidies. It's a death sentence to any investments. cjwirth, thanks for the article, it confirms my view.

2008 Jul 06 05:31 PM

[paolo pezzutti:]

Actually it is quite true that without government subsidies it is quite difficult even at this price of oil to find competitive renewable sources. The problem is that you need to develop the technology before the demand of energy cannot be met by enough supply.

2008 Jul 06 05:52 PM

[Robert Sczech:]

To say that renewable energy is expensive in comparison to conventional fossil fuel energy sources, is equivalent to saying that oil is still cheap. What are you going to say when oil gets really expensive, say $500 per barrel or, even worse, oil is not available at any price? Are we going to sit in our houses in the dark and freeze simply because renewable energy was more expensive than fossil energy?

In my opinion, we should invest into renewable energy as long as the energy produced is much higher than the energy needed to produce this alternative energy infrastructure.

2008 Jul 06 09:41 PM

[dawdler:]

In such a nascent and volatile market I wonder if ETF's or funds will really be an effective way to capture the opportunity in the sector. Wouldn't the outsized returns of a few stars be completely killed by the failure of hundreds of start-ups?

Also, I agree with the thought that the industry probably won't really see great returns until they get gov't subsidies or some radical innovations occur. But the way things are going, our government may HAVE to subsidize these sources of energy production.

2008 Jul 07 12:31 AM

[bzh1111:]

Alternative Energy and Subsidies / Most of the subsidies do not fall into the companies's pockets but help new technologies to emerge and deal with the peak oil. It is absolutely wrong to say that without subsidies Alternative Energy is not profitable. As an example, Wind Power (onshore) is now less expensive than conventional electricity (EUR60/MWh vs EUR70/Mwh in Europe). In the US the PTC provides 1.5c/kWh credit for Wind, Solar Geothermal and closed loop bionergy facilities) but the US market is miles away from countries like Germany in terms of "Green Electricity" generation. Summary: Subsidies are good and help driving the market, companies are profitable...look at the numbers and do not listen your buddy at the bar.

2008 Jul 07 04:23 AM

[Alex Filonov:]

Main altenergy research started in 1970s, not now. Governments in US and Europe already paid trillions of dollars in subsidies. We still, after 30+ years, don't have any profitable technologies. Wind is only profitable with subsidies, zero price of land to install towers and no tax (another subsidy). By the way, altenergy, when renewable, is not green, by any means. And efficiency of many projects can't be increased because of plain physics (solar panels is a good example, geothermal is another).
Big problem with subsidies: they will be cut. Sooner or later. You can't support more than 10% of energy production with subsidies, country will go bust. Altenergy is a good engine for speculation, but no good at all for long term investment.
More on that in coming article in my blog.

2008 Jul 07 01:19 PM

[Stockguy456:]

I downloaded the article cited by cjwirth above. Very informative. Thanks

2008 Jul 08 05:27 PM