Sustainable Energy After the Correction

I don’t know whether we are close to the bottom but October has reduced the market value of the sustainable energy sector by about one-third.  

Click to enlarge

This is somewhat worse than broader markets and sustainable energy has lost ground against the value of Exxon Mobil (XOM).  To gage the scale of the sustainable energy business I frequently stack up the value of the companies in Camino’s database against Exxon Mobil.  As recently as September 24th at the Clean Energy Showcase in Sacramento I was able to report the 363 sustainable energy companies I track represented 67% of the value of Exxon Mobil.  Today it’s down to 50%.  

For investors in this sector who have suffered significant losses this year, the real question is- is there hope for better-than-market returns in the coming months and years?  Or should you go back to cash or  to indexing exclusively?   I think the answer is maybe. 

In Solar there are competing forces which can send the industry on two different trajectories.   US presidential candidates are saying they prioritize alternative energy very highly.  But they, and politicians around the world, are going to face serious financial pressures driven by market forces.  Will they maintain subsidy policies for solar in the face of large budget deficits and potentially continued sub $100 oil?   Without the subsidies investors may be faced with a sector growing much slower then in the last few years. 

Renewable Electricity doesn’t rely on subsidies to as great an extent .  But it does rely heavily on continued access to monopoly electric markets, access driven by global warming and security concerns.   I think the good news for investors is that governments can continue strong support for Renewable Electricity without having to deal with significant budget problems.  

Today, LED and Lighting is driven almost entirely by market forces.   While the sector needs continued cost reductions to increase its market share, silicon technology has proven it can follow a cost reduction path as volumes increase.   With technological advances I think there is the possibility of better than market returns here, particularly with the huge declines the sector has already recorded this year.  Since we formed the LED and Lighting index on 4/1 it’s down 59.8%. 

Biofuels will continue to present challenges to investors.  The promise, of course, is that Biofuels is one of the strategies available to reduce oil consumption.  But the sector is resource constrained,  needs significant technology advances, has its margins pressured by declines in oil prices, and has had a number of problems with hedging strategies (Vera Sun (VSE) and Biofuel Energy (BIOF)). 

Fuel Cells are still searching for the niches where they can economically compete and start to produce profits.  Investing in public companies that are still in the development stage presents a high level of challenge. 

Two previous oil price shocks spawned alternative energy companies.  Subsequent declines in oil prices pruned the field but did leave behind a viable independent electric producing sector.   This sector has continued to grow, is now armed with dramatically better wind technology, and doesn’t need to impact national budget deficits.    I expect Renewable Electricity companies to survive this correction and continue to expand their share of the electric generation market.  This should, over time, produce better than market returns.    

Disclosure: None

Comments

[bigswing:]

Solar stocks are at deep discount now and will prove to be the best buy at current price...

Solar sector is on a path to grow from 3.9GW of cell/module production in 2007, to more than 7GW in 2008, 14.7GW in 2009 and at least 52GW by 2012. This equates to a 68% CAGR, with significant upside potential for both silicon and thin film production. Although it is expecting a 7% compound annual price decline, the solar sector revenue is poised to expand from $27bn in 2007 to $274bn by 2012. The operating margins to remain above 30% through 2012.

Anyone who buy solar stocks now will be hugely rewarded in a few years.

2008 Oct 12 09:47 PM

[Energy Guy:]

Can you post the specific stocks in the indexes you discuss above? It would be interesting to look for counter trends within these buckets....

2008 Oct 12 10:40 PM

[John Petersen:]

You might want to consider adding energy storage to you list of sustainable energy sectors. While storage doesn't create new energy, it clearly fosters the more efficient use of available energy and makes sources like wind and solar more reliable.

2008 Oct 13 02:45 AM

[gebby:]

no comment on the need to address global warming when doing your analysis. this is not just driven by economics yet you and other analysts always seem to think so. gore said the laws must be changed to adopt clean technologies in a timely fashion in order to avoid the havac of permanant global climate change. how does this impact your outlook?

2008 Oct 13 10:25 AM

[WayneS:]

This may come as a shock, but in the 1980's Exxon said that there was a need to look into global warming and for investment into alternative energies. Unfortuately, oil dropped to $10. No companies could could afford to invest in alternative energy and the politicians backed out of their campaign promises to develop alternative energy and eliminate our dependency on foreign oil. Deja Vu. This same thing will happen right after election day.

2008 Oct 13 11:53 AM

[bigswing:]

solar stocks UP 20% on average today alone...

that is only the begining... it will up another 50% from current price in a month... wait and see

2008 Oct 13 04:19 PM

[rockymtnway:]

I'm fairly heavily weighted in the sector and I'm no long optimistic. The biggest spenders on solar in the last few yearrs have been Germany and Spain; two countries with very serious economic problems right now. I just can't see the governments continuing to put expensive incentive plans on the table in the 2010 budgets.

Also, as the markets have crashed, so has gone the money to buy that new set of panels. The same pool of money that goes toward early retirement goes to invest in lowering my utility bill.

While I was hopeful just a year ago, we are in a completely different landscape and I think you can't go based on current or projected earnings when looking beyond existing contracts for future revenue.

2008 Oct 14 12:21 PM

[PeteK:]

For November 4th Election, California put forth an Energy Initiative called
MEASURE 7 for the voters to decide. If passed, will require government owned utilities to generate 20% of their electricity from renewable energy by
2010, to 40% by 2020 and 50% by 2025.
Chance of passing ? 50/50.
Tell your California friends to vote Yes.
At the same time, tell your State to start the same as California or better.

2008 Oct 15 04:42 PM

[User 285555:]

OK got a question for all solar followers about YINGLI, this stock went down to an all time low of under $4, looks like a good buy but who thinks this Chinese based company could be delisted in the next few months? I know it sounds insane but this is an insane time as we all know. Any comments people?

2008 Oct 25 07:40 AM

[PeteK:]

User 285555, your view is a little bit too much on the gloomy side. As I wrote on the above comment that California is now paying attention to Solar & wind energy by letting people vote on it. If more States do the same then Solar companies will get a lift from it. California uses more oil than any other State, it will be wise to promote Solar or Wind energy in case oil prices go crazy again. The governor is supporting this issue all he can. See what happens on Nov. 4th. Just hold onto your YGE shares.

2008 Oct 26 06:51 AM

[User 285555:]

Thanks for the reply, yeah it was a gloomy one, but this situation is just beyond anything. it is just getting close to the mental $1 mark! Well nothing to do but wait and enjoy the excitement. What you think for November and December?

2008 Oct 26 11:48 AM

[tiredofwelfare:]

do your financial scenarios include the value of the ethanol subsidy
cost to consumers? ethanol breaks even exchanging btu savings; i.e.
number of btu's to produce ethanol is equal to the btu's of fossil fuel
saved....at a cost of $.54 per finished gallon to American taxpayers
(E85 in Sioux Falls should be $1.32 ($1.88 per gal. less $.54) is this
yet another form of welfare to be people that actually have equity
holdings and value in the form of land, etc.

2008 Oct 27 02:37 PM

[Stockguy456:]

great time to buy!!!!

2008 Oct 27 05:00 PM

[PeteK:]

User 285555: Take a look at Yingli's ownership, major holders section.
YGE is 76% owned by Institutional & Mutual Fund owners,
and 5% owned by insiders. That will tell you something.
The most important factor now is the US Presidential Election. The outcome will affect the stock market in a different way.
2nd factor will be oil price. Cheap oil is not good for Solar ideas. I am getting more YGE shares at this price.

2008 Oct 28 06:34 AM

[James Wilson:]

I own YGE stock and I import their solar panels. Great Company to do business with fast service ever shipping by boat for large container loads.

They go out of their way to meet all my needs to supply my customers a cheaper way to heat and cool their homes.

I buy all YGE the stock I can afford.

2008 Oct 31 07:01 PM

[PeteK:]

Hi James,
During summer months we have pretty high electric bills. What would you recommand so that we can cut down about 30% of the monthly bill ? Is it cost effective now ?

2008 Nov 01 02:06 AM