RE: [hreg] Re: alternative energy--next bubble?
Incidentally, Zack’s just featured the solar industry in their online newsletter:
Solar Firms Up With the Sun
by Jonathan Kolb
Jun 13, 2008
Zacks senior alternative energy analyst Jon Kolb was on hand recently to give us his views on where the biggest strength is at the present time. He was also kind enough to give us three Buy recommendations within the space.
What is your view on the overall alternative energy sector at the present time?
The investment outlook for the alternative energy industry is bullish, in our view, with significant growth potential over the next 5-10 years. As with any burgeoning industry segment, there will likely continue to be rapid changes within individual names as new technologies continue to evolve, although the longer-term trend is favorable for diversified long-term investors.
Those investors seeking to capitalize on the ongoing efforts to reduce both domestic and global dependence upon the dominant oil and natural gas producing regions of the globe may wish to focus on emerging and established firms engaged in wind power, solar/photovoltaic, solar thermal, geo-thermal, hydro, marine and biomass-based energy sources. Dozens of such companies exist within the U.S. and many more internationally, ranging from micro-cap ventures to large-cap multinationals.
There is one caveat, however. Individual names will likely continue to experience high volatility in securities prices although a well-diversified portfolio of alternative energy names would be well positioned to profit from rapid growth in the sector.
Let’s start with one such name you recommend.
We remain optimistic about Energy Conversion Devices’ (ENER) long-term potential success, given increased activity in solar power projects. The company also achieved profitability in the reported quarter for the first time since it went public in 1969.
The company’s operating segment, United Solar Ovonics, has a total annual production capacity of 118MW (megawatts). Ongoing expansion plans will increase United Solar’s manufacturing capacity to 178MW by the first half of 2009 and to over 300MW per annum by the end of fiscal 2010. United Solar signed an 18-month agreement with EDF Energies Nouvelles (EDF EN) in September 2007, to supply up to 30MW of thin-film PV laminates for large-scale installations on industrial and commercial buildings.
United Solar’s laminates will be installed on the roof of the General Motors (GM) facility at Fontana in California. United Solar Ovonic also signed a three-year distributor agreement with Advanced Green Technologies, Inc. for $108 million of Photovoltaic (PV) products.
Any caveats regarding a stock like ENER?
The company is developing and expanding its solar business while exiting other non-core businesses. We note the stock’s high volatility, pending sale of its Cobasys joint venture, and higher preproduction costs. Additionally, despite increasing product revenue, the internal restructuring processes and several recently announced contracts, we question the profitability potential of licensing royalties.
A history of negative profit margins, operating income and negative historical earnings, including EPS losses until Q2 08, without meaningful valuation metrics, collectively show potential for moderate-to-high returns yet with high risk. Accordingly, we maintain a speculative BUY recommendation on ENER common stock with a six-month target price of $74.00, representing 13.2% upside potential.
What is another company you see benefiting in this space?
The fortunes of SunPower (SPWR) appear greener given the very high growth potential in the alternative energy industry, and specifically solar power energy, with apparently greater certainty of polysilicon supply through SunPower s new 5-year supply agreement with Jiawei SolarChina. In addition, a new solar cell manufacturing facility in the Philippines and the company s expansion into the Italian market with the acquisition of Solar Solutions adds visibility to the story.
New cheaper polysilicon supply contracts and thinner wafers are improving the solar cell and panel production overheads. We have a BUY recommendation on SPWR common stock with a six-month target price of $106.75. Price appreciation to our near-term target price represents 34.6% upside potential.
What are some of the main advantages of solar power, in your view?
Compared to other renewable energy technologies, solar power is one of the most benign electric generation resources. Solar cells generate electricity without air or water emissions, noise, vibration, habitat impact or waste generation.
Unlike fossil and nuclear fuels, solar energy has no risk of fuel price volatility or delivery risk. Although there is variability in the amount and timing of sunlight over the day, season and year, a properly sized and configured system can be designed to be highly reliable while providing a long-term, fixed price electric supply.
Also, unlike other renewable resources such as hydroelectric and wind power, solar power is generally located at a customer site due to the universal availability of sunlight. As a result, solar power limits the expense of, and energy losses associated with, transmission and distribution from large-scale electric plants to the end users. For most residential consumers seeking an environmentally friendly power alternative, solar power is the only viable choice because it can be located in urban and suburban environments.
Any other big stories out there among solar energy or other alt-energy companies?
VeraSun Energy (VSE) is on the fast track of growth with its recent merger with fellow biofuel company U.S. BioEnergy. Earnings rose in the reported 1st quarter due to higher ethanol volumes and prices, partially offset by surging corn prices. Post-merger, the company is expected to become the largest bio-fuel company in the world.
However, the cyclicality of the ethanol industry and rising prices of corn and natural gas, remain a concern. Nevertheless, recent bullishness on the energy bill for ethanol production, rising crude oil prices, ongoing capacity expansion plans and value unlocking through synergies from the recent merger with USBE should maintain the momentum of growth over the near-term. We also have a BUY recommendation on VeraSun, with a six-month target price of $7.50, representing 27.1% upside potential.
Jon Kolb is a senior analyst covering the alternative energy industry for Zacks Equity Research.
The discussion on RE and whether the industry in general is in an investment bubble reminded me of an article I read a few weeks ago. I found the article interesting and thought some of you may as well.
There will be winners and losers in the renewable energy field. I first became involved with renewable energy back in the mid seventies when we worked on a pyrolysis project with Union Carbide. The purpose of the demonstration project was to be able to take organic wastes and produce methane, and by products, as an alternative to traditional fossil fuels. The facility failed both economically and technically. My next projects were in the mid 80’s in trying to convert organic wastes into usable products, including fuels through other pyrolysis projects and aerobic composting projects. The last failure was a MRF/Composting facility in Maryland that worked technically and failed financially. All of the above projects involved some form of government money – subsidies, grants, tax credits, public funds. When the rubber had to meet the road no politician would continue to fund the projects. All the projects finance involved public funds and all failed.
There will be a real shake out in renewable energy and in my humble opinion the sooner the better. Today it is possible to build economically sound renewable energy projects and those that can compete will succeed. Those that are based on subsidies, public grants, special laws, etc. will eventually fail. A landfill not far from my home in Kingwood currently has 10 MW of power generation capacity that is sold during peak hours. And yes, there are subsidies, while with the price of energy at its current levels it can survive without subsidies.
Subsidies produce false markets, processes, and long term business failures. There is a difference between subsidies and new processes that are more energy efficient. During my career I have been involved in DOE and EPA projects where we received matching grants up to 50% of the project cost. Grants where the company has “skin” in the game can be very effective. Subsidies, regulations, and laws that try to manipulate the market will fail - free market or central government. Yes there will be a bubble that will burst in the renewable energy market.
H.W. Bud Johnson
Remedial Operations Group, Inc.
15010 FM 2100, #200
Crosby, TX 77532
Environmental Sampling - Drilling, MIP Site Assessments, Monitoring Wells, P&A, Soil Borings, Air, Water, Groundwater, Soil, Storm Water, Estuaries, Ponds, Sludge, Tanks, Containers, etc.
Specialized Technologies - Geo-Cleanse > 10’ ISCO; CBA Environmental 0-12’ ISCO, Thermal, Soil Blending; McMillan -McGee - In-Situ Thermal; Dry Dredge - Environmental Dredging; Bioremedial Technologies - In-Situ Enhanced Bioremediation; CET- Spill Buster NAPL Recovery System
Construction, Operation & Maintenance - PMC2 Program, Water Treatment, Wastewater Treatment, Groundwater, Soil Remediation
From: firstname.lastname@example.org [mailto:email@example.com] On Behalf Of Robert Johnston
Sent: Wednesday, May 28, 2008 6:43 PM
Subject: RE: [hreg] Re: alternative energy--next bubble?
From what I read, bubbles have more to do with excess liquidity. When there is too much money chasing too few investments, the balloon bulges out where the money is thrown, until it pops, then the money flows somewhere else for another bubble, until it pops, etc. Or until the money supply (liquidity) dries up, whichever happens first. Alan Greenspan lowered interest rates dramatically and flooded the markets with money. Asian countries (China, etc.) and oil producers had lots of our money that they had to put somewhere, so that also flooded into the markets. That helped create the real estate bubble that is now collapsing. But so long as interest rates remain low and liquidity remains high, investors will continue to search for “the next big thing” to put their money in, and bid the price of those stocks up well beyond what the companies are worth. It has little to do with intrinsic worth or the contributions of the company to society and more to what the investor psychology is and where they are running to put their money (or in most cases, not “their” money, but the money they manage—in pension funds, mutual funds, etc.). It seems reasonable to me that alternative energy (regardless of type) companies could be overbid.
Nice article, BTW, but it is addressing societal value/costs, not how a company is valued by investors. Just like with biotech a couple decades ago, or .com’s a decade ago, there is little question that the industry will survive—and even thrive if your arguments are correct (I’m not sure nuclear, coal, etc. won’t delay that day for quite a while yet). However, that doesn’t mean a lot (probably majority) of alt-energy companies won’t go bankrupt and investors lose their shirts.
As an aside, one of the more interesting books I’ve read on investing was Jeremy Siegel’s “The Future for Investors”. He shows that over the long haul, the best performing stocks were not technology, but companies like Phillip Morris and the oil companies. Alt-energy seems to me to be a technology play. It will be governed by Moore’s Law or some variation thereof. Technology stocks have a poor record over the long haul, as Siegel shows.
This is an interesting idea about a bubble coming and popping for Renewable energy. The formation and popping of bubbles seem to me to have something in common. That is that the bubble is formed by people, companies, goverment, whoever trying to gain profits without adding any real value. This is where I think renewable energy is different from these other industries. I believe that renewable energy installations actually create more value than we are currently assigning to them and that will help keep the industry from popping. Here is the introduction to an article that I wrote recently following a presentation and discussion that I gave for a Professional Development seminar with Engineers Without Borders. Please click on the link below if you are interested to read the whole article.
PhD Chemical Engineer
Progen Energy, LLC
Written by Phillip Hamilton
Tuesday, 06 May 2008
The traditional cost-plus pricing structure used to evaluate energy resources does not adequately capture the real value of renewable energy. Many of the negative implications of conventional energy sources are externalized and there by not seen directly by the consumer as a cost. In the same way many of the benefits of renewable energy are externalized and often not understood or considered by consumers. A shift in the way society thinks about energy is required to fully understand these values. Rather than viewing energy as a commodity we need to understand that energy is a product with far reaching effects on society. Long time critics of renewable energy often focus completely on the costs without fully exploring its total value, while renewable energy advocates preach about the benefits of renewable energy without fully acknowledging its costs. The goal of this website is to have a real dialogue between both camps in order for everyone participating to increase their understanding.
Some of the values that are supplied by renewable energy which are not normally considered are:
- Risk Management
- Benefits of Emissions Reduction
- Policy Incentives
- Reduced Resource Use
- Social Responsibility
- Societal Economic Benefits
- National Security
To Read the whole article click: www.alternateenergycentral.com
From: Robert Johnston <junk1@...>
Sent: Mon, 26 May 2008 10:14 pm
Subject: RE: [hreg] Re: alternative energy--next bubble?
Interesting point. I doubt the author included that in his hypothesis. On the other hand, though, oil, gas, metals, etc. are also needed by society, and yet can and have undergone bubbles (and many are believing they are again). I’m no prophet; time will tell…
In the comparison of investments in renewables to investment in the dot.com's there are some major differences. The existance of dot.coms were not really needed in our society, just a convenient change. Harvesting renewable energy is essential to the survival of the human species, and if we don't grow the industry, we will be thrown back to the pre-industrial age as our supply of fossil fuel declines. I don't think the author of the "bubble" article included that in his hypothesis.
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Since we’ve been on the topic of renewable and investment, HREG members may find the following interesting. It sounds like lack of congressional action may have a significant impact on renewables.
The Daily Reckoning PRESENTS: There is no geothermal fairy waving a magic wand and ZAP, you have electrons in the grid. From exploration to drilling to development to spinning turbines, you have to know what you are doing in the geothermal field. Byron King explains...
“WE NEED TO TALK”
by Byron King
There is a looming problem for the renewable energy business. It affects the geothermal producers. As the expression goes, “We need to talk.”
I have argued over and over that in an energy-short future, geothermal power will play a key role in meeting power needs. Geothermal systems are well-known technology, at least to people who follow the technology. And some geothermal fields have been making power for many decades. So there’s a real track record for geothermal, unlike for many other alleged technological “solutions” to the energy problems of our time.
Geothermal offers some unique benefits. It is “clean,” emitting essentially no carbon dioxide (CO2). Plus, geothermal comes with its own fuel supply, namely the heat of the Earth. That is, once you drill the wells, you don’t have to buy coal or oil or natural gas over the decades of operation. In essence, when you set up a geothermal power system, you are “buying” not just the installation, but also the fuel upfront.
Keep that last point in mind. Geothermal has higher upfront capital costs. But it has far lower operational costs over the life of the project. It’s like buying a car and never having to buy any more gasoline.
So geothermal works. But like most good things in life, it requires a specific skill set up and down the industrial ladder.
And there is no geothermal fairy waving a magic wand and ZAP, you have electrons in the grid. From exploration to drilling to development to spinning turbines, you have to know what you are doing in the geothermal field. This includes accounting for the costs of operation and production.
OK, here is the issue. Under current U.S. tax law, a power producer gets an income tax credit (called a “production tax credit,” or PTC) for producing electricity using renewable energy resources. This includes geothermal, as well as wind, biomass, low-head hydropower, landfill gas and even trash combustion.
The PTC is a key part of the economics of geothermal. The prospect of the eventual PTC helps get projects funded and developed. The PTC helps overcome the higher upfront capital costs to drill into the Earth’s hot spots.
So the PTC offers some serious incentive for geothermal development. A taxpayer can claim the PTC for 10 years, beginning on the date the qualified facility is placed in service. But under current tax law, in order to qualify for the credit, the geothermal facilities must be placed in service by Dec. 31, 2008.
In the past, Congress has set the PTC to last for two years, and has renewed it periodically. When Congress has not renewed the PRC, investment in renewable energy systems has crashed the next year. See how in this graph (Page 19 of 29).
Do you see the pattern? Boom-crash. Boom-crash. Boom-crash. Then Congress extended the PTC in 2006, so the installed base of power systems began to take off in the past couple years. Renewable power is gaining traction.
But for some strange reason, Congress has not extended the PTC beyond Dec. 31 of this year. So starting Jan. 1, 2009, the tax incentive for renewable energy in the U.S. will expire and go away. Poof. Gone. Adios.
Really, can you imagine anything more stupid than eliminating the PTC in the midst of the current round of skyrocketing energy costs? Oil hit $135 per barrel a couple weeks ago. Natural gas is in the midst of a stealth rally to over $12 per mcf. Coal is so expensive some producers are signing “open contracts,” meaning they promise to deliver, but won’t tell you the price until you take the coal in a couple years.
And while fossil fuel costs are shooting up, Congress, apparently, wants to put at risk any new investment in renewable energy systems after the end of this year.
Whoever is the next U.S. president – of either political party – do you want him immediately to confront a crash in investment in renewable power systems? What a way to tie the hands of the next president as he tackles the nation’s energy problems.
The good news is that the Senate has passed a bill called S. 2821, the bipartisan Cantwell-Ensign Clean Energy Tax Stimulus Act of 2008. S. 2821 has 43 co-sponsors. It provides for the limited continuation of the PTC for renewable energy. The Senate vote was 88-8 in favor.
There is a companion bill in the House, called H.R. 5984, with 70 co-sponsors. There is another version of this bill called H.R. 197, the “Pomeroy bill.” But both versions are being blocked by the “pay-as-you-go” (PAYGO) rule that prevents “tax cuts” without corresponding tax increases.
But wait a minute. Extending the PTC is not a “tax cut.” The PTC is already in effect. So extending it will just be continuing the status quo.
And does the government really think it will raise more revenue if the PTC goes away? C’mon. It’s more like how much revenue will the government LOSE if investment in renewable energy systems takes its characteristic plunge when the PTC goes away. How many jobs will go away? How much progress will we just toss?
The logic of PAYGO governance at work in Washington, D.C., has Congress believing that extending the PTC to promote renewable energy development – in the midst of soaring costs for fossil fuels – is something that the U.S. cannot afford to do. Actually, we cannot afford NOT to develop renewable energy systems.
This makes so little sense that we could all have a good chuckle if it were not such a serious issue of national energy policy. What does it take for Congress to figure this out? Do the lights really have to flicker and die before the issue gets some attention?
So I’m asking you to contact your member of Congress and confront him or her with this issue. The future of the renewable energy industry in the U.S. depends on this.
Action to take: Contact your representative and urge him or her to support H.R. 5984 or the alternative H.R. 197, called the “Pomeroy bill.”
Here is a link to find the contact information for your member of Congress.
Shoot me an e-mail (OI@... ) to let me know what you hear. Thanks for your help on this one.
You’ll be helping yourself, and helping the country,
Byron W. King
for The Daily Reckoning
Editor’s Note: Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also co-editor of Outstanding Investments , and editor of Energy & Scarcity Investor .