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Alternative Energy Forecast: Why Investors Will Finally Start to Profit in 2011

Companies / Renewable Energy Dec 20, 2010 - 06:06 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleLarry D. Spears writes: For a long while now, we've heard a lot of talk about the potential for alternative-energy technology.

Investors take note: In 2011, that potential will start to be realized. And those who want to benefit from this emerging sector's projected long-term growth would do well to climb aboard.

The Ins-and-Outs of Alternative Energy
Why the change? For one thing, a number of energy mandates and incentive programs are maturing at the state and regional level. And new ones are also coming online.

And still others, like the federal renewable power initiative authorized in 2009 as part of President Obama's $787 billion stimulus package, are just beginning to have a major impact on energy development and utilization.

An example in the first category is the 2005 mandate by the California Energy Commission (CEC) that utilities in the Golden State get 20% of their power from renewable sources by the end of this year. Most utilities won't quite hit that target.

There are no penalties for missing the 2010 target, so long as the shortfall is made up in the coming year. That means California utilities will continue to ramp up alternative output in 2011, most likely lifting the renewable portion of production to 21% or 22%. That will keep power companies on pace to meet an even newer mandate - issued by Gov. Arnold Schwarzenegger on Nov. 17, 2008 - requiring that 33% of electricity sold in California come from renewable sources by 2020.

Similar programs and objectives have been established in other states - Texas, New Mexico, Nevada, Florida and Massachusetts, to name just a few - as well as many other countries in Europe and Asia, including Germany, Spain and, most notably, China. Brazil also has one of the world's largest renewable energy programs, focusing heavily on the production of ethanol fuel from sugar cane.

In case you're not entirely familiar with the subject, renewable or alternative energy (AE) is power that comes from sources that can be naturally replenished. At the end of 2008, the Renewable Energy Policy Network for the 21st Century (REN21) estimated that 19% of worldwide energy came from renewable sources, though usage in the United States was pegged at just 8% (based on figures provided by the U.S. Energy Information Administration).

AE is generally broken down into five categories:

•Biomass: This is energy obtained from biological materials such as wood, waste, hydrogen gas and alcohol fuels. It is primarily used in heating and accounts for about 13% of current global energy use (though the total is only 4% in the United States).
•Hydroelectric power: This is electricity generated by water, typically from dams, river sluices (kinetic energy generators), and more recently tides and waves. At the end of 2009, water power produced about 3.2% of the world's energy supply (2.8% of U.S. usage).
•Wind generation: This is the fastest-growing form of renewable energy generation, with production increasing by 30% annually over the past five years. However, wind still accounts for just 1.3% of global energy (0.72% in the United States). Giant windmills capable of producing between 1.5 and 5.0 megawatts of electricity (a megawatt will power about 750 homes at any given time) and commercially bunched in so-called "wind farms," now dot large areas of Texas, California, Germany, Western China and ocean areas off the coast of the United States and Europe. At the end of 2008, operational wind turbines were capable of producing 158 gigawatts of power globally, with that number expected to triple by the end of 2012.
•Solar energy: The production of power from sunlight is also growing rapidly, largely thanks to new "solar thermal" technology, which uses sunlight to heat water or air that then drives generators. This differs from photovoltaic (PV) power production, which uses light-sensitive panels to convert sunlight directly into electricity. The U.S. and Spain currently dominate solar thermal production. Photovoltaics are used around the globe (producing 21 gigawatts at the end of 2009), with Germany and Spain hosting the most facilities. That could soon change, however, as California has approved two new plants in the past three months and the world's largest PV solar farm came online in southern Nevada in November. California has approved seven new solar power plants capable of producing 2,979 megawatts so far in 2010.
•Geothermal: The smallest of the AE sources, production of geothermal energy is limited to areas where the earth's heat can be converted to power generators. The Geysers project in California is the world's largest producer with a capacity of 750 megawatts.

Change is in the Air
When combined, wind, solar and geothermal production right now supplies just 2.7% of global energy demand (1.2% in the United States), but that number is expected to increase dramatically in the coming decade. One example: California has applications in the pipeline for more than 100 wind and PV projects capable of producing 6,434 megawatts of power - and those are just the ones seeking state approval and federal financing. (The 2009 economic stimulus package authorized roughly $26.6 billion in grants and tax credits for the expansion of renewable-energy efforts in the U.S. market.)

Many smaller, privately financed AE projects around the country are being handled at the county level, with local governments providing property tax incentives, economic development grants and, in some cases, even land to attract utilities and firms that construct and service AE facilities.

For example, Expansion Solutions Magazine recently named the rural Texas Panhandle city of Dumas (population 16,000 and one of just two communities in 900-square-mile Moore County) one of the Top Five towns in the country for "recruitment and development in the wind-energy industry."

The award recognized the fact that local efforts have lured more than 80 wind turbines, sited in 11 different wind farms, to the county, with more on the way. Developers include John Deere & Co. (NYSE: DE) and Valero Energy Corp. (NYSE: VLO), with most of the energy being used locally (to power refinery operations) or sold through Xcel Energy Corp. (NYSE: XEL).

Although it surrendered some tax revenue and provided some funding and regulatory assistance, the city and county will come out well ahead in the long run. For one thing, the tax breaks usually last just five to eight years, after which revenues start coming in again. Construction of each wind farm also provides an estimated 80 to 100 temporary jobs, while ongoing operational and service requirements provide 18 to 20 permanent positions. The local community college in Dumas also added a wind-energy training program to ensure an adequate supply of knowledgeable personnel to fill the jobs.

There's also a benefit for local landowners when land for the farms is leased. Although specific figures are hard to come by because each lease is negotiated individually, one local farmer whose property hosts 16 Deere wind turbines confided that he received $55 a month for each windmill - which, he said, "is a lot easier and more profitable than raising wheat." Plus, he can still use the land as the typical wind farm takes only three to five acres out of production, mostly for service roads and power lines.

Solar facilities typically require more land, but provide similar benefits. E.I. du Pont de Nemours & Co. (DuPont) (NYSE: DD) is building a $175 million solar-materials plant in Ohio that will employ 70 people, The New York Times recently reported. Ohio now has 1,500 solar-related jobs. Solar-related activities had produced even more jobs in Michigan, with the industry there now worth $4.1 billion a year - and those two states don't even get that much sunshine.

U.S spending on solar projects will likely double every year between now and 2015, according to a separate story from Bloomberg New Energy Finance. And Forbes recently reported that solar power development has become a major focus of national energy policy in India, representative of increasing potential demand around the globe.

Of course, developing new AE projects is not without obstacles.

Wind Resistance
Although most states and local government entities are eager for new developments, the approval process can be arduous, and there are often problems with overlapping jurisdictions and regulations.

In California and the rest of the Southwest, developers often have to deal with the U.S. Bureau of Land Management (BLM) as well as state and federal energy officials. The same applies to some wind-energy sites.

The Environmental Protection Agency (EPA) can also create some roadblocks. Tandy McMannes, vice president of business development for Abengoa Solar Inc., told the San Francisco Chronicle that his company's solar plant in San Bernardino County had to meet more than 200 specific environmental conditions to gain approval.

"We're a solar plant, and we have 67 conditions for air quality," McMannes said. And the "process is expensive, and the conditions of certification are onerous."

Expensive tests are also required before a new solar or wind project can even be considered to ensure the proposed sites have ample average wind speeds or get enough annual sunshine. In addition, since many of the best wind and solar sites are in remote locations, developers have to have advance deals in place for power transmission and distribution - a situation complicated by the fact that the end-purchaser of the power frequently doesn't control the transmission lines or power grid in the project area.

The push to meet mandates for AE use could also create both demand and pricing problems. In some of the areas best suited for wind and solar production, current and proposed projects are capable of producing far more electricity than the utilities in the area need or can use, meaning it will have to be resold and transmitted through already loaded power lines.

Even though that represents excess supply over demand, sharp hikes in prices are possible - a projected jump of 16.7% in California by 2020 - because the government mandates will force utilities to buy from renewable energy producers even when cheaper power is available from traditional sources.

One final note: The potential for gains in the AE sectors in 2011 may be more likely to come from mergers and buyouts than operations. The U.S. is the global leader in energy and power industry mergers and acquisitions (M&A), according to the Thomson Reuters Investment Banking Scorecard. Through mid-November, the industry had seen 642 deals worth $418.2 billion in M&A activity, up 50% from the same time in 2009. Oil giant Chevron Corp. (NYSE: CVX) had been particularly active, using buyouts to achieve quick expansion into the clean-energy market.

Still, the growth prospects for alternative energy companies in 2011 could power up some major stock profits.

Actions to Take: Alternative energy has been a hot term for several years. But there's not been a lot of action.

Expect that to change in 2011. Numerous mandates and incentive programs at the state and regional level are maturing, with new ones quickly coming online. Federal catalysts will be key, too - including a renewable-power initiative authorized as part of the Obama administration's $787 billion stimulus package.

Here are 10 potential beneficiaries:

•Vestas Wind ADR (Pink Sheets: VWDRY), recent price $10.75: Domestic pure plays in the wind sector are rare, but Denmark-based Vestas is the current leader in wind-turbine production, holding 23% of the global market share. In 2007 alone, Vestas produced enough turbines to power nearly 5 million homes, and has made deliveries of turbines rated at 4.5 gigawatts to nearly 30 countries. The stock recently bounced from a yearly low near $9.00 a share, but is still well below its January 2010 high of $21.92.
•Datang International Power Generation ADR (PINK: DIPGY), recent price $7.30 - China's newly established National Energy Commission (NEC) has formed a new development plan for clean energy, and plans to make $738 billion in direct investments in wind, solar, biodiesel and nuclear energy from 2011 to 2020. The goal is to reduce fossil-fuel consumption by 15% in the same period. Datang will be a major beneficiary as the government looks to finance switching the company's largely coal-fired existing plants to cleaner fuel alternatives.
•American Superconductor Corp. (Nasdaq: AMSC), recent price $29.01 - AMSC isn't involved in the direct generation of renewable energy, but it makes the equipment and develops the technologies for every aspect of the electrical power infrastructure, from power-grid management and surge-protection systems to transmission-voltage regulators and power cables. Every new AE project coming online will need something AMSC makes, which should turn industry growth into higher company revenues.
•Duke Energy Corp. (NYSE: DUK), recent price $17.68 - For investors with a more traditional bent, Duke represents a nice combination play between new and old energy sources. The company just completed a 34-turbine wind energy farm in Colorado and has plans to leverage the tax credits and state incentives into a major shift in its production capacity from coal and gas to wind and solar.
•SunPower Corp. (Nasdaq: SPWRA), recent price $13.55 - Based in San Jose, CA, SPWRA is a leading U.S. maker of solar panels and power system components. It has lagged Chinese suppliers for some time based on pricing inequities, but the company has combined aggressive cost cutting with improved technology and increased power-system efficiency and is now experiencing so much demand that it has a backlog of orders from project developers in the Southwestern United States. SunPower is also developing and building some projects on its own, naturally using its own products.
•China Integrated Energy Inc. (Nasdaq: CBEH), recent price $7.82 - Another potential beneficiary of China's new clean-power initiative, CBEH is the country's
•Ocean Power Technologies Inc. (Nasdaq: OPTT), recent price $5.63 - This company goes outside the mainstream and into the tidal stream. Specifically, OPTT's PowerBuoy systems harness the energy of the tides and ocean waves and enable commercial users to convert it into electricity. The market is limited in that users need to be near the ocean, but the competition is limited, too. The company also got a major boost in August when it signed a significant development contract with Japan's Mitsui Engineering & Shipbuilding Co.
•Amaresco (NYSE: AMRC), recent price $12.97 - AMRC is the largest independent energy services provider in the United States, and will benefit from any rise in prices due to clean energy mandates since its specialty is efficiency. To wit, its client base is made up of companies having to deal with high energy costs - a market estimated at $5 billion annually in the United States alone.
For those reluctant to plug all their energy investment dollars into a single corporate outlet, there are also several exchange-traded funds (ETFs) that focus on clean energy. Two with potential in the wind and solar sectors are:

•First Trust Global Wind Energy Index Fund (NYSE: FAN), recent price $10.19 - Tracks the ISE Global Wind Energy Index, investing 90% of assets in stocks or ADRs comprising the index.
•Market Vectors Solar Energy Fund (NYSE: KWT), recent price $10.98 - Seeks to mirror the price and yield performance of the Ardour Solar Energy Index, a weighted index that tracks companies that get at least 90% of their revenues from solar power products, generation projects and services.

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