Scoring the 'Green' in Green Energy

By Nick Hodge
Friday, August 8th, 2008

Has green lost its luster?

Of course not. Yet that seems to be the attitude of more than a few.

Sure, solar stocks have been battered over the past few months. But didn't the Dow (Index: DJI) go from over 13,000 to below 11,000 in the same time? Indeed, it did.

And hasn't Exxon Mobile (NYSE: XOM) gone from nearly $95 to to about $75 in the same time? Indeed, it has.

Even the incessantly-talked-about Transocean (NYSE: RIG) is down 15%. . . in just the past two months.

So for renewables to be dismissed as bad investments by bulls of other energy sectors is not only wrong, it's quite hypocritical.

Indeed, with the world's largest oil fields being depleted—some by as much as 15% per year—and natural gas facing a similar long-term plight, we're going to need all the energy we can get. And there's plenty of money in all of it.

But you must realize, new oil discoveries, and even arctic and offshore drilling, are certainly no catholic cure. In fact, the amount of oil they're providing—and could potentially provide—is absolutely not enough to offset rising demand and oil field depletion, not to mention that oil is increasingly more expensive to extract. This is an often overlooked aspect of new oil finds.

Yes, there's money to be made from the remaining oil and the companies that refine the ever more heavy and sour crude. And I'm not against making that money.

But to think that there will be no serious energy transition to include a large share of renewables coupled with efficiency is naïve at best, and moronic at worst.

That said, let's look at the billions of dollars that continue to pour into the green sector even during this progressively bearish market.

Renewable Energy Markets: Investment Magnet

According to New Energy Finance, one of the world's most highly respected renewables analytics firms, private equity and venture capital deals in cleantech surged to a record $5.8 billion in the second quarter.

If the technology had no future, would it be bringing in record investment dollars at the most foundational levels? Hardly. Surely you can remember the internet naysayers of the 1990s. And look how that turned out. . . you're reading this on the internet, and it's marvelous.

These green technologies that are being invested in today on a very nascent level are going to be the energy juggernauts of the future. From my perch, it's inevitable.

But back to that second quarter $5.8 billion investment, which, by the way, is more than double the $2.6 billion invested in the first quarter.

You know where that money went: wind, solar, and second generation biofuels.

And speaking of oil companies and second generation biofuels, check out where BP (NYSE: BP) thinks transportation fuels are headed. On Wednesday, they announced a $90 million partnership with Verenium (NASDAQ: VRNM), to speed the development of cellulosic ethanol.

Verenium shot up over 75% on the news. . . in two days.

More affirmation of the ethanol market came this week when the EPA decided to uphold the increased Renewable Fuel Standard (RFS) signed into law last December, which increases the amount of renewable transportation fuels used annually to 36 billion gallons by 2020—16 of which must be cellulosic ethanol.

Texas Governor Rick Perry had requested that the EPA cut the RFS mandate by 50%. He lost.

Back to green energy investment. . .

Beyond second generation biofuels, wind and utility-scale solar continue to be hotbeds of investment. According to a recent Wall Street Journal Environmental Capital posting:

Wind energy in the U.S. is still going strong, despite the lingering uncertainty over congressional extension of tax credits for clean energy. The American Wind Energy Association today said second-quarter wind-power installations fell slightly from the first quarter, to 1,194 megawatts. But the wind lobby said 2008 should be another record year overall, with more than 7,500 megawatts installed, provided Congress finally renews the tax credits.

Power companies in the U.S. and Europe are increasingly looking to new types of solar power for big clean-energy installations, rather than do-it-yourself rooftop arrays. Biofuels have gotten a bad rap, but the next generation-made from stuff you can't eat like waste wood and algae-is drawing multi-million dollar investments.

We now know that pre-public cleantech companies are still attracting gobs of investment.

So what's the problem with publicly traded companies?

Publicly Traded Renewable Energy Companies

Part of the problem stems from the fact that renewable energy companies are finding increased resistance to listing publicly. This is do to instability in the overall equity markets fueled by a credit crunch, a mortgage mess, and a weak dollar.

That precarious situation has shelved several cleantech IPOs, making it harder for early-stage investors to recoup their investments.

Even though companies raised $5.2 billion in public markets during the second quarter, over half of that came from just one listing: Portugal's EDP Renovaveis.

Nonetheless, that $5.2 billion was monstrous jump over the dejected $1 billion during the first quarter—a sign that conditions may be starting to improve.

Until conditions completely improve for new entrants, one must embrace the current culture of the market.

There are plenty of bargains to be had in these troubled waters. Great companies, across all renewable sectors, have been beaten down as a function of broader market conditions.

Chinese solar companies, for example, are painfully oversold. And their rebound to levels of old will certainly provide gains congruous with the amount of of their recent losses—about 46%, on average.

I'm talking about companies here like JA Solar (NASDAQ: JASO), Solarfun (NASDAQ: SOLF) and Yingli (NYSE: YGE).

The same holds true for other renewable sectors.

Indeed, the bull market in energy is long from over. In fact, we're just in the first inning. The downturn in energy stocks due to negative external conditions is only a bump along the way.

As long as demand continues to rise exponentially—and we all know it will—then the energy, and particularly the renewable energy, bull market is destined to press on.

Call it like you see it,

Nick