Alternative energy: bubble or no bubble?
In investing terms, alternative energy can be a divisive subject. On the one hand, the bulls believe it’s one of the greatest areas of profit potential. But on the other hand, the sceptics say green energy is forming a speculative bubble that could pop in as little as two or three years, leaving investors in the lurch.
However, while bubble conditions may be developing, they won’t cause a ‘speculative bubble’. In this case, there’s definitely more to the story…
Healthy incentives + better technology = a thriving climate for these three green resources
To those who argue that the alternative energy legislation now in place (with more on the way) will have the same damp effect as the efforts to increase ethanol production, you’ll get no argument from me that Bush’s foray into ethanol was misguided at best.
But unlike ethanol, solar, wind and geothermal tax credits have been catalysts for those respective industries and energised them.
Improvements in technology have resulted in generation costs on par with – and in some cases, below – conventional fossil fuel sources.
And with regard to solar in particular, costs per watt are on track to fall by another 50% over the next few years. And in spite of the lower costs, industry margins will be in the 35% to 50% range, three times what they are today. That’s a recipe for increased earnings if I ever saw one.
Forget fossils… nuclear nixed
Over the past two years, about $200bn has flowed into the alternative energy sector – about right for a capital-intensive business like that.
After all, if it weren’t flowing into alternative energy development, one of the few other places it could go would be to pay for higher oil. But perhaps it’s easier to describe where it won’t be going…
Forget fossil fuels. No one wants a fossil fuel plant in their backyard (and few are even planned, let alone being built).
Forget about any new nuclear power plants here in the US, too. Only a few are even in the permit stage (a ten-year process in itself), with subsequent construction lasting 10-15 years at a cost of $15-20bn.
In fact, back in June 2008, Moody’s estimated that the cost of power from a nuclear plant could exceed $7 per watt – ten times higher than solar’s $0.70 per watt cost. And then there’s the spent fuel issue, decommissioning, etc.
Flash the ash for alternative energy investment, not speculation
Given that the US alone spends over $500bn every year on foreign oil, there’s plenty of room to beef up spending on alternative energies like wind power.
Besides, we don’t really have a choice. Cheap energy is the key ingredient that drives healthy economic growth. And the problem with coal, oil and natural gas is that they’re all finite resources – with best deposits (those with the highest energy content) already used up.
Combine that with oil prices that will likely be closer to $100 a barrel by the end of the year… and interest in alternative energy will reignite.
And to those who argue that alternative energy is a speculative business, I’d counter with the fact that we’re talking about investment, not speculation.
For example, because of the tax credits I mentioned earlier, many start-ups already exist – particularly in the solar sector, where no less than 143 companies are currently in the thin-film segment of the industry.
Now, in an economic environment like this, there’s no question that they won’t all survive. But those who do will have viable, long-term businesses, supplying the world with much-needed alternatives to fossil fuels.
The changing face of renewable energy
The energy sector is changing.
Fossil fuels are on their way out. Green energy is on the way in.
The change won’t happen overnight, though. It’s going to be a 20- to 30-year process – which is why it’s destined to be such a great opportunity for investors.
It’s not just an ‘American social responsibility’ thing, either. It’s global. Right now, in fact, our alternative energy progress is way behind many other nations.
Take Portugal, for instance. Over 60% of the country’s energy comes from renewable resources – and its goal is to hit 100%. China and Germany also have aggressive alternative energy generation plans underway.
And because of all the government tax incentives dangled in front of the sector’s players, cost-effective solar panels and wind generators are already in use. And they’re busily generating power that produces no greenhouse gases – and more importantly, they don’t use a drop of oil when running.
Here’s the bottom-line…
This global problem requires a global solution
The world has such a monumental need for cheap energy that alternative, renewable energy is destined to remain a target-rich environment for many years to come. Will some companies make for better investments than others? Of course… just like in any other sector.
But I don’t believe we’ll see a bursting bubble in two to three years. Actually, a mini-bubble popped last year when oil dropped from $147 a barrel to the current level around $48 today.
This drove many solar, wind and geothermal stocks down as much as 80% – with current valuations as low as they’ve ever been in many cases.
And that has helped to set up what could be one of the best sectors to invest in for decades to come.
• This article was written by David Fessler for the Smart Profits Report