ON NEW ENERGY INVESTING

The new question: Is there a bubble emerging in New Energy?

Kirk Shinkle, energy writer, U.S. News & World Report: “…whether companies are developing solar, wind, advanced biofuels, or any of a number of emerging clean-energy technologies, the combination of global economics, investor interest, and a forthcoming pro-green turn by Uncle Sam makes it hard to argue a long-run bear case against green stocks. Of course, that sort of superoptimism is itself a prerequisite for a bubble.”

Silicon Valley venture enthusiasts being what they are, the bluster coming from there about “clean tech” cannot help but irk the irritable and arouse skepticism in the reasonable.

Mark Twain’s infamous three kinds of lies aside (“lies, damned lies and statistics”), the most dependable reference available on New Energy is the numbers. That’s why last week’s CleanTech Group report on New Energy’s record-setting performance in 2008’s so far flailing market is so compelling. (See NEW ENERGY VENTURE INVESTMENT HITS NEW HIGH)

The question, again: Bubble or bonanza?

The answer: Both and neither.

Kirk Shinkle, energy writer, U.S. News & World Report: “…rather than one megabubble, a more likely scenario is that a bunch of minibubbles in various subsectors would constantly percolate, bubble, and pop…That's certainly been the pattern so far.”

New Energy will continue to have winners and losers. Some growth, especially early on, will be explosive. Some wipeouts will happen.

Example of long-term trend: Corn ethanol is a present winner but is likely to falter as commitments to AGROfuels fail. Companies, though, are already shifting to next generation biofuels derived from nonfood crops. Those companies will likely ride the change to higher profits. Yet all crop-based biofuels could in the longer run give way to algae. Some investors in second-gen biofuels will lose while others will find companies making that transition as well.

Example of long-term trend: Hydrogen fuel cell makers, once the darling of the marketplace, are falling or have fallen, while a big bet is coming in 2010 with the introduction of battery-powered cars from major automakers. Who does the smart money go with, GM or Toyota? Or will both carmakers ride the rising tide of plug-in transport to brighter days?

Example of momentary disruptions: Wind production has crashed each time in this decade when Congress withdrew the production tax credit (PTC). The PTC was restored each time in the following year and the wind industry exploded.

Currently riding an unprecedented boom, wind expects to slump in 2009 if the current Congress fails to extend the PTC expiring again at the end of this year. The solar industry, which will see its vital investment tax credit (ITC) also go when the PTC expires, will likely follow the same pattern.

Longer-term, however, the in-coming Congress is expected to create sustained tax credit allowances for all the New Energy industries. Wind anticipates growth over the next 2 decades that will provide 30+ times the electricity to the U.S. grid it now generates. The solar industry anticipates similar growth over the same extended period. Can those be bad bets?

How to recognize the moment of transition: When the U.S. puts a price on emissions. Predicted for 2009, because both presidential candidates favor a cap-and-trade system. When it happens, it will make New Energy price-competitive with traditional sources.

Trickster: The price of oil. iShares oil and gas exploration exchange-traded fund in 2008: Up ~5%. Most green ETFs in 2008: In the red.

That said, consider the prognostication of economist Hazel Henderson, who recommends what she calls “Sustainability sector” investments: “Obsolete accounting methods used by traders, asset managers and security analysts keep their minds hypnotized by the indicators of the dying, fossil-fueled Industrial Era…”

The old “sectors” (“Energy,” “Retail,” “Military,” “Health,” etc.) are incapable, Henderson contends, of categorizing investments in the “Sustainability” sector. The market has even failed to account for the shift of the newer “Technology” sector from digital investments to New Energy venture funding. The market's traditional “Energy” sector is still mainly taxpayer-subsidized oil, coal, gas and nuclear projects.

Henderson: “…wind power (which added 35% of newly installed electricity in the US in 2007); solar (growing at 35% per year); geothermal (which is gearing up to power millions of homes in the US) are overlooked and have been largely ignored by mainstream financial media…”

Conclusion: The real winners will be those who get in now and stay in for the long haul.

Kirk Shinkle, energy writer, U.S. News & World Report: “…eventually, of course, all the hype and investor enthusiasm will bid shares to crazy levels, and there will be a nasty shakeout. But we're not there yet. Not even close.”

See the trend?

The Outlook for Investing in Green Energy; How to deal with a sector that has pop – and could go pop, too
Kirk Shinkle, July 23, 2008 (U.S. News & World Report)
and
Nervous Investors Searching For New Asset Classes
Hazel Henderson, July 23, 2008 (© 2008 Other News)

WHO
Both Presidential candidates; Silicon Valley entrepreneurs; Investors looking for New Energy investments

WHAT
Following CleanTech Group’s announcement that New Energy drew a record-setting $2 billion from venture investors in the first half of 2008 despite a flailing market, U.S. News & World Report energy writer Kirk Shinkle considered future prospects for New Energy investments.

Another record for investment this year. (click to enlarge)

WHEN
- The emerging high tech sector of the mid-1990s that turned into the bubble of the late 1990s and the burst bubble of the early 2000s had many of the same attributes as the current enthusiasm for New Energy, right down to the blustery Silicon Valley entrepreneurs who funded high tech and now are blustering clean tech.
- Ethanol timeline:
2005: big round of venture funding to ethanol
2006: Pacific Ethanol (backed by Bill Gates) jumped from ~$10/share to $40 (for a moment).
- Battery timeline:
2007: Gates sold.
2008: Pacific Ethanol is $2/share.

WHERE
- Silicon Valley is where the big money and the big noise is currently coming from.

WHY
- Upside potential of New Energy: Only 1.5% of U.S. electricity comes from New Energy.
- Senator McCain suggested a $300 million prize for the inventor of a battery that can drive the shift to electric vehicles and Senator Obama’s economic plan is centered on incentivizing New Energy. Both advocate cap-and-trade.
- Batteries and energy storage devices may be the next new thing.

The coming shift to plug-in cars will create enormous opportunities. (click to enlarge)

QUOTES
- Brian Fan, senior research director, Cleantech Group: "We're still in the very, very early stages of the game…Is there a bubble? There isn't. If valuations in some publicly traded sectors are out of whack, I think it's a function of the fact there are too few opportunities for investors and there's too much demand and appetite for exposure to these technologies."
- Ted Sullivan, senior research analyst at Lux Research: "Advanced biofuels are starting to recover…Solar is on its way down. The companies are still trading at 100 to 200 times [earnings per share]."
- Michael Carboy, analyst, Signal Hill: "I don't think people appreciate how solar will be over the next few years and the role products will have worldwide in the energy infrastructure…The pullback in prices is more a reflection of a failure to understand the opportunity that the solar industry presents to the investment community over the next two years. Step two or three years out, and people will regret not owning solar stocks."