NEW ENERGY A BEST BET LONG TERM

Green Energy Rising; But investors should brace for a bumpy ride.
Bob Frick, June 2009 (Kiplinger Personal Finance)

SUMMARY
The New Energy industries expect slow short term growth but Kiplinger, known for its astute market forecasts, predicts that when credit frees up and the ground rules for the use of the stimulus monies are clarified New Energy will boom.

Indicative of the New Energy fall off, the WilderHill Clean Energy Index, which tracks 51 international New Energy companies, lost 60% in the past year, April to April.

Part of the reason for optimism going forward in New Energy is that the October 2008 and February 2009 stimulus packages provided a wide variety of big benefits. The Obama administration is strongly committed to the idea that New Energy will speed U.S. economic recovery by increasing jobs and bringing in tax revenues while reducing dependence on foreign oil and fighting climate change.

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To further spur action, the Obama Department of Energy (DOE) has begun issuing loan guarantees that were legislated in 2005 but not processed during the Bush years. The first DOE loan guarantee processed backs a $535-million U.S. Treasury advance to Solyndra, a California solar-energy company.

The only thing now lacking is liquidity. Financing, a product of market confidence, is showing signs of loosening in response to the full frontal assault in support of the economy by the Obama banking and finance team. Venture capitalists are beginning to test the waters, as are some lending institutions.

New Energy producers presently await new forms and guidelines for the stimulus funds that should be available by the beginning of this summer. Stimulus-eligible projects must begin before the end of 2010. An expansion, therefore, is expected to begin in the second half of 2009 and pick up steam in 2010.

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The most important long-term policy benefit, a national Renewable Electricity Standard (RES) requiring all U.S. utilities to obtain a specific portion of their power from New Energy sources by a date certain, is expected to be a part of the energy bill now being developed in Congress. The current compromise proposal requiring utilities to obtain 15% of their power from New Energy by 2020 may not be as strong as New Energy industry leaders had hoped but the very fact that it was set by a compromise between elements across a wide political spectrum ups its chances of becoming law.

An Allianz Global Investors study found that 78% of investors believe New Energy could be the "next great American industry…" and 97% of investors said New Energy fuels will remain important even if oil prices are low.

Kiplinger identified 25 favorite stocks. (See illustrations). Click thru to the Kiplinger piece for extensive information on solar industry giant First Solar, geothermal specialist Ormat Technologies, smart grid innovator Itron, New Energy-friendly utility FPL Group, and LED leader Cree.

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COMMENTARY
The Obama administration energy bill is expected to initiate a 10-year, $150 billion investment in New Energy.

In the October 2008 stimulus package, the New Energy 30% investment tax credit was extended to 8 years, the cap was removed so that it now applies to the full cost of a system, and utilities were made eligible for the benefit for the first time.

The February 2009 package extended the production tax credit to 3 years and allowed it to be traded for a cash grant by companies that need the money and have no use for tax breaks. The 2009 package also added a variety of other options that New Energy companies and lending institutions are still evaluating. (See FOR WIND, A SLUMP IN '09 AND A BOOM IN 2010)

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The only apparent constraint on long-term growth in New Energy is the U.S. transmission system. New capacity has to be able to get to the grid or there can be no payoff for building it. At present, some claim local wires in the sun-rich Southwest, the geothermal-rich Mountain West and the wind-rich regions of the Pacific Northwest, the Midwestern Plains, the Great Lakes and the offshore Atlantic are inadequate. Hundreds of thousands of megawatts reportedly await grid connection and U.S. New Energy potential has barely been tapped.

Utilities have proposed grid expansions and have a few small scale projects in the works. Regulatory impediments may, however, prevent the development of a satisfactory delivery system until the federal government steps up to mandate a national New Energy superhighway. Such federal legislation could also allot power to the Federal Energy Regulatory Commission (FERC) to settle snafus or exercise the right of eminent domain in the service of obtaining the needed nationwide complex of high voltage wires.

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QUOTES
- Lyndon Rive, CEO, SolarCity: "Once you address that bottleneck [caused by the absence of financing]…solar power will boom."
- Gregory Wetstone, outgoing CEO, American Wind Energy Association: "Our astronomical growth came to a screeching halt in late 2008."
- Christopher O'Brien, executive, Oerlikon Solar: "Tax credits are great, but you need profits to use tax credits, and in this economy nobody's making profits…We're in a window where renewable energy is a policy-driven market…"
- Fred Morse, senior adviser, Abengoa Solar: "You could take your federal guarantee to your bank and they'd say, ‘I'm not worried about you defaulting; I don't have money to lend.'"
- Steven Berexa, managing director of research, RCM Informed/Allianz: "Alternative energy's rise isn't going to be smooth, but it's going to be one of the great new growth industries."