Don't count out clean-energy stocks, some say

A market correction wasn't surprising, green-investors contend

By Dan Jamieson

Mar 10, 2008 @ 12:01 am (Updated 3:58 am) EST

The big hit clean-energy stocks have taken this year is just an expected correction, not the end of a fad, green-investing advocates say.

A correction wasn't surprising, since the clean-energy sector got ahead of itself, they contend.

Last year, for example, the WilderHill New Energy Global Innovation Index, which tracks a group of clean-energy related companies worldwide, was up 58%. The Standard & Poor's 500 stock index gained 3.5%.

The WilderHill index comprises 60 global companies engaged in clean-energy and related activities.

In 2006, the index was up 33%, compared with a 13.6% gain for the S&P 500.

But in January, with the market sell-off, the WilderHill index lost almost 20%, while the broader S&P 500 was down about 6%.

'DROP LIKE A ROCK'

"Clean energy can drop like a rock," said Robert Wilder, founder of Wildershares LLC and manager of the WilderHill indexes, who is based in Encinitas, Calif. "Areas like solar have really been bid up." Solar firms in the index rose 163% last year. They were the index's top-performing group. But the promise of clean energy is a "little bit more talk" than reality, said Sam Halpert, a senior analyst at Van Eck Associates Corp. in New York who follows the coal industry. People will support green energy "until the cost to keep the lights on goes up dramatically," Mr. Halpert said. Meanwhile, coal companies — the scourge of environmentalists — have also done well over the past several years. And the sector has held up better during the recent downturn. The Stowe Coal Index, a measure of global coal-related companies, lost just 6% in January after gaining 103% last year. "Coal trades differently" from clean-energy companies, Mr. Wilder said. Coal firms have larger capitalizations and use simpler technologies, he said. "Solar and wind [power firms] trade closer to Silicon Valley tech stocks," Mr. Wilder said. Demand for coal from China and India, supply disruptions in Australia and the United States, and a surprising rise in U.S. coal exports have caused coal prices to rise even further recently, Mr. Halpert said.

The coal industry has been promoting the promise of carbon-sequestration to deal with global warming.

But even in the best-case scenario, large-scale carbon capture technologies are at least two decades away from meaningful deployment, according to a study released last month by Cambridge Energy Research Associates Inc. of Boston, an influential research firm.

Expectations for carbon capture "underestimate the lead time needed for widespread application," CERA said.

In particular, storage technologies, as opposed to simply capturing carbon emissions, are the main challenge.

Despite the recent sell-off, alternative energy technologies won't go by the wayside, even if oil prices fall, observers said.

Following the energy shocks of the 1970s and early 1980s, alternatives to oil-based power emerged but then faded.

"Today, however, is a different story," according to CERA's study.

Higher oil prices are being driven by long-term demand from emerging economies, rather than short-term supply disruptions, as occurred then. Green investments have been hot, "but it's not like the technology or real estate" bubbles, said Joe Keefe, chief executive of Pax World Management Corp. of Portsmouth, N.H., adviser to the Pax World funds.

He and other green-investing advocates think that a transformation is under way in how power will be produced.

"It's the beginning of a trend, not a bubble," Mr. Keefe said. "It will prove to be durable."

New energy technologies will be driven by economics and concerns over energy security and the environment.

Furthermore, a political consensus on dealing with climate change has taken root, according to CERA. Action on carbon emissions, such as capping the amounts an industry can emit, are expected to advance, especially with the change of U.S. administrations.

"If there's any cost associated to [burning] fossil fuels, coal is no longer so cheap," Mr. Wilder said.

Even if the United States imposes a cost of $20 or so per ton on coal, as Europe has done, coal is still cheaper than alternatives, Mr. Halpert said.

Not all new technologies are set to take up any slack from coal and oil, Mr. Wilder warned.

The "most over-hyped" technologies — hydrogen and fuel cells — are "nowhere near to being economically feasible," he said. Hydrogen is difficult to store and fuel cells are far too expensive to compete with other forms of energy, Mr. Wilder said.

"But wind [power] is cost competitive to natural gas," he said. "Around the world, wind is taking a big chunk" of the energy market.

PRICE DROP

Solar is still too expensive, but coming down in price, Mr. Wilder added. In five to seven years, solar power producers might be competitive in California, where costs are high, with other peak power suppliers.

Depending on political and economic developments, CERA predicted that renewable power generation will increase its share of total global capacity to between 7% and 16% in 2030, from just 3% in 2006.

CERA said that recent investments in energy technologies "far surpasses anything that has been done in the past." Renewable clean energy attracted $66 billion in investments worldwide in 2006, up from $50 billion in 2005, and $30 billion in 2004.

Full data from 2007 weren't available for the CERA study, but the upward trend continued into last year, based on data from private equity and venture capital firms.

VC firms' investments in clean technologies have risen to the level where, for the first time, their stakes rival those made by traditional oil and gas companies, CERA said.

E-mail Dan Jamieson at djamieson@investmentnews.com.

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