The most promising alternative energy plays

By MoneyWeek Editor John Stepek Aug 19, 2010

John Stepek

Share with
friends:

Comments (10) Print this article

One perhaps unexpected casualty of the credit crunch has been the alternative energy sector.

Shares in the world's biggest producer of wind turbines, Copenhagen-listed Vestas Wind Systems, lost about a fifth of their value yesterday.

The group reported a €119m loss for the three months to the end of June. It's the second quarter in a row that the company has lost money. And it warned that profits for the year would be lower than previously forecast. Tighter bank lending and governments desperate to cut back on spending have both taken their toll.

But could this be a buying opportunity?

The dangers of investing in government-backed sectors

As the FT's Lex column points out, "renewable energy has taken a battering during the global downturn." The S&P Global Clean Energy Index "has fallen almost three-quarters from its 2007 high."

The trouble with wind energy and solar power is that both rely on government support to prop them up. And at the moment, governments across the world are cutting back where they can. For example, new wind power installation in the US was down by more than two-thirds year-on-year in the first half, while the Spanish government is slashing subsidies to the renewables industry in general.

Hence yesterday's poor results from wind turbine manufacturer Vestas. Orders from both Europe and the US have been delayed. On top of that, banks have been far more wary of lending to the wind park developers who buy turbines from Vestas and other manufacturers.

It's another valuable lesson in the dangers of investing in a sector which is so heavily dependent on government backing. Politicians can promise the world when they feel flush with cash. But now that sovereign debt is the focus of investor angst, they are looking for ways to shore up their budgets.

To be fair, it's not as though no one is buying turbines any more. In fact, as Lex notes, future orders for Vestas look pretty solid. "The most recent weakness is largely the delayed result of last year's 50% slump in orders." The group "still expects to lock in at least one-quarter more orders this year than in 2008, its record year." And as Bloomberg reports, Vestas "has signed at least eight orders in the past month, including its biggest ever in the US and its largest in Australia."

The need for alternative energy sources is here to stay

And the drive to wean the world off its reliance on fossil fuels isn't going to go away. Even putting concerns about climate change aside, with oil prices stuck stubbornly in the $70-$80 a barrel range, there's plenty of incentive to explore alternatives.

But a further problem for Vestas and other turbine manufacturers in general is that competition in the sector is hotting up, particularly from China. As Eoin Treacy points out on Fullermoney, "China has a key advantage in production due to its monopoly of the rare earth elements market." Rare earth metals are vital to produce the components for wind turbines.

Sure, if you're feeling brave, then now might be the time to take a punt. Prices across the sector have been hit by Vestas' profit warning. MoneyWeek's resident share tipster Paul Hill picks his favourite play in the wind sector in this week's issue of MoneyWeek magazine, out on Friday.

But I'd be reluctant to make any big bets on the industry. Given its dependence on subsidies, there's just too much uncertainty for my liking. And it's very unlikely that wind power will ever provide more than a small proportion of our future energy needs.

Where should you put your money?

So what might be a better option? At our most recent MoneyWeek Roundtable, we invited a group of energy experts in to discuss which sources of energy were best-placed to help wean us off fossil fuels. Nuclear power was a clear favourite. But perhaps a more interesting option - if not strictly renewable - is natural gas. With recent breakthroughs in extracting gas from 'gas shale', the US is sitting on massive reserves.

For our experts' views on the best way to play natural gas, you can read the article online here: The future of energy - eight stocks to buy now. If you're not already a subscriber, get your first three copies free here.

Our recommended article for today

The best way to get in on the rise of 3D films

In the entertainment industry, 3D technology is the hot topic, with suggestions that it could be worth more than $40bn by 2015. So how can you profit from it? Theo Casey investigates, and picks the best bet in the sector.

Comments (10)

Published in Tips & advice | More articles by John Stepek

Share with
friends:

Related articles

Comments

Leave a comment

  • 1. Atchman

    (19 August 2010, 12:18PM)  Complain about this comment

    What about Geo-Thermal? The heat beneath your feet. While it only makes sense in areas whose geographical locations favour it, it should not be ignored. its not a panacea to all our needs but it sure does help. It may be benefitting from gov subsidies in the US right now but unlike Wind and Solar it is not reliant on them and thats the salient point to take away here - geo can generate profit! And where there is profit there is enterprise. Also experience from the mining industry can be quickly transferred into this field. Two good bets are Ormat and Nevada Geothermal NGLPF. Also keep an eye on Magma Energy.

  • 2. CKP

    (19 August 2010, 12:34PM)  Complain about this comment

    Thin-film solar technology is developing at a startling pace with cost declining and efficiency rising exponentially. There's a US firm - First Solar that is leading the market and the shares have already taken off - probably missed the boat to buy in for now. Their panels are currently only sold in bulk to their preferred clients in large scale construction - likely due to limited manufacturing capacity. It won't be long till the technology will be cost competitive with other energy sources. Forget about crystalline silicon panel technology, it's about to become obsolete due to production cost - producing silicon is very energy intensive.

  • 3. John M

    (19 August 2010, 12:36PM)  Complain about this comment

    Lesson 1. Never invest in companies which depend upon the whims of Goverment.
    Geothermal power, a proven technology which is economic in the right locations, is an alternative energy source that does not depend upon state subsidy (wind) or taxing consumers (solar feed-in tariffs). Any area with hot springs or signs of volcanic activity is suitable.
    In Iceland, it already meets the huge electrical demands of aluminium smelters. In Kenya it powers the greenhouses which grew the red roses you gave your partner on Valentine's Day.
    Here are a couple of undervalued Geothermal companies quoted on Toronto: Ram Power - RPG & Magma Energy - MXY.

  • 4. Mark

    (19 August 2010, 01:17PM)  Complain about this comment

    I'm really not a fan of Solar or Wind Power and am a firm believer that a significant portion of future energy needs will be met by clean coal and hydrogen fuel cells. This technology not only has the ability to create clean electricity (99% CCS) but also diesel and other fuels through GTL technology (using Syngas). Anyone interested should have a look at a small English company called AFC energy and Aussie Firm Linc Energy. I only found out about these technologies a couple of months ago and can't believe that they haven't been picked up by the mainstream media!

  • 5. Tony Dalton

    (19 August 2010, 03:35PM)  Complain about this comment

    As identified by Investors Chronicle on 11 June the most profitable way to benefit from renewables seems to be via the Aim listed Trading Emissions (TRE). This investment fund trades at a 30% discount to NAV of 143p and is set to be wound up and the proceeds returned to shareholders by December 2012. If realised that's a capital gain of over 40% and a projected yield of 5.5% this year and 6.5% next year. Sounds a bargain to me, which is why I bought some - but ask me in two years!

  • 6. Dave Smith

    (19 August 2010, 04:04PM)  Complain about this comment

    Wind does have a part to play, especially if turbines are sited in places with a reasonably high annual mean wind speed. I believe around 6% of electricity generated in the UK last year was generated by wind turbines, more in fact than hydro-electric.
    In periods of high demand (winter) wind generated electricity actually keeps wholesale prices down as it's sold at a fixed price, unlike gas generated etc which fluctuate in price with demand.
    There in no direct 'subsidy', government or otherwise for wind farm construction and electricity production in the UK, there are however Renewables Obligation Certificate payments, not paid by the taxpayer, but ultimately out of our electricity bills, as ROCs are traded between electricity companies.

  • 7. Luddite

    (20 August 2010, 02:07PM)  Complain about this comment

    Hi,
    I have recently seen a firm developing use of CBM gas in brittain. See http://www.igasplc.com/ . I have invested here myself as is aiming to be full production next year, non intrusive to surroundings and appears to produce good energy output with almost no downside.

  • 8. Gemma

    (20 August 2010, 04:03PM)  Complain about this comment

    "Anyone interested should have a look at a small English company called AFC energy and Aussie Firm Linc Energy."

    Thanks for your comment Mark. I represent AFC Energy and they have produced a short video about the developments they are making in the hydrogen fuel cell sector. If you would like to take a look and learn more about the technology then here it is: http://www.youtube.com/watch?v=uTlZ5-cSnJI

  • 9. Jim

    (21 August 2010, 05:10PM)  Complain about this comment

    Thanks Gemma for the info on AFC energy, very interesting.

  • 10. Jim

    (21 August 2010, 05:14PM)  Complain about this comment

    Thanks Gemma for the info on AFC energy, very interesting.

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.

>