Investing in Alternative Energy

    The recession, coupled with the fall in the price of oil, has adversely impacted alternative energy stocks, giving us an opportunity to stock up on such stocks. As the charts below reveal, alternative energy index funds are selling for 1/3rd or less of what they were fetching at the end of 2007. This means that we might expect them to triple from here when they recover from their current slump over the next year or two. But unlike blue chip stocks that can at best expect to return to their October, 2007, highs, alternative energy equities have the potential for rapid (historically 30% a year), long-term (10 years or more) growth. Alternative energy sources account for only a fraction of 1% of all energy sources. Meanwhile, alternative energy sources are getting cheaper and better. Wind energy is presently cost-competitive with conventional power sources in selected markets. First Solar claims to have just passed below the grid-parity "tipping point" of $1 a watt. The U. S. government's just-enacted alternative energy stimulus bill is funding research into very-deep well geothermal power plants, that, it's hoped, might permit the installation of geothermal power plants outside volcanically active regions, though it will probably be a while before these feasibility experiments have been completed. Nuclear power is being expanded around the world, although problems with perceived safety and nuclear waste are deterrents. Tidal power is another potential player in coastal areas.
    Energy conservation is probably the quickest and cheapest way to cut our carbon footprints.
    On the downside, only nuclear and geothermal sources guarantee dependable, around-the-clock power delivery.
Guesstimating the Gains: Now to Mid-2010
    .I'm personally anticipating a near-term tripling of alternative energy index funds as they recover their end-of-2007 peak prices. Looking beyond that, it might be reasonable to expect alternative energy stocks to return to their historic 30%-per-annum growth rates, at least for a few years  We might speculatively postulate 0% growth for 2008 and 2009, with 30% per annum growth returning in 2010. Then, if the index funds were to re-attain their end-of-2007 highs during the first half of 2010, we might anticipate a 3-folding from current values by mid-2010, followed by a 30%-a-year growth rate after that. How long could we expect to see a 30% annual growth rate continue?
Guesstimating the Gains: Beyond 2010
    Right now, one of, if not
the largest company devoted exclusively to alternative energy, Vestas Wind Systems, expects to report about $11 billion in sales in 2009, while one of, if not the largest conventional energy company, Exxon-Mobil, expects about $500 billion in sales in 2009, or about 45 times the dollar receipts anticipated by Vestas Wind Systems. This kind of ratio of 40/1-to-50/1 is probably a reasonable order-of-magnitude ratio of conventional energy sales versus alternative energy sales. (Although the ratio of alternative power output to conventional power output might be 200-to-1, we might expect the dollar ratio to be lower than the power output ratio because alternative power still costs more than conventional power.) The next question we have to ask is: is the 30%- per-year growth rate the rate of growth of power output or is it the rate of growth of dollars allocated to the alternative energy field? I rather suspect that the 30%-per-year growth rate refers to the rate of growth of generated power rather than the growth rate of monetary allocations. After all, a sizable part of the justification for these increases in the installed power base is that the costs of alternative energy are falling rapidly. And this raises the question: what about the major players in the conventional-energy business? If there were a lot of money to be made in this field, wouldn't they be jumping all over it? To some extent, there are major players in alternative energy... BP, GE, Sharp. But part of the money going into alternative energy stems from government subsidies. I suspect that the blue chip energy companies are waiting for this market to mature before  What usually happens is that as soon as a significant fraction of the world's total energy budget  starts to become diverted from the big guys to the little guys, the big guys buy out a few of the little guys, and the rest of the little guys go bankrupt. And after the buyouts, the big guys only grow at approximately the same rate as the economy as a whole. I think a tripling or better over the next two years may be in the cards, but after that, it's hard to say. I think global warming and alternative energy might reach a panic phase at some point down the road, but just who will profit from this seems to me to be less certain.
    A 30%-per-year growth rate leads to 2.2-folding in 3 years, and to approximately quintupling in 6 years. At this historic rate of growth, alternative energy sources would provide about 1/8th of the world's energy requirements in 12 years... by 2021, and more than half by 2027.
     I'm more comfortable buying alternative energy index funds than I am individual stocks because I could imagine it being hard to know which companies will survive shakeouts and which areas of green energy will show the biggest profits. For example, in addition to a number of competing technologies such as solar thermal, smart power grids, energy conservation, and saltwater algae-based biodiesel, there are uncertainties over which companies will actually survive various shakeouts. As mentioned above, once a sizable market develops for alternate energy, companies like GE, Chevron, and BP might muscle into the marketplace and stomp pioneers like Q-Cell and Vestas, or at least, runners-up like Suntech and Gamesys. Consequently, I'm inclined toward such ETF's as the PowerShares Wilderhill Green Energy Technology Fund, PBW,
Chart for PBW
 the Claymore/MAC Global Solar Energy Index ETF, TAN,
Chart for TAN
and the First Trust ISE Global Wind Energy Fund, FAN.
Chart for FAN
    All three of these funds have plenty of headroom.