The so-called “lame duck” Congress has gotten itself into a productive fit over the last couple of weeks, and passed more important legislation than it had done all year long — much of it bipartisan. In many ways nothing was more surprising than the action that preserved the “1603 Program” this morning. Widely reported today, the 1603 Program (so-called because it was created as section 1603 of the American Recovery and Reinvestment Act of 2009 — or ARRA) will be extended by a year, allowing the clean and renewable energy industries to continue to be boosted by a 30% subsidy for qualifying projects. Proponents of the program claim that it has been responsible for the creation of 100,000 jobs. Here is a take on the news by Pete Danko of EarthTechling: http://www.earthtechling.com/2010/12/clean-energy-grants-get-another-year/.
The Treasury had doled out nearly half a billion dollars this year to solar projects alone: http://www.solarindustrymag.com/e107_plugins/content/content_lt.php?content.6920, and the support was very widespread, with 42 out of 50 states getting at least one grant. Here is a brief summary from WilmerHale of the provisions of the program and related programs: http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=9682.
What does this mean for the renewables industry? According to the American Wind Energy Association, the 1603 Program enabled the construction of 10,000 MW of new wind capacity in 2009, along with 10,000 construction jobs and 2,000 permanent jobs. The solar industry grew by more than a third in 2009 and may grow by more than 50% in 2010 when the numbers are tallied: http://leadenergy.org/2010/12/the-importance-of-extending-the-1603-treasury-grant-program/.
What does that mean to investors? Well, to begin with, many of the renewable-energy companies had seen their valuations whacked over the last several weeks as doubt mounted about whether 1603 would be extended. So there may be some bounce-back profits to be made simply from that. Look at the giants like First Solar (Nasdaq: FSLR; http://www.firstsolar.com/), whose shares have moved up nearly 10% over the last 2 weeks. But since the trickle-down effect may not be either as fast or as efficient for the smaller companies and the supply chains, you may have more time to take a position.
Biomass companies are definitely included in 1603 — and that includes companies that grow their own biomass (jatropha, algae) as well as companies that use decomposing waste to create fuels. An article from Popular Mechanics talked about 5 of them: http://www.popularmechanics.com/science/energy/biofuel/4333722. One of those is South San Francisco-based Solazyme (http://www.solazyme.com/company-profile), but the choice is not wide if you are looking for companies that trade on the stock markets. The largest is Melbourne, FL-based Petroalgae Inc (EBB: PALG; http://www.petroalgae.com/), with a market cap of over $1.1 billion.
There are as many solar companies as Arabian Nights in the story book, it seems, divided into those that make the gear (photovoltaic cells, thin film, solar concentrating devices, a myriad of different parts and pieces); those that install the gear, and those that generate electric power from the installations. There seem to be many claimants for the title “Largest Solar Installation in the World,” but one of the most recent is due to be installed in the eastern Mojave desert near the California city of Blythe: http://www.renewable-energy-news.info/worlds-largest-solar-installation-blythe-ca/. About 2 months earlier, First Solar announced its own “world’s biggest”: http://solarhbj.com/news/worlds-largest-solar-pv-power-plant-now-operating-in-ontario-canada-0989. But the “dream team” solar project still has to be the electrification of the Sahara desert, even though it has no hope for 1603 funds: http://inhabitat.com/worlds-largest-solar-project-sahara-desert/.
Perhaps the most controversial renewable is one of the oldest: harnessing the wind. When I was a kid I was taught that waterwheels and windmills were some of civilized man’s first non-combustible attempts to harness natural energy. But as the applications have gotten bigger, the windmills and waterwheels have become gigantic — and some folks don’t like them one little bit. The highest-profile new projects tend to be offshore these days, like the huge project planned for the area around Nantucket Island, described here: http://www.capewind.org/. Wind farms are probably no larger than solar farms, but they stick up really high, and they create what some people see as visual pollution — “that big white thing with the rotating arms is ruining my view.” Most of the big vendors are BIG, but there are a few smaller makers who might be good places to place a bet. One is Irvine CA-based Composite Technology Corp (EBB: CPTC; http://www.compositetechcorp.com), founded in 1980, and with a market cap of about $66 million. CPTC makes wind turbines for the electric utility industry, and so stands to be a fairly direct beneficiary of 1603. Or there’s Hamburg-based REpower Systems AG (DAX: RPW; http://www.repower.de/), which just last week announced 51 additional MW for the US to be installed in PA, NY, OH and WA. RPW is a much larger company, with a market cap in the range of 1.1 billion euros, and in the US there is an ADR, RPWSF.PK.
If there’s anything more picturesque than an old windmill (think Mykonos), it’s an old waterwheel, and if there’s anything more gargantuan than a big wind farm, it is the modern descendent of the waterwheel, a huge hydroelectric dam. But if there is anything that is renewable it is mountain streams and the rivers they power, and from the time that Buffalo was electrified by Niagara Falls, the attempt to harness every fast-flowing river has been universal. And when there are no fast-flowing rivers, we create artificial lakes to run the turbines. Most big dams are owned or operated by utilities or groups of utilities, and many small dams are under the authority of the Army Corps of Engineers, with a popular estimate that there are 20,000 small dams in the US alone that do not yet generate any electric power. Thus the growing demand for what is called “small hydro” — miniturbines that can generate smaller amounts of electricity but that can also be installed with a minimum of environmental impact and capital expenditure: http://en.wikipedia.org/wiki/Small_hydro. Earlier this year Russell Ray had a look at the regulatory and funding environment for small hydro: http://www.renewableenergyworld.com/rea/news/article/2010/04/regulating-small-hydro.
It’s not easy to find a small hydro smallcap stock, because most of the hydroelectric stocks are big companies like Idacorp (NYSE: IDA) or AECOM Technology Corp (NYSE:ACM). Smaller utilities in the northeast and northwest can be good places to look, and some very small nonpublic technology companies like Hydroring, a privately held Dutch company with an innovative “fish friendly” small turbine for riverine applications. Very little data is available on Hydroring, based in The Hague, but there is a website at http://hydroring.nl/.
Storage: the 800-pound gorilla
One of the conundrums of renewables is that although they smile a lot, utilities frequently are not well-disposed toward renewables. They present a lot of technological and cost problems. They are frequently remote from the grid and very costly to build long lines to. Talk to most utilities and you will quickly believe that the key to renewables is a way to store the energy generated until it is needed. And that means batteries. Some lithium-ion companies have major smart-grid initiatives underway, but they represent a super-expensive way to store wind-turbine energy. Regular old lead-acid batteries are a heck of a lot cheaper, but they don’t charge up and charge down fast enough, and they wear out very quickly. As with other areas of potential 1603 beneficiaries, there are a lot of energy storage companies, so you might look at NYC-based Ener1 Inc (Nasdaq: HEV; http://www.ener1.com/) , which has a lot of Russian and Japanese lithium-ion technology know-how. Another option would be Tyngsboro MA-based Beacon Power (Nasdaq: BCON; http://www.beaconpower.com/), which has a flywheel technology. And the low-cost leader looks to be New Castle PA-based Axion Power International* (EBB: AXPW; http://www.axionpower.com), a company with a battery that is a relative of the lead-acid battery in your car, but turbocharged with nanocarbon to eliminate corrosion and increase the ability to charge/recharge. It is worth saying that none of the 3 companies has been a mass manufacturer of their products to date, so all require due diligence with regard to their ability to scale up and serve the market.
*client of Allen & Caron, publisher of this blog.