As the “going green” trend has become increasingly popular, the demand for more use of renewable energy has grown stronger. Many people now want to reduce their carbon footprint as much as possible to minimize pollution and limit their dependence on diminishing petroleum reserves.
“From the big picture, the future of conventional fossil fuel energy is very limited,” says Gary Gerber, president of the California Solar Energy Industries Association (CALSEIA). “It’s a material resource that is finite. You’re dealing with something that’s more and more scarce.”
Is Renewable Energy a Good Investment?
Energy suppliers have responded by working to make use of renewable energy more efficient and less costly. But where does renewable energy stand as an investment?
Adam Ritt, director at National Association of Investors Corporation — the nation’s largest nonprofit investment education organization — says that alternative energy is a potential growth area because although oil prices have come down considerably, he believes they will go up again once the economy recovers.
“If this happens, stocks related to the oil industry will likely regain their various levels, but high oil prices will also make these alternative energies more economical,” he says. “Long-term, alternative energy is an interesting area for investors.”
Market Demand for Renewable Energy
Blaine Collison, director of the Green Power Partnership, a national voluntary green electricity purchasing program from the U.S. Environmental Protection Agency (EPA), says the 1,100 organizations he works with are making proactive, eco-friendly choices with their electricity to answer an increasing demand.
“The collective electricity-consuming market is saying ‘we’re willing to spend more money above and beyond what is required because of renewable energy’s importance, usefulness and value,’” he says. “It strikes me as a very positive indicator that the supply side is going to continue to step up to meet the demand.”
Collison believes market demand should spur future efforts in renewable energy development in terms of technology and efficiency.
Government Support for Alternative Energy
Gerber says demand from the public is also being supported by government legislation, which is helping internalize the cost through incentives, such as tax credits, rebates or deductions.
“The government is saying: This is where we need to go,” he says. “There’s government commitment behind it to make it happen.”
As of January, the U.S. Senate was debating a bill that would create a cap-and-trade program designed to reduce greenhouse gases by placing mandatory caps on emissions. The House passed a similar bill last June.
The government is also encouraging states to implement a renewable portfolio standard (RPS). According to EPA’s Web site:
“An RPS requires electric utilities and other retail electric providers to supply a specified minimum amount of customer load with electricity from eligible renewable energy sources. The goal of an RPS is to stimulate market and technology development so that, ultimately, renewable energy will be economically competitive with conventional forms of electric power.”
An RPS is meant to help a state increase use of renewable energy in a way that’s cost-effective and administratively efficient. Collison says that a state that implements an RPS is required to get a certain percentage of electricity from renewables by a specific date, and these policies are a form of guarantee that supply will be developed to meet that demand.
“Facilities will have to be constructed to meet those demand minimums,” he says. “Developers have the confidence that a renewable energy developer such as a wind farm will be built, and there will be customers.”
Currently 24 states plus the District of Columbia have RPS policies in place, which according to the U.S. Department of Energy, accounts for more than half of electricity sales in the United States.
The Volatile Landscape of Alternative Energy
“Alternative energy for the most part is speculative, and stocks of companies that are 100% related to this industry tend to be quite volatile,” Ritt says. “Some investors surely have done exceedingly well by being fortunate enough to buy very low and sell very high, but individual investors generally have difficulty studying these stocks because they lack the historical performance required to understand management’s capability.”
Like any developing field, the success of any particular renewable energy company or technology depends on a number of shifting factors. And while getting in on the ground floor of the next big thing sounds appealing, there are many things to consider before deciding to invest in industries that solely produce renewable energy.
Matt Peron, director of equity research at Northern Trust, says that the renewable energy investment decision is a difficult one. Even though the government shows enthusiasm for renewable energy practices, actually creating policies is a political process, which can be unpredictable and often not based on the most economical solution. Because of this, Peron doubts that Congress will adopt meaningful cap-and-trade legislation anytime soon.
“The regulatory uncertainty has been a problem,” he says. “We don’t know what form subsidies or emission standards will take.”
Peron mentions that even if you do have a good grasp of the regulatory environment, which might be creating demand to inspire technological advancement, investing in any specific technology can be a bit of a gamble. You always face the risk that something newer and more efficient is waiting just around the corner.
“Most alternative energy is not yet competitive on its own versus fossil fuels,” Peron says. “The technology is not quite to the point where we can produce clean energy efficiently; it needs a government incentive.”
Ritt says that the renewable energy situation reminds him of the Internet boom, where many companies and technologies rushed to the market, only to fail as enthusiasm subsided and investors began to take a hard look again. Likewise, Ritt feels there will be relatively few big alternative energy winners in the long run.
Should You Invest in Renewable Energy?
While your investment advisor can help you determine whether renewable energy investments would be suitable for your portfolio, Peron does recommend some guidelines to consider. He advises against investing in a sole renewable energy producer, such as a wind farm or a solar panel company, because of the risks stemming from regulatory and technological uncertainty. Even buying a diversified basket such as an exchange-traded fund focused on clean energy can be risky, he says. Rather, Peron recommends buying “large, diversified, multinational industrial” companies that are moving toward greener product portfolios.
Ritt agrees and says that investors should have at their disposal at least five years of sales, earnings, profitability and return on equity data. “Investors should focus on high-quality companies, which are firms that have achieved a history of sales and earnings growth and of steady or growing operating profitability,” he says. “Few alternative energy companies meet these parameters. Investors might have more success finding larger, established companies that are making investments in alternative energy.”
Peron believes that investing in larger, established companies is a sound long-term approach because they have the capital to acquire the appropriate technology needed and the customer relationships to apply it profitably to infrastructure projects.
“These companies are moving their product portfolios to address the renewable energy market. And, as the incumbent supplier to the power grid, they’re more likely to be well-positioned to take the lead in applying new technologies to the grid,” Peron says. “They’re essentially making the investment in renewable energy for you.”