United States has flirted with developing environmentally friendly and renewable sources of energy, such as wind and solar power, for 30 years. But these and other alternative energy sources couldn't compete with fossil fuels on a cost basis. And without development and operating subsidies, many emerging energy sources have never taken root in the U.S.
Based on early impressions, the Bush administration appears headed for continued support of traditional energy sources such as coal, oil and natural gas. But thanks to sweeping technological advantages, alternative energy sources are becoming competitive with fossil fuels on a price per kilowatt basis. Many have widely assumed that cost parity would be the key to stimulating demand for so-called green energy.
The tide has already turned in the field of solar power. Photovoltaic cells have become much more efficient and industry watchers think that solar will become the fastest-growing form of energy over the next decade. The recent performance of solar panel maker AstroPower {APWR} bears that sentiment out.
Sales of AstroPower's equipment rose 41 percent last year to $49.8 million. That would translate to a fivefold increase in five years. The company's goal of $77 million in sales this year likely will be attained. AstroPower's backlog exceeds that figure, but management thinks it can only build that much this year. The company is adding to its production capacity, but figures it will be constrained until the end of next year. Recently signed agreements with a number of homebuilders would seem to ensure that AstroPower can grow smartly for several years to come.
Shares of AstroPower have pulled back from a peak of $64 to a recent $45. But that doesn't necessarily make them a bargain, considering they still trade for more than 40 times projected 2002 profits. But Raymond James' Greg Haas, who rates the stock a "strong buy," figures the shares are worth $58 on a discounted cash flow basis. He thinks the multiple is quite tolerable when compared against his projected three-year EPS growth rate of 110 percent. Regardless, shares of AstroPower will be highly volatile in the months to come.
A safer way to play the solar sector may be British Petroleum {BP}. The oil giant has hedged its bets by heavily investing in its BP Solar division, which has operations in the U.S. Spain, Australia and India. On a revenue basis, BP Solar is the largest producer of solar power generating equipment in the world. Royal Dutch/Shell {RD} is also getting into the game. It's Shell Renewables division is involved in solar, biomass (plant material) and wind power.
Wind power has taken the lead in Europe, thanks to an aggressive expansion by Denmark's Vestas and NEG Micon (both trade only in European markets). But the U.S. is playing catch up as wind turbine farms are starting to pop up across the landscape. In fact, a division of Florida Power & Light {FPL} is currently building the world's largest wind farm on the Oregon-Washington border.
Other utilities are also ramping efforts in the wind area--and for good reason. The cost of wind-generated electricity has fallen from 38 cents per kilowatt-hour in the early 1980's to just 3 to 6 cents today, according to the American Wind Energy Association. As a result, the global use of wind power has been increasing at a rate of 24 percent annually a year over the past decade.
Industrial giant Asea Brown Bovieri {ABB, News, Boards}, regarded by some as "the General Electric of Europe," has also been quickly building up its wind-related business. The company's experience in the area of turbines makes it a natural competitor as giant newer, offshore turbines are installed off the U.S. and European coastlines. "ABB is staging a credible challenge, which is likely to see a new technology entering the market in 2003," writes HSBC's Roddy Bridge.
In recent years, U.S. investors have placed their bets on fuel cells, which convert hydrogen into energy, with water and oxygen as the only emissions. Investor interest has sent the shares of emerging players such as Ballard Power {BLDP} and Plug Power {PLUG} soaring.
But analysts caution that a series of hurdles remain for fuel cells, especially when used in cars and trucks. "Clearly, automotive represents a multi-billion dollar opportunity for (Ballard), yet this is the area that will require the greatest cost reduction in order to have any chance for success," writes Wedbush Morgan's Gary Holdsworth.
Acknowledging that reality, many fuel cell developers are rolling out fuel cells that can serve as a backup power plant for facilities such as hospitals and factories. In light of emerging threat of blackouts in California and elsewhere, that market may prove to be quite attractive.
Investors looking for smaller stocks in the sector that could prove successful should check out Millennium Cell {MCEL}, which is developing Boron-based hydrogen carriers that will help minimize the risk associated with the highly-volatile liquid. The company has already inked initial development agreements with a number of industry players.
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