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Update on Clean Energy Investing

| January 17, 2012
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By Shane G. Johnston & Judith L. Seid, CFP®

Many of our clients own some stock in clean energy companies and so, given the significant negative performance of this sector over the last couple of years, we’ve had numerous conversations about where these companies are headed and whether or not they still make good investment sense.

The whole sector of clean energy has struggled since January 2008 for several reasons:

• Financing the leap from product development to commercialization is an important stage for any unproven sector. Subsequently, this is exactly the stage that companies struggled for financing of during the credit crunch, leaving many companies cash-strapped and straining to smooth out volatile sales cycles during expansion (read Cnet News report from Sep 2008 here).
• European governments like Spain, France and Germany have been large supporters to this sector, implementing clean energy mandates ahead of many other countries. Subsequently, these same countries have been hit very hard throughout the downturn and haven’t had as much of an ability to fund projects (read a more complete discussion of recent public policy and clean energy in Foreign Affairs here).
• The political will to pass the Clean Energy Bill in the U.S. died during the BP oil spill, which lead to a controversial offshore drilling moratorium for several months (Bloomberg story here). Consequently billions of subsidies into this sector were foregone,
• Recently, the weakening of the Kyoto Protocol threatens to delay internationally-organized support for implementing clean energy policies.

Amidst all of the downward pressure on the clean energy sector in the last 47 months, some important positive indicators continue to provide support for a positive outlook:

• Let’s not forget that, at the end of the day fossil-based fuels are limited and will eventually run out whereas renewable energy sources are, well, renewable.
• Technology continues to improve, bringing the cost of energy output from clean methods closer to par with the oil industry (see the Energy Information Administration’s cost comparison of energy sources here).
• Demands for clean energy continue to surge. Most notably perhaps, the US Department of Defense, one of the largest energy consumers in the world, has increased their clean energy investments by 300%, from $400 million to $1.2 billion, between 2006 and 2009, a figure that’s projected to surpass $10 billion annually by 2030 (read CleanTechnica post here).
• Venture capital and private investors have been pouring money into this sector (good article on “Post Stimulus Financing”).
• The value of clean energy stocks, measured by price to earnings ratios, has improved significantly from their 2008 peak and many companies in this space are very attractively priced right now.

Feel free to contact us if you’d like to explore how renewable energy investments should fit into your overall financial plan and portfolio.

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