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Green Energy Rising

But investors should brace for a bumpy ride.

By Bob Frick, Senior Editor

From Kiplinger's Personal Finance magazine, June 2009

Business isn't so sunny these days for SolarCity, the country's largest installer of residential solar-power systems. But Lyndon Rive, chief executive of the Foster City, Cal., firm, says it's an absence of financing, rather than a lack of demand, that has caused the slowdown. "Once you address that bottleneck," he says, "solar power will boom." So, too, will the entire spectrum of renewable-energy stocks, which lately have generated as much sizzle as a solar panel in an eclipse.

A year ago, alternative energy shone brightly. Then came the financial crisis, which starved the industry of its lifeblood: capital. Lack of it caused demand to tumble and inventories to grow. Says Gregory Wetstone, of the American Wind Energy Association: "Our astronomical growth came to a screeching halt in late 2008." As a result, alternative-energy stocks crumbled. The WilderHill Clean Energy Index, which tracks 51 companies around the world, lost 60% over the past year through April 9.

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Enter President Obama. His stimulus package, enacted in February, represents a Herculean effort to reinvigorate the renewable-energy industry. The White House sees a trifecta of benefits from alternative energy: New jobs, a reduction in our dependence on foreign oil, and the beginning of the end of global warming.

Washington is sparing no expense. It plans to spend $150 billion on renewable energy over the next ten years. Consider a typical solar-energy system installed by Rive's SolarCity. Uncle Sam used to pay for 30% of the cost, with a $2,000 cap. But installing solar panels on your roof that produce 5 kilowatts—enough to power an average-size house in some areas—costs $40,000. Under the new program, the feds will still pay for 30% of the system, but there is no longer a cap. If you add in subsidies from state governments, the cost of a home solar system could drop to $20,000.

Big businesses will also benefit from Uncle Sam's largess. Federal incentives will help pay for large renewable-energy projects that will cost hundreds of millions of dollars and generate thousands of megawatts of power. And those incentives will take the form of outright payments, not the generous tax credits the government once offered for such pro-jects. "Tax credits are great, but you need profits to use tax credits, and in this economy nobody's making profits," says Christopher O'Brien, a U.S.-based executive of Oerlikon Solar, a Swiss company.

Guarantees in action

To further spur financing, the Department of Energy is finally guaranteeing loans for renewable-energy projects. The operative word is finally, given that the guarantee program became law in 2005. The Obama administration has lit a fire under the department, which recently announced its first guarantee—on a $535-million loan to Solyndra, a solar-energy company in Fremont, Cal. The loan, from the U.S. Treasury, will be used to expand Solyndra's solar-panel factory in California. That's right, one branch of the government is making a loan that another one is guaranteeing; the feds aren't leaving anything to chance.

But the ultimate government stimulus for alternative energy may yet be an energy bill that sets renewable-energy goals for all 50 states. Currently, 28 states have their own renewable-energy standards. "We're in a window where renewable energy is a policy-driven market," says O'Brien.

Despite the Obama administration's efforts, spending on renewable energy hasn't yet exploded. The short-term holdup is that applicants must wait for the government to produce new forms and guidelines that detail how to tap stimulus dollars; they should be ready soon. Regarding large projects, the rules essentially state that if you start building a project before the end of 2010 and it comes online before 2017, you can expect to get a check from the Treasury.

Uncle Sam is willing, but getting private capital still isn't easy. Says Fred Morse, senior adviser to Spain's Abengoa Solar: "You could take your federal guarantee to your bank and they'd say, ‘I'm not worried about you defaulting; I don't have money to lend.'"

Venture capitalists seem more eager to back renewable energy. In 2008, they invested $4.1 billion in alternative-energy projects, from research and development to construction of solar farms. That's a 54% hike from 2007, according to PricewaterhouseCoopers. That's despite an 8% drop to $28.3 billion in overall venture-capital financing from 2007.

At the moment, says Pricewaterhouse's Tim Carey, venture capitalists' favorite alternative-energy technology is solar. Last year, 45% of the money went to solar projects, compared with 23% in 2007. Much of the money is being used to finance the move by solar companies from development to full production, Carey says. Still, the financial crisis dampened even venture capitalists' ardor for renewable energy, he says. Funding fell 14% from the third quarter of 2008 to the fourth.

The second major constraint on the expanded use of alternative energy is the power grid, or lack thereof. Massive wind farms in the Midwest and solar farms in the Southwest aren't much use if they aren't connected to major cities. Says Morse: "It's not enough to build a car factory. You have to build some roads." Wetstone, the wind-energy association official, says the extent to which the power grid is developed will ultimately determine whether wind meets 3% to 4% of the nation's energy needs, or as much as 20%.

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