Lex: Renewable energy
Sunday July 31, 12:55 pm ET
There are few things as enjoyable as feeling the sun on your face and the wind in your hair. Investors seem to agree. Shares in wind and, especially, solar energy technology companies have outperformed the industrials sector by a wide margin over the past few years.
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Memories in the capital markets can be painful and, perhaps as a result of that, are often short. Back in 2000, it was US stocks like Plug Power and Capstone Turbine (NASDAQ:CPST) that were all the rage. But, once tech-stock fever and the shock of California's blackouts that summer passed, the fall was swift and sharp.
There are, however, important differences this time. One is the much higher gas price. At current UK and US gas price levels, gas-fired power costs around $36-$72 per megawatt-hour. The most efficient wind farms can now produce at $48 and do not require expensive carbon permits. Solar power, $240 per MWh at best, is still much more expensive. But since solar panels can sit on roof tops, rather than on centralised "farms", that figure should be compared with retail, not wholesale, prices. On that basis, it is not far above household bills in markets like Germany and Japan although these are hardly the most competitive benchmarks.
Political commitment to tackling climate change remains the critical driver. While strengthening overall, this is patchy as evidenced by the mixed reaction to the announcement of a US-backed rival initiative to the Kyoto treaty. At the local level, voters do not want landscapes blighted by windmills. Moving them to large remote or offshore wind farms increases technical risks, putting pressure on the smaller operators seeking financing.
Solar companies, with their small, discrete projects, do not face this issue. Perhaps that is why stocks like SolarWorld of Germany have risen six-fold in the past year alone. It now trades on a punchy price/earnings multiple for 2005 of 31 times, although that drops by a third within two years. Fundamentals are improving. Still, at these prices, sun-seekers risk getting burned.
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