Alternative Energy and the NEP
22-May-01 00:03 ET
[BRIEFING.COM - Matt Gould] Last week, the Bush Administration unveiled the National Energy Policy Development Group's report to the President. In this Stock Brief, we will take a look at what implications the report holds for alternative energy stocks.
There's Green In There
The National Energy Policy (NEP), as recommended to the President, provides a broad overview of both the demand and supply side of the nation's energy situation. You have probably heard environmentalist groups and Democrats criticize the Bush Administration for advocating increased coal and nuclear generated energy, however, you may not have heard that the report devotes significant consideration to alternative and environmentally friendly energy sources. It's always easy to point the finger when words like coal and nuclear are brought up, they have negative connotations that go back generations. However, the policy encompasses the entire spectrum of North American energy sources, and in very broad terms, it addresses long-term and near-term objectives. Technologies like fuel cells are not viable options in the immediate future, while coal and nuclear energy are.
Alternative Energy Policy Recommendations
The National Energy Policy Development Group (NEPDG) made over 100 policy recommendations in the report, and 13 of those relate to renewable and alternative energy. It's important to note that these are only recommendations, and the benefits to individual companies or even industries are not easily or clearly determinable. These policy recommendations are far from money in the bank, they're merely starting points for negotiations. Nevertheless, the market reacted strongly to the mere inclusion of alternative energy recommendations in the report, and the already high valuations in the group rose further.
One of the more talked about recommendations calls for a temporary income tax credit available for the purchase of new hybrid or fuel cell vehicles between 2002-2007. We view this as a positive for all companies involved in fuel cell research, but most beneficial to those specializing in Fuel Cell Vehicles (FCVs). Ballard Power (BLDP) is the leading FCV developer, and FCVs have been the focus of the majority of fuel cell R&D. Ballard has strategic agreements in place with DaimlerChrysler and Ford, which own about 19.3% and 14.5% of BLDP common shares, respectively. Microturbines are also seen as having a future in FCVs as onboard battery chargers, and Capstone (CPST) has a head start in that area. Flywheels are seen as a future replacement for lead-acid batteries to be used in hybrid and enviromentally-friendly automobiles, and Active Power (ACPW) and Beacon Power (BCON) are two leaders in flywheel technology. As we pointed out in a January Stock Brief, FCVs are far from ready for commercialization and a 5-10 year timeline is considered by many to be optimistic.
Another interesting proposal calls for expansion of the section 29 tax credit to include new landfill methane projects. Capstone claims their microturbines can run on fuels with energy content as low as 350 Btu/scf, and that their system is ideal for converting landfill and digester gas to electricity. This is not only a promising future application of an energy source that is currently being wasted, it's an extremely clean production method with very low emissions. The majority of R&D expenses from the private sector in microturbines have come from major conglomerates such as Caterpillar (CAT), Honeywell (HON), General Electric (GE), Ingersoll-Rand (IR) and United Technologies (UTX).
Wind, biomass and solar energy producers are also going to be beneficiaries, as are residential solar energy systems vendors. The report calls for a new 15% tax credit ($2000 max) for residential solar energy property. The plan also calls for Congress to use an estimated $1.2 bln of bid bonuses from environmentally responsible leasing of Arctic National Wildlife Refuge land for funding research into alternative and renewable energy resources, including wind, solar, geothermal, and biomass. There are many companies that stand to benefit from such a proposal, a few pure-plays include: Capstone for biomass, and AstroPower (APWR) and Evergreen Solar (ESLR) for solar applications. Numerous diversified companies have interests in geothermal and wind-generated power.
In addition to the FCV tax credit already mentioned, fuel cells are mentioned in a proposal that advocates an educational campaign for next-generation technology, an R&D effort regarding hydrogen, fuel cells, and distributed energy and legislation reauthorizing the Hydrogen Energy Act. This rather vague proposal is a broad stroke, but nevertheless does hold positive implications for the fuel cell stocks: Ballard Power, FuelCell Energy (FCEL), H Power Corp. (HPOW), Hydrogenics Corp (HYGS), Millennium Cell (MCEL), Proton Energy and Plug Power (PLUG).
Time To Buy and Hold?
While the inclusion of alternative energy funding is certainly an encouraging sign, the stocks in this sector have already priced in the future potential and then some. Remember, some of these companies have yet to develop viable products, and in some cases never will. That hasn't stopped speculation from driving the valuations to nosebleed levels. The pure-plays always attract the speculators, but the major conglomerates are the real source of the R&D push. The alternative energy stocks will continue to trade up and down on news, and while some of the companies boast very promising technology, the cat is out of the bag, and the valuations reflect it. Nevertheless, high risk tolerant investors will continue to play these stocks, and some of the companies that are showing a clear path to profitability are capable of providing attractive returns, but pick your stocks and your entry points carefully. For more on valuations in the sector see last week's Stock Brief. |
