I don’t know whether we are close to the bottom but October has reduced the market value of the sustainable energy sector by about one-third.
This is somewhat worse than broader markets and sustainable energy has lost ground against the value of Exxon Mobil (XOM). To gage the scale of the sustainable energy business I frequently stack up the value of the companies in Camino’s database against Exxon Mobil. As recently as September 24th at the Clean Energy Showcase in Sacramento I was able to report the 363 sustainable energy companies I track represented 67% of the value of Exxon Mobil. Today it’s down to 50%.
For investors in this sector who have suffered significant losses this year, the real question is is there hope for better-than-market returns in the coming months and years? Or should you go back to cash or to indexing exclusively? I think the answer is maybe.
In Solar there are competing forces which can send the industry on two different tragectories. US presidential candidates are saying they prioritize alternative energy very highly. But they, and politicians around the world, are going to face serious financial pressures driven by market forces. Will they maintain subsidy policies for solar in the face of large budget deficits and potentially continued sub $100 oil? Without the subsidies investors may be faced with a sector growing much slower then in the last few years.
Renewable Electricity doesn’t rely to as great an extent on subsidies. But it does rely heavily on continued access to monopoly electric markets, access driven by global warming and security concerns. I think the good news for investors is governments can continue strong support for Renewable Electricity without having to deal with significant budget problems.
LED and Lighting is today driven almost entirely by market forces. While the sector needs continued cost reductions to increase its market share, silicon technology has proven it can follow a cost reduction path as volumes increase. With technological advances I think there is the possibility of better than market returns here, particularly with the huge declines the sector has already recorded this year. Since we formed the LED and Lighting index on 4/1 it’s down 59.8%.
Biofuels will continue to present challenges to investors. The promise, of course, is Biofuels is one of the strategies available to reduce oil consumption. But the sector is resource contrained, needs significant technology advances, has its margins pressured by declines in oil prices, and has had a number of problems with hedging strategies (VSE and BIOF).
Fuel Cells are still searching for the niches where they can economically complete and start to produce profits. Investing in public companies that are still in the development stage presents a high level of challenge.
Two previous oil price shocks spawned alternative energy companies. Subsequent declines in oil prices pruned the field but did leave behind a viable independent electric producing sector. This sector has continued to grow, is now armed with dramaticly better wind technology, and doesn’t need to impact national budget deficits. I expect Renewable Electricity companies to survive this correction and continue to expand their share of the electric generation market. This should, over time, produce better than market returns.
Mark doe not have a position in any companies mentioned in this article.