Alternative Energy Sector Gets No Love From Investors, Despite BP Oil Spill Disaster

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Freeman explained that when the price of oil surges to alarming levels – as it did in the summer of 2008 – interest in the Alternative Energy sector likewise increases. Oil prices, while volatile, have remained locked in a fairly narrow trading band since the BP catastrophe occurred in late April.

However, David Kurzman, co-portfolio manager of the Leuthold Global Clean Technology Fund, counters that some of these assumptions about Alternative Energy are flat out wrong.

“The Gulf oil spill, while a huge headline story and an environmental disaster, has little or nothing to do with Alternative Energy or its share prices,” he said. “It also has little or no impact on the price of oil since the well that exploded was just one of about 300 producing wells in the Gulf, hardly putting a dent in either global supply or global consumption.”

Alternative Energy share prices, Kurzman indicates, suffer primarily because these technologies are not as cost-effective as traditional fossil fuel sources – and this perception weighs down the sector.

Moreover, oil prices, while they may be drivers of public perception of Alternate Energy companies, are not directly linked to the economics of most forms of renewable energy.

“Most renewables – wind, solar, geothermal, etc. -- are used to generate electricity, while oil is mostly used in the transportation and chemical industries,” said Nathan Gagnon, Alternative Energy analyst at IHS Herold.
“The price of oil has very little effect on the price of electricity, and it is electricity prices that determine the profitability of most renewables.”

Alternative Energy currently forms a tiny portion of energy usage in the U.S. today. Kurzman estimates, for example, that less than 2% of electrical energy in the U.S. currently originates in renewable/alternative energy sources.

“Most Alternative Energy technology is still developing,” Gagnon noted. “Many investors likely feel that the perceived risks of the sector outweigh the potential rewards.”

In addition, the vast majority of Alternative Energy 'pure plays' – even some of the most prominent names within the sector – are small-cap companies, an area of the investing universe riddled with high risk, volatility and earnings uncertainties.

As crucial as investor perception/interest might be, the Alternative Energy sector is more reliant on political and legislative support, via incentives and subsidies.

“Increased cash grants, real money, is what will give American Alternative Energy providers a real boost,” Kurzman noted.

Freeman said that “President Obama has been a big supporter of Alternative Energy; but many other politicians need to catch up on this. A strong signal of support from the government would give the average investor confidence that Alternative Energy stocks represent a viable long-term investment theme.”

In the U.S., Alternative Energy technology has lacked the financial commitments to bring it to scale.

“Alternative Energy is better established in some European nations, especially Spain, Portugal and Germany,” Freeman indicated.
“China and India have aggressively raised their activities in Alternative Energy as well, seeking to cut their dependence on oil imports and to wean themselves from coal and its harmful effects on the environment.”
However, for the moment, especially in China, Alternative Energy remains in its infancy, with the nation's factories and households still insatiably hungry for fossil fuels.

Germany, Kurzman said, is the world's largest market for solar power, primarily due to the generous subsidies and tax credits solar practitioners receive from their government.

The deepening debt crisis in Europe may, however, put a crimp in the development of Alternative Energy technology on the continent. Cash-strapped European countries are likely to further prune back subsidies for wind and solar power in the face of crushing budget deficits.

Gagnon indicated that even before EuroZone balance sheets fell under pressure, some countries, like Spain, had already planned to trim subsidies to solar and wind farms.

“But even with these potential cuts, Alternative Energy providers in many European nations would still receive fairly generous cash subsidies, “Kurzman stated.

The Alternative Energy market remains relatively small in the U.S., but it would seem its potential is limitless.

Indeed, some big established U.S. utilities -- notably NextEra Energy Inc. (NYSE: FPL), Duke Energy Corp. (NYSE: DUK) and PG&E Corp.(NYSE:PCG) -- have already ramped up their investments in Alternative Energy projects.

Even Exxon-Mobil Corp. (NYSE: XOM) has gotten in on the action – the oil behemoth plans to invest up to $600-million to genomics guru Craig Venter to help launch his new photosynthetic algae biofuels program.

Nuclear energy remains a contentious issue in this discussion. While nukes definitely qualify as an “alternative” energy source, fears over its safety apparently preclude some managers of Alternative Energy funds from investing in nuclear-related stocks.

“Nuclear has to be part of the conversation,” Kurzman added. “I would daresay that nuclear is actually much 'cleaner' and 'safer' than, say, coal mining.”

In any case, the near-term outlook for Alternative Energy stocks is “rocky” concluded Gagnon, due principally to risks in government policy in the EuroZone and the U.S.