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Digging Gold or Getting Trapped in Alternative Energy Investments

Digging Gold or Getting Trapped in Alternative Energy Investments

Rocky Chan

For recent years, the word "alternative energy" seems to be stealing a lot of headlines. The text book definition is any energy beside the traditional fossil fuel. Some good examples are solar power, water and tidal power, wind power, biofuel and ethanol, thermal energy and so on. Another word substitute for alternative

energy may be the renewable energy, which simply means something that will never be consumed up such as sun power, as the sun will always be there. To be frank, the word alternative is actually a relative term. We have to place ourselves in a certain country or certain historical period to fully appreciate its true meaning. China uses coal as the dominant source of energy. The newly pickup of nature gas may well be regarded as an alternative energy in China, but may be not the case in United States. Also for the same token, coal was certainly considered as alternative energy back in 1500AD in Europe where wood was the dominant source energy for heating and warming. The heavy wood deforestation happening in that era forced people to search for new sources of alternative energy. Now, of course, in our generation, coal is not an alternative any more.

Among all the sources of alternative energy, solar power is probably the most visible one. In early 2006, I remember that we got so exciting about alternative energy that we are partying like internet boom in 1999. A lot of fresh concepts like solar power companies got loads of media exposure. Walls Street eagerly wrapped up this industry into a nice looking package and presented it to public in exchange for quick investment money. For instance, in early 2006, one Chinese alternative energy company named Suntech Power Holdings Co. ltd. (STP) was IPO and traded at around $20. It was once the world's largest panel maker. This fancy lasted right before the 2008 financial crisis and we witnessed the stock price flying well above $90. Unbelievably if you dare to turn on your mobile apps and glance through the stock screen, you will drop your eye balls to see it trade at 65 cents at this moment. The market cap of this stock is almost completely wiped out due to the fact that it is undergoing the insolvency process. In early March the announcement of a gigantic loan defaults ($541milion) rattled the market and triggered the free fall on the stock price. Unfortunately, this may not be the end but just the beginning of the defaulting trends in Chinese solar industry. Another Chinese solar power company named LDK Solar Co. Ltd. (LDK) is following the similar footsteps. What did these companies go wrong? Well many things. On top of the list, the Chinese government over-involvement in this sector has to be blamed. Capital market is better left capitalists to run, not the communists or government. Think about it, even US, Japan, German and other developed countries has been struggle for decades to improve the technology, the efficiency and effectiveness on commercializing alternative energy. China government was so dare and bold to invest $52 billion in 2011 and led the world in renewable energy investment while US rank second with $51 billion. Without deep understanding and good foundation on alternative energy, Chinese government made this alternative energy investment a nationwide commitment: 12th five year plan for economic & social development of 2011-2015 targets to spend a lofty $473.1 billion on clean energy investment. However, not even half way through, we are witnessing the fall of the giant such as Suntech Power Holding. It is fair to say now that most of the Chinese government investment money got wasted or got corrupted. The heavy investment results in over-production and over-supply. The over production and massive borrowings have finally crippled Suntech Power. By inspecting its past two year financial statements, we should not have too much difficult to foresee the high probability of loan defaults. However, the easy credits of Chinese government may be a good excuse to keep the life blood flow for a long period of time. The new leader of China Mr. Xi has been upholding and promoting an anti-corruption campaign. Whether this campaign will do any good to China remains to be seen but the easy credits seem to be evaporated suddenly. State governors have not only started to limit the easy credits but also call back loan overdue determinedly. Friends become enemies overnight. All of a sudden huge pressure is capped on those sun power companies and defaults are the natural outcomes.

Other detrimental factors include the trade battles and heavy tariffs placed on Chinese export companies. As high as 31% tariffs from western government were levied on the so-called guilty verdict of dumping on products below the market price. Suntech Power Holdings, Trina Solar (TSL) and Yingli Green Energy (YGE) are the major losers on this battle. Another major problem is the gradually appreciation of RMB, which was eroding the core earnings of all export driven industries. Now, solar industry in China is struggling. What would be the way of handling this mess in the eyes of the top Chinese authority? Consolidation is the norm. China government is always quick to shut down the small and consolidates industry into a few key players. The estimate is that players in the solar industry will shrink from the current 330 to 15. Obviously, this approach will concentrate power, reduce competitions and create monopoly monster which cares nothing about improving services and increasing efficiency.

On the bright side, however, as solar power technology continues to advance and the cost of installation continues to drop, some day in the future, it may become a reality that average family can afford to put sun panel on top of the wood and huge savings is materialized in electronic bills. Global environment friendly activists will continue to advocate and push forward green and renewable energy and western governments will continue to boost the number of new domestic users by all kinds of tax incentives.

Wind power is another type of alternative energy but it does not enjoy as much spotlight due to a number of reasons. First, it is too costly to build the wind-turbine. Second, wind direction and force are hard to control and harness, making it an unreliable sources of energy. It is an interesting fact that wind power has been harvested for over a hundred years but it remains to be an alternative energy. We can easily recognize the windmills in Holland with the beautiful and colorful tulip map all around it. Windmills are long employed for generating just enough power for irrigation on flower, plant and crop. However, it is hard to go beyond that and extend to a larger scale of usage. Chinese companies are also getting dominating in wind power sector. Good examples include Huaneng Renewables Corporation (00958) or China Datang Corporation Renewable Power Co (01798), both are listed in Hong Kong stock market.

Water, wave and tidal power are other examples of alternative energy with limited capacity. Gigantic water falls are scarce and limited resources. It may worth more on cultivating tourism business than producing electricity.

Hydrogen is another rarely mentioned alternative energy. It is mostly reserved for the spaceship use or warfare needs.

Biofuel and ethanol are plant-derived substitutes of gasoline for powering vehicles. The idea of turning food into gasoline does not sit well with the general public. In addition, biofuel and ethanol energy development is still in an infancy phase and mostly confined in laboratory. At the current available level of biofuel technology, we need to put aside the entire global grain harvest just to generate 16% of the auto fuel needs. Are we willing to give up bread for electricity or starve to death just for keeping warm?

Now that we have identified the potential alternative energy sources, let move our attention to the way of investing into these new concepts. First, there is growing number of individual alternative energy stocks listed globally. At this moment, not all sun power stocks got hammered or drained to the toilet. First Solar Inc. (FSLR), which is the leading solar power company based in US, for example, is currently trading to close to 53 weeks high. The energy sector remains volatile and politically controversial. It makes lot of sense to invest in diversified portfolio to lower the risk if you are confident about this industry but not so sure about picking the winners. For diversification purpose, mutual funds may be the way to go. You may want to consider some good performance funds such as the best 2012 performance alternative energy funds: Allianz RCM Global Water Fund (AWTAX) or Pax World Global Environmental Market Fund (PGRNX) both enjoyed 20% gain in 2012.

Of courses past performance does not guarantee for future performance. If you are like me, very much fees averse and do not want to be charged upfront fees, backend fees, 12b-1 fees, management fees, liquidation fees or deferred sales charges and the likes, you may want to consider the lower fee versions - ETF (Exchange Traded Fund) or Unitrust (Unit Investment Trust). Good examples are First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID) and Powershares Global Wind Energy (PWND). There are other ways to invest in alternative energy such as private equity, hedge fund, foundation and structure products available. However, they are usually limited or reserved for high network individuals or accredited investors. Before you put your hard earned money into alternative energy investments, always do good homework or consult investment professionals or industry experts.

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