Wednesday, September 10, 2008

The Time Is Now For a Green Revolution

Pulitzer Prize-winning New York Times columnist Tom Friedman was interviewed by Charlie Rose yesterday discussing his new book, Hot, Flat, and Crowded: Why We Need a Green Revolution—And How It Can Renew America.

You can view the Charlie Rose interview by clicking here. You can also watch his lecture on clean energy by clicking on the YouTube video here.

Friedman has been touring the U.S. discussing his book and promoting a greener future:

"We are either going to be a Democratic China or a banana republic," Friedman told about 800 people attending the Jim Blanchard Leadership Forum in the Columbus Convention & Trade Center.

He then gave his definition of a banana republic.

"BANANA: Build Absolutely Nothing Anywhere Near Anything," the slide behind him read.

His message was clear: Change our outdated ways or suffer dire consequences.


Friedman is as hot as the climate he cautions against. He said the time is now for a Green Revolution, but it will be difficult.

"Have you ever been in a revolution where nobody got hurt?" he said. "When everybody is a winner, that's not a revolution; we are having a party."

The revolution needs to center around energy technology, he said. And it must happen as the world's population continues rapid growth.

"Energy technology will be the next great industry," he said.

It's time to change attitudes and look for new answers, said the New York Times columnist.

"We don't need to drill, drill, drill," he said. "We need to invent, invent, invent."

I happen to think that Tom Friedman is absolutely correct. The "ET" industry holds tremendous potential and it will be the next great industry if the political will is there to embrace it and promote it.

I write this knowing full well that a standoff between Democrats and Republicans in Congress has prevented the renewal of tax credits for alternative energy that experts say are critical to the wide adoption of solar and wind energy in the United States.

According to the SPIE, the time is now to extend renewable energy tax credits:

Renewable energy industries, including solar photovoltaic companies, totaled nearly $40 billion in gross revenues in 2006 and were responsible for more than 450,000 direct and indirect jobs, according to the American Society for Solar Energy.

"Without assurance of the tax credits, progress toward energy independence and cost efficiency enabled by recent advances could be drastically delayed," said SPIE CEO Eugene Arthurs. "The U.S. will not be in a position to benefit from recent technology breakthroughs and ongoing research."

At stake are incentives that reduce the cost of developing solar, wind, biomass, and other renewable energy sources eligible under the Investment Tax Credit (ITC).

Continuation of the tax credits now is crucial for leveraging recent advancements in solar energy and keeping momentum going in development of technology.

"Photovoltaic electricity is on the cusp of reaching grid parity, becoming competitive with petroleum, natural gas, and coal-fired utilities," said Ravi Durvasula, Director of Optical Engineering at Lightfleet Corporation. "Extending renewable energy tax incentives at this critical juncture will undoubtedly hasten the technical progress and thus shorten the timelines needed for reaching the tipping point." Durvasula was Symposium Chair of SPIE's Solar Energy conferences at its 2008 Optics and Photonics event.

"Solar photovoltaic and other renewable energy technologies have advanced rapidly in the U.S. over the past few years," said Robert J. Phillippy, President and CEO of Newport Corporation, a Corporate Member of SPIE. "Extension of the renewable energy tax credits will enable development of more cost-effective and efficient sources of renewable energy to continue at this rapid pace. This will provide significant and sustainable benefits to our environment and our economy."

The White House has endorsed more than one bill to extend the credits, but its efforts have relied on a balanced-budget approach that required that they be offset by cuts in other areas. With President Bush threatening to veto such legislation, and Senate leadership not being able to muster a veto-proof 60 votes, the effort remains stalled, despite bipartisan agreement on the need for the tax incentives.

With many projects now stymied until the stalemate is resolved, the industry is beginning to feel the fallout from the potential expiration of the credits at the end of 2008. Solar manufacturers and installers have delayed hiring, companies have revised earnings forecasts, and homeowners may delay adding alternative energy systems due to the potential increase in out-of-pocket expense. Other companies are adjusting their strategies to invest outside the U.S.

I have written extensively on the solar sector before here and here. I also talked about how Kleiner Perkins Caufield & Byers, one of the best VC funds is betting big on a green technology.

I track several solar shares every single day and I am very bullish on the long-term potential of this sector. However, it is extremely volatile and extremely manipulated by hedge funds. I have seen countless solar companies report outstanding earnings, raise their guidance and then get clobbered into oblivion.

Yesterday's Tech Trader Daily from Barron's, Solar Shares Collapsing; Where's the Bottom?, focused on some of the problems plaguing this industry:

  • Lehman analyst Vishal Shah wrote a note on the solar sector that in general was quite bullish, and in fact repeated his recommendations on First Solar (FSLR), SunPower (SPWR), Suntech (STP) and JA Solar (JASO). But Shah also noted that most solar companies have provided “somewhat aggressive guidance” for 2009 on the assumption that poly supply would become readily available from the spot market or silicon partners. He writes that supply tightness is likely to continue for now, and that solar ASPs are likely to decline at a faster rate than poly costs for companies without relatively long-term supply contracts. In particular, he cautions that gross margin pressure could be an issue for “most” Chinese solar companies.
  • A tight supply for polysilicon would in theory be good news for MEMC Electronic Materials (WFR). However, Credit Suisse’s Satya Kumar today cut his target price on the company to $45 from $50, repeating his Neutral rating. Kumar is worried not about solar, but rather about the company’s other key market: semiconductors. The target reduction, he wrote today, reflects “potential for incremental semiconductor wafer pricing weakness in 2009.” He writes that poly spot prices are high, increasing and expected to remain high in Q4.
  • Kumar today also raised another issue: currency. He chopped his price target on First Solar today to $300 from $350 to reflect currency factors. He notes that the Euro has declined from $1.60 to $1.42, and that almost all of FSLR’s sales are denominated in Euros. He notes that FSLR hedges 50% of revenues and 70% of profits. Kumar cut his 2008 EPS estimate to $3.81 from $3.98; for 2009 he drops to $6.05 from $6.81. Kumar maintains his Outperform rating on the stock.
  • As I noted yesterday, Richard Keiser, technology strategist at Bernstein Research wrote in a research piece Monday that fears of commoditizaiton and over-supply in the solar sector “are well founded.”
  • Also in yesterday’s post, I noted that Oppenheimer’s Sam Dubinsky wrote a research note Monday in which he said that the stocks in the solar sector were becoming more attractive, but that he was not a believer in the fundamental story; he raised concerns about both currency and over-capacity.

So in short, there are concerns that prices in 2009 are going to fall, that there is too much capacity for modules, but a short supply of polysilicon, and that the industry is going to get crunched by the strength in the dollar. The result: big, ugly price declines.

In Tuesday’s trading:

  • MEMC fell $6.36, or 16.2%, to $32.93.
  • First Solar fell $22.42, or 10.1%, to $200.26.
  • SunPower fell $11.04, or 12.8%, to $75.55.
  • Suntech fell $4.40, or 10.7%, to $36.67.
  • Canadian Solar fell $5.27, or 19.8%, to $21.34.
  • SolarFun fell $1.82, or 13.6%, to $11.60.
  • GT Solar fell $1.40, or 13.5%, to $9.
  • Evergreen Solar fell $1.46, or 19.2%, to $6.16.
  • Energy Conversion Devices fell $8.86, or 14.3%, to $53.05.
  • JA Solar fell $2.47, or 17%, to $12.08.
  • LDK fell $5.91, or 13.7%, to $37.37.

But in my opinion, these concerns are exaggerated and misguided. These are real companies with real earnings and tremendous growth potential. The recent pullback in these shares represents a buying opportunity for long-term investors who believe in the Green Revolution. In fact, solar shares rallied sharply today.

In these crappy markets, if I were to bet on the next big thing, I would bet on renewable energy in general and solar in particular. If you believe that the time is now for a 'Green Revolution', then you might want to invest in this industry now.

Be warned, however, that you need a strong stomach to weather the volatility of this sector (even though many solar shares have low forward P/Es, reflecting strong fundamentals, these are extremely high beta stocks and I've often seen them move 20% in a day and over 100% in a few weeks!).

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