It is customary, at the dawn of a new year, to reflect back on the past year’s highlights. This exercise is generally conducted immediately before the new year, so you could say I’m a little late. However, this time around, instead of creating my own list of key things to remember from 2006, I decided to see what the heavy hitters in the alt energy and clean tech spaces had to say. I picked 3 sources that I read religiously and that all published such a list for ’06. They are: Clean Break, Cleantech Blog and Red Herring. Two blogs and a formal media outlet. Here are the main 6 points I took from reading all 3: 1) 2006 was a great year for alt energy and clean tech, on a number of fronts. Nothing too groundbreaking here. Nevertheless, to get an idea of the scale, consider the following numbers from New Energy Finance (PDF document): the broad alt energy sector is estimated to have achieved a record $100 billion in financing in 2006. Of particular interest to retail investors is that fact that public market financing (i.e. alt energy and clean tech stocks) grew by a whooping 141% on 2005. Bubble or not bubble, that is the question. 2) Of all alt energy technologies, solar drew by far the most attention in 2006. Some of the highest profile alt energy plays of the year were solar firms. Think of Suntech Power [NYSE:STP], Sunpower Corp [NASDA:SPWR], as well as the multitude of non-pure plays that have exposure to this technology. However, the rapid increase in the demand for solar power led to a silicon shortage that threatens to eat away at margins in the sector. Credit Suisse initiated coverage of First Solar [NASDAQ:FSLR] in late December with an Outperform rating. One of the things they are particularly bullish on is the fact that the company’s technology, thin-film solar, requires only a fraction of the silicon-intensive semiconductor material used by its peers. Next to actual demand for solar technology, silicon became, in 2006, the 500-lb gorilla in the solar room…at least in the short and medium-term. 3) 2006 was also definitely the year of biofuels, more specifically ethanol in North America. The current supply-demand gap is not expected to be filled in the near future; the best ethanol plays should thus start to make money from their ethanol operations soon. This leads us to… 4) The alt energy space is still not viable without government support. Ethanol, in particular, got a huge boost from the Energy Policy Act of 2005. The Cleantech Blog reminds us that ethanol is just as much about placating the farming lobby as it is about weaning America off foreign oil or protecting the environment. The same held for Canada in 2006. It is imperative that alt energy investors be constantly reminded of the extent to which the viability of many of those firms rests of government support. 5) Climate change is increasingly on the radar screen of politicians. The scientific consensus underpinning action on climate change is strengthening by the day, Al Gore is making movies that do very well at the box office, and I was out playing soccer in the park today…I live in Toronto, I should be playing hockey! Jokes aside, climate is getting bigger and bigger, and we have commented in the past on the importance of keeping an eye on this increasingly material investment issue. 6) Batteries are in, hydrogen and fuel cells are out. There was a lot of hype in 2006 around electric cars and, more importantly, plug-in hybrids. This is occurring at the confluence of 2 movements: a) battery technology is improving rapidly and b) hydrogen is no easier to produce, transport and store then it was when Ballard’s [NASDAQ:BLDP OR TSE:BLD] share price collapsed a few years back. While there’s no denying the advances made in battery tech, I still think hydrogen and fuel cells hold a great future…the problem is, this may not happen for another decade. In the short-term, all things battery are hot, and not only for automotive. Think of it this way: there are loads of things that use batteries, and in almost all cases those batteries can be made better. These do, I believe, a pretty good job of summing up 2006, and are also all things to keep watching in 2007. I wish you all a great year with your alt energy stocks!
On #3, there is basically limitless demand for ethanol and biodiesel (subject to transportation constraints) but there are serious supply problems, especially with corn for ethanol. If all the ethanol plants currently planned are built, they will use most of the corn we currently grow. Given that gasoline is a perfectly adequate substitute of ethanol, there is a cap as to how much they can sell it for (once all govenrment RFPs have been satisfied.) That means they can’t pay any price for corn and still sell ethanol at a profit… which means that as corn prices rise due to ethanol demand, many ethanol plants will start losing serous amounts of money.
Good point Tom.
I’m also of the mind that a purely agricultural crops-based ethanol industry will encounter viability problems in North America at some point.
The feedstock-driven crunch will be assuaged by the arrival of cellusosic ethanol technology on a commercial basis. I think that that’s where the future of ethanol lies here, since we don’t grow sugar cane.