It has been a rough couple of years for the alternative-energy sector.
First, in September 2011, California solar cell manufacturer Solyndra filed for bankruptcy protection, defaulting on its sizable U.S. Department of Energy-backed loans. Then, Colorado-based Abound Solar went belly up, despite the $400 million in federal loan guarantees it received in 2010. And those are just two of the highest-profile examples. The bankruptcy cycle has so far claimed a series of small wind and solar manufacturers nationwide, while larger firms such as Vestas Wind Systems, General Electric (GE) and Phillips 66 (PSX) have been significantly cutting back their renewable-energy investments this year.
In fact, according to the American Wind Energy Association, U.S. wind industry employment is on track to be cut in half to 41,000 by 2013, and investment in the sector is expected to plunge from $15.6 billion to just $5.5 billion in the next year.
Renewable energy stocks have been down almost across the board in the as well. In its October 2012 Alternative Energy Stock Outlook report, Zacks Investment Research expressed concern about firms that would be exposed to oversupply issues, including Real Goods Solar (RSOL), Solar Power Inc. (SOPW), Trina Solar Ltd. (TSL) and Suntech Power Holdings Company (STP).
So what went wrong? Wasn't renewable energy supposed to be the wave of the future? The technological breakthrough that not only restored the U.S. economy but freed us all from our reliance on foreign oil? Truth is, the industry is still working toward those goals; it's just been a tougher road than most had expected.
"The renewable-energy industry has been politicized so much that I don't think anyone can see the long-term strategy anymore," says Dean Musser, CEO of Tangent Energy Solutions. "It's a boom and bust cycle right now."
The problem, Musser explains, is that government incentives have created a "gold rush" mentality among many in the industry, with providers moving from state to state as credit programs are created, overbuilt and then allowed to expire. It's a difficult model to sustain, especially for the startups that make up much of the cleantech industry, and it's a poor fit with the traditionally stable energy sector. At the moment, for example, wind energy firms are facing down the expiration of the federal Production Tax Credit (or PTC) at the end of 2012, while solar manufacturers are waiting for the expiration of their credit in 2016. Whether or not either credit is renewed or retooled by Congress remains to be seen, making it difficult for companies to make strategic and long-term plans in the meantime.
"There is still money out there for projects," Musser says, "but only for those of the highest quality. You have to make a real impact on your customers' bills. Talking about a 1 percent savings on their energy bills won't get anyone's attention, but 10 percent to 15 percent savings, making real change, that's how you can get business in this market."
Tucker Twitmyer, managing director of private equity firm EnerTech Capital, says it all boils down to a change in focus. Now that collection and delivery systems are in place, many in tech are working on ways to improve productivity and make existing energy assets cheaper and more efficient. As a result, that's where the money is now going.
"In the U.S., we expect to see very choppy development over the next few years depending on what industry you're talking about," Twitmyer says. "The big question remains how stringent the states will be in sticking to their renewable standards and how wind and solar will play into all that."
The Obama Factor
Anyone who thought the Obama re-election might bring some sense of stability to this roller coaster, however, should think again.
"Certainly most cleantech companies preferred to see an Obama victory," says Pavel Molchanov, alternative energy analyst with Raymond James and Associates, "but there has been utter gridlock in DC on energy policy overall the last two years, and that same sense of gridlock is likely to persist, at least through the current Congress."
And the fact is, most of what has been happening in the renewable energy space has more to do with overseas competition, cheap natural gas and changing consumer behaviors. "These are not problems that Washington can solve even if it wants to," Molchanov says.
A Slow-Growth Investment
So is there still investment interest in renewable energy?
Yes, says Chris Blansett, alternative energy analyst with J.P. Morgan, but not because the sector has a particularly bright future. It's because utility companies signed on to today's alternative energy projects several years ago at rates much higher than today's electricity prices, making for impressive "built-in" profits for the short term.
"When you hear about Warren Buffett or MidAmerican Energy coming in on one of these projects, they will likely make 20 percent or more because the rates they signed on for four-five years ago are very high," Blansett says. "The question now is, can the industry replenish the pipeline with new projects that make financial sense? That's proving to be very difficult."
What do you think? Does renewable energy have a future? Is the sector a sound investment?