The suits are moving in
The planet isn’t the only thing heating up because of climate change. Some renewable-energy stocks have been pretty hot too. The price of electricity and oil could easily double in the next few years, making solar panels look inexpensive and stocks in solar panel companies looking even cheaper.
Wind turbines were once just for hippies, but shares of Vestas Wind Systems, the world’s biggest maker of wind turbines, have doubled in the past year, despite the market’s latest turmoil. The Danish company is ramping up production in its two biggest markets, China and the U.S., and expects sales to rise 17 percent this year. It recently announced that profit jumped fivefold in the most recent quarter.
Vestas might seem a perfect place to invest for an era of global climate change. The fortunes of many firms are tied to changes in the Earth’s temperatures and to the evolving legislative climate, and that can present an array of investment opportunities, as well as pitfalls. There are builders of nuclear power plants, traditional utilities, wind turbine-makers, solar companies and biofuel firms.
“This is not a social or moral issue only. It’s an investment issue,” in the opinion of Edward Kerschner, chief investment strategist at Citigroup Inc. “Whether or not you believe in climate change is not germane to how you invest your money.” Many economists would disagree with this remark.
But before jumping in, investors would be wise to carefully study the companies involved. Vestas, for example, faces hurdles. Wind turbines use hundreds of parts that are in limited supply, raising the specter of bottlenecks despite strong demand. The company also depends in large measure on continued government subsidies. And it faces stiff competition as companies such as General Electric Co. and Siemens AG expand and take aim at Vestas’ market-leading position.
Investors also need to pay close attention to action in Congress. The final details of climate-change legislation, such as whether to auction or distribute carbon-dioxide emission allowances, could turn some companies from losers to winners, or vice versa.
One thing a lot of analysts agree on: Some kind of regulation or tax for emissions is coming, and that could affect the fortunes of several companies, including Lake Forest-based Tenneco Inc. and Chicago-based Exelon Corp.
Though not the most potent greenhouse gas, carbon dioxide is the most common, accounting for 77 percent of the gases. And because carbon dioxide is produced by the most common forms of energy use — coal, oil and natural gas — that could alter a wide range of behavior and investments.
*Transportation. California and Florida plan to require the carbon content of tailpipe emissions to drop by at least 10 percent by 2020. That won’t help just Toyota Motor Corp. and its hybrid vehicles, but Tenneco, which supplies emission-reduction technologies for diesel-fueled engines, could benefit, Citigroup said.
Tenneco has jumped 25 percent since the start of the year. Diesel engines are more efficient than gasoline engines and, as a result, diesel-powered vehicles emit 10 percent to 30 percent less carbon dioxide than gasoline-fueled ones.
Anticipating a rise in diesel market share, Marathon Oil Corp. is investing in its largest U.S. refinery to be able to produce equal quantities of gasoline and diesel. Marathon is up 13 percent since the start of the year. Diesel car sales will climb to about 750,000 this year, but sales of gas-electric hybrid vehicles are growing faster and pose competition for carbon-conscious consumers.
*Coal. If Congress and the White House agree on legislation that puts a price on carbon-dioxide emissions, utilities that have a lot of nuclear power capacity, such as Exelon, could benefit from being able to sell carbon-free electricity. Others, such as American Electric Power Co., whose coal-fired plants are leading emitters of carbon dioxide, could face new costs.
A cap-and-trade system would set a national ceiling on emissions and issue allowances for that amount. Companies with extra allowances could sell them to those falling short.
Any company that figures out the best method of separating carbon dioxide from coal-plant emissions and burying it safely underground stands to make lots of money. There are three unproven, and costly, technologies now, pioneered by the likes of GE, Siemens, Babcock & Wilcox and Alstom.
Meanwhile, the coal rush has shown some signs of slowing. Several plants have been blocked by lawsuits, soaring construction costs and regulatory delays. Citigroup recently downgraded coal stocks.
*Biofuel. Federal regulations requiring growing use of ethanol by gasoline refiners have boosted the fortunes of countless ethanol producers. Ethanol production in January averaged 375,000 barrels a day, up 30 percent from the year before. Legislation approved by the Senate would require that use to rise to 2.3 million barrels a day over the next 15 years, half of it corn-based and half using other plants, such as wood chips or switch grass, as feedstocks.
Corn-based ethanol saves little energy compared with petroleum because of the energy that goes into growing and distilling corn. Cellulosic ethanol, or sugar-based ethanol, has a better balance between energy and carbon and would fare better than corn-based rivals under legislation that placed a value and price on carbon emissions.
So far, however, all the major U.S. ethanol producers, led by Decatur-based Archer Daniels Midland Co. and Verasun Energy Corp., use corn. Profits at those firms have been squeezed by high corn prices.
*Solar power. This is much more expensive than other forms of power generation, but it would become more competitive if lawmakers tax or price carbon-dioxide emissions.
“Electricity prices could go up 50 percent over the next 10 years. Then solar will be cheaper than the grid,” said Jesse Pichel, a senior analyst at Piper Jaffray, who expects rising oil and coal prices and falling solar costs as companies innovate the way semiconductor chip firms did. For now, solar relies heavily on government subsidies.
Shares of Suntech Power Holdings Co, a Chinese maker of photovoltaic cells used in solar panels, were up as much as 35 percent in the past year before sliding during the market turbulence this month. The company’s output has surged, however, making it the world’s fourth-biggest manufacturer of solar cells in 2006. Next year’s Summer Olympics in Beijing could prove to be a showcase for Suntech’s products.
Although the problem of polysilicon shortages and a sevenfold price increase over five years is squeezing profits at Suntech and its competitors, it has proved a boon to companies that turn sand into polysilicon. Among those companies are a unit of Dow Corning and MEMC Electronic Materials Inc., based in St. Peters, Mo. The polysilicon industry is expected to more than double production by 2010.
*Nuclear power. Advocates for nuclear power believe their time has come. The Bush administration has been pushing for a nuclear power revival, and the Energy Policy Act of 2005 contains powerful financial incentives, especially for the first half-dozen plants.
If lawmakers make companies pay for carbon emissions, nuclear would get another boost. So far, 17 companies are weighing license applications for more than 30 plants, and other plants are being built abroad. The main companies in the nuclear-power construction business are a unit of GE, Areva of France, a unit of Mitsubishi Heavy Industries and the Westinghouse Electric unit of Toshiba.
In anticipation of a nuclear resurgence, uranium prices have soared, brightening the fortunes of firms such as Cameco Corp. of Saskatchewan, the world’s largest uranium producer. Uranium prices rose to $136 a ton in mid-July from $11 a pound in June 2003, though they have fallen to $105 per ton.
*Natural gas. Carbon dioxide emissions from natural gas are far lower than those of other fossil fuels. That should keep demand strong for domestic natural gas producers and importers of liquefied natural gas.
Costly LNG projects mostly involve big utilities and major oil and gas multinational firms. Sempra Energy and Cheniere Energy are active in new LNG terminals in the U.S. Exxon Mobil is helping Qatar expand its LNG export sector. In a recent climate change report, Citigroup noted that every 1 billion gallons of additional ethanol production would require 28 billion cubic feet of natural gas to fire the ethanol distilleries.
*Wind. There is a giant backlog of orders for wind turbines. Most manufacturers have enough orders to keep busy through 2009. Gearboxes, blades, castings and bearings are all in short supply. Technology has more than doubled the power output from each turbine, with size growing from about 10 yards in diameter in the 1970s to more than 80 yards today. The biggest turbinemakers are Vestas Wind Systems, Spain’s Gamesa, GE and Siemens.
Developers of wind farms also could benefit. Citigroup pointed to Babcock & Brown Wind Partners Group, an Australian company, which has an interest in 33 wind farms, many in the U.S.