Energy's Foolish Future: Renewables

This article is part two of a two-part series on why the U.S. needs both fossil fuels and alternative energy sources, and how savvy investors can benefit from both.

Fossil fuels are still the dominant energy sources in our country, but environmental concerns and the need for sustainable energy have companies looking for other alternatives. Renewable energy is still a burgeoning industry, but big companies are investing time and money into renewables. Investors would be smart to do the same.

Just because it's hard, doesn't mean it isn't worth it
"Renewable energy" is a broad term, so let's narrow it down to two renewable-energy sectors that get the most attention ­-- solar and wind. Both are traveling some long and difficult roads as they make their way to becoming bona fide energy sources. But the first to travel untrodden paths are always bound to suffer a few missteps.

Solar companies have had a hard go of it, and I've had my doubts about their current stability. Both First Solar's (NASDAQ: FSLR  ) and SunPower's (NASDAQ: SPWR  ) net income fell into the red last year, after two years of profitability. Two companies don't represent the industry as a whole, but coupled with Solyndra's public failure, they paint a pretty accurate picture of how solar is doing for small companies. Cheap solar panels from China forced small solar companies to drop their prices, which ate into their profits.

Similarly, wind has seen its share of setbacks recently, largely at the hands of cheap natural gas. Even T. Boone Pickens, one of the strongest proponents of wind power, sold his wind farm back in October and cited the price of natural gas when he talked to CNN.

Renewables make up a young industry, and they need help. To put it bluntly, solar and wind need help from the government. Energy subsidies get a bad rap from opponents of renewables, claiming that the need for public aid shows these energy sources aren't worth it. But this argument misses the 800-pound gorilla in the room: the fossil fuel subsidies that already exist.

In 2010, worldwide subsidies for fossil fuels hit as much as $750 billion, according to the International Energy Agency and the U.S. Natural Resources Defense Council. These subsidies include things such as tax incentives for production, purchase requirements for energy sources, research and development, the subsidizing of certain energy sources, partial government ownership, and many others. And compared with fossil fuel subsidies, renewable energy received a much lower $66 billion in the same year. In fact, adjusting for inflation, the U.S. government is giving less in new energy subsidies than ever before, according to a report by capital ventures company DBL Investors.

Both the solar and wind industries caught a break recently, when Congress voted on a fiscal deal that included extending tax credits for the two renewables. Wind-energy production projects receive a tax credit of 2.2 cents per kilowatt-hour until the end of year, and wind-energy proponents are pushing for further credits into 2019. The fiscal cliff deal also included a tax credit extension for solar-power production and the option for both wind and solar companies to choose a 30% investment tax credit instead of the per-kilowatt-hour credit.

It's true that fossil fuels produce more energy than renewables do, but the argument that renewable sources such as solar or wind are receiving too many government subsidies doesn't hold up when compared with fossil fuel subsidies.

Fossil fuels needed time to grow, and so do renewables
Last year, renewable energy accounted for about 13% of all electricity generation in our country. The same amount of electricity came from natural gas back in 1993. Today, natural gas accounts for 25% of all of our electricity needs and could produce 30% in 2040. That means it will possibly take natural gas 47 years to go from 13% electricity generation to 30% of generation.

If we'd given up on natural gas decades ago because it wasn't holding a large enough percentage of our electricity production, we'd be missing out on a resource that now provides a quarter of our electricity. All energy resources need time to develop, and renewables are no different.

The renewables revolution
For the foreseeable future, the fate of renewables may lie in the most unconventional hands -- the oil companies. Earlier I mentioned SunPower, which is 60% owned by Europe's third-largest oil producer, Total (NYSE: TOT  ) , which purchased its stake in SunPower for $1.38 billion two years ago. The company has been researching solar power since the early 1980s and biofuels since 1993. Total has also partnered with Amyris to produce renewable diesel and jet fuel from plant sugars, for commercial sale.

Another large oil producer, BP (NYSE: BP  ) , also has some skin in the renewables game. Although the company recently jumped ship from its solar projects, it has invested a total of $4 billion into wind energy. The company has more than 1,000 wind turbines and generates enough electricity to power 586,000 homes.

Though Total and BP are investing in renewables, one of the most dominant oil producers leading the renewable charge is Chevron (NYSE: CVX  ) . The company switched an entire California school district on to solar power, converted an old Texaco refinery into a wind farm that powers 4,400 homes, and is one of the world's largest producers of geothermal energy. Chevron's geothermal plants in Indonesia and the Philippines generate enough electricity to power millions of homes in those countries.

The future of renewables for Fools
The future of renewables is cloudy, but it's not uncertain. Oil and gas company investments in renewable energy should be a sign, even if a small one, that we're headed on the right track. These companies exist for the same reason every other company exists -- to provide a product and to make a profit off that product. When they invest in renewables, it shows there's future potential for renewable-energy sources to be profitable.

I'm a fan of smaller companies getting into the renewable energy market. They can focus on just one energy source, instead of investing in renewables as an afterthought. A new solar company backed by Elon Musk, called SolarCity (NASDAQ: SCTY  ) , just had its IPO last month. Musk, famous for his Tesla Motors car company, may be the one to invigorate the solar industry. But smaller companies don't have access to the same capital that a Chevron or Total does. So that's why Foolish investors should look to the bigger energy producers as well as the smaller ones when investing in renewable energy.

But the renewable-energy industry can be a volatile market. Investors and bystanders alike have been shocked by First Solar's precipitous drop over the past 12 months, and now the stakes have never been higher for the company. Are they done for good, or are they ready for a rebound? If you're looking for continuing updates and guidance on the company whenever news breaks, we've created a brand-new report that details every must-know side of this stock. To get started, just click here now.


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  • Report this Comment On January 15, 2013, at 1:36 PM, damilkman wrote:

    I have some concerns about this article that I find misleading. There is a big difference between a subsidy and a tax break. If were going to label all tax breaks as subsidies then the US housing market is subsidiezed to the tune of the interest rate deduction. The tax code is so giganitc that about every endevor is technically subsidized at some level. In which case what is the point? So additional clarification needs to be added there the author is arguing about oil subsidies.

    The other item that concerns me is the lumping of all renewables into one catagory. In my opinion not all renewables are created equal. I think geothermal, solar, and hydro are reasonable alternatives. Efficent conversion of plant material to hydrocarbon(example algae) are interesting. However wind and ethanol are horrible wastes of time and energy. Which comes back to subsidies.

    A tax break can be a useful though often misguided social engineering tool that is attempted to encourage a particular action. For example tax breaks on oil exploration and home ownership encourage more oil exploration and home ownership. Unless the tax break is insane it does not influence people to enter into the endevor but makes them more prone to do it anyway or to do more of it. Most people want to own houses. With the tax break they perhaps buy more house then they are inclined to. Oil companies want to discover more oil reserves. The tax break means they spend more on R&D then they normally would.

    A subsidy is a different beast. A subsidy takes a money losing proposition and makes it profitable. For example if it costs ten dollars for a company to make something but the market says it it only worth five dollars, for every unit built the government gives the company six dollars so they can sell it for four dollars to make a one dollar return. When a country subsidizes gas so the customers pay 1 dollar when the cost is 3 dollars is much different then giving a company a tax break for additional R&D.

    This does not mean there are subsidies in the oil industry. However, I doubt the author is noting that apples and oranges are truly different. Lets call a subsidy a subsidy and a tax break a tax break. Giving Exxon a tax break on R&D is much different then a paying a company a dollar for every kilowat generated via a certain way.

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