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How to Clean Up With Clean Energy

Richard Asplund

Many investors are interested in investing in clean energy, but are not sure where to start. My book, Profiting from Clean Energy, is designed to help investors navigate the volatile waters of investing in clean energy.

Clean Energy Drivers and Growth Potential

The demand for new and cleaner forms of energy comes not only from climate change and energy security concerns, but also from the sheer amount of new energy generation that will be needed to satisfy the world's fast-growing needs. World energy demand will grow 57% by 2030 and $4 trillion of new power generation assets are needed by 2030, according to the International Energy Agency and the U.S. Department of Energy. With this huge target market, the clean energy industry is riding a megatrend and can easily grow at double-digit annual rates for decades.

Not All Clean Energy Sub-sectors Are Created Equal

The term "clean energy" refers to a collection of very different sub-sectors that have completely different growth prospects, drivers, profit models, and investment prospects. Clean energy typically includes renewable energy generation solutions (solar, wind, geothermal, fuel cells), in addition to power efficiency solutions and advanced battery solutions such as lithium-ion batteries for plug-in hybrid and all-electric vehicles.

It is very important to differentiate among these various sub-sectors from an investment standpoint. For example, the prospects appear attractive for clean energy sub-sectors such as solar, wind, and hybrid batteries. However, investors should be much more cautious on other sectors such as ethanol and fuel cells for transportation. The corn-based ethanol sector, for example, faces an unattractive investment proposition, in my opinion, because of its profit-margin dependence on corn prices (which have more than doubled in the past two years) and also because ethanol in my view will only be a temporary transportation solution until cleaner transportation technologies such as hybrid and all-electric vehicles take over.

Even within attractive sectors, investors must be very careful to choose attractive companies that will survive and prosper over the long-haul. In that regard, investors should focus on the larger clean energy players that have the best technology and R&D and will therefore be best-positioned to roll out mass production and drive prices lower in coming years. These are the companies that will be best-positioned to capture the massive demand for clean energy solutions that is likely to emerge over the next several decades. For example, in the solar energy market, Norway-based Renewable Energy Corp. (Oslo Stock Exchange ticker: REC) is building new polysilicon plants, using its proprietary "fluidized bed reactor" technology, which will allow REC to produce polysilicon at a cost of 30% less than the industry-standard Siemens technology. This will allow REC to undercut competitors on price, maintain strong profit margins and build its market share.

Lots of Choices in Clean Energy ETFs and Mutual Funds

In order to participate in the sector, investors can buy stocks of companies that focus on clean energy. However, a safer strategy is to diversify risk by buying a green exchange-traded fund (ETF) or mutual fund. The clean energy ETF with the largest amount of assets is currently the PowerShares WilderHill Clean Energy Portfolio (PBW) with about $1.3 billion in assets. This ETF's current top stock holdings include FuelCell Energy (FCEL), First Solar (FSLR) and Ormat Technologies (ORA).

As an investor, you should consider green ETFs and mutual funds that are global in nature since many of the world's clean energy companies are outside the U.S. This gives you exposure to the sizeable clean energy companies that are based in Europe and Asia. The PowerShares Cleantech Portfolio (PZD) , for example, just went global and added a large number of global stocks. This ETF's current largest stock holdings include First Solar, Siemens (SI) and Corning (GLW)..

There are now six mutual funds and six ETFs covering the clean energy space. In addition, there are also two ETFs that specialize in solar energy and two ETFs that are currently in registration that specialize in wind power. There is a complete list of these mutual funds and ETFs on the book's companion Website at http://www.ProfitingFromCleanEnergy.com/ETFs.

In the solar energy space, for example, the Claymore/MAC Global Solar Energy ETF (TAN) tracks the global solar energy industry. In just the past two years, the solar industry has grown large enough to be an investment sector in its own right. The Claymore/MAC Solar ETF has 25 of the world's largest "pure-play" solar companies that are listed in the U.S. and Europe. This ETF was just launched in April and already has over $150 million in assets, making it one of the fastest growing ETFs launched in 2008 so far, according to Claymore.

ETF Stock Market Performance

Clean energy ETF prices have fallen this year, mainly because of the broad market correction. However, the clean energy ETFs have far outperformed the S&P 500 and Russell 2000 over the past several years as clean energy investing has proven its mettle as an attractive investment sector.

The volatility in clean energy stocks makes it a sector where it is important for most investors to stick to a longer-term investment strategy. With a longer-term investment horizon, an investor can weather the inevitable short-term ups and downs and ride the larger trend of the double-digit revenue growth that the industry is likely to produce in coming decades.

More Online

My book's companion Web site, ProfitingFromCleanEnergy.com, has more information on regulation, conferences, resources, green jobs and links to clean energy videos. The site has the latest news headlines on the clean energy industry, as well as profiles of the main U.S.-listed publicly-traded companies that focus on clean energy.