The alternative energy sector offers great potential, but depends heavily on state or federal subsidies, mandates and true believers who are willing to pay a premium for “green” energy.
President Bush earlier this year once again used the State of the Union address to push energy efficiency and the increased use of alternative fuels. The President called for a 20% reduction in gasoline use in the next ten years, tougher fuel-economy standards and increased mandates for the use of ethanol and other alternative fuels.
Energy industry leaders will be discussing alternative as well as conventional sources of energy in meeting the changing global needs at the Cambridge Energy Research Associates (CERA) 26th annual executive conference in Houston this week.
Solar, wind, geothermal and biomass energy combined produce about 2.3% of the electricity now generated in the United States and are expected to produce about 2.8% by 2020. In short, “green” energy can’t keep the nation competitive in a global economy.
“The key thing to remember is that 49.7% of the electricity in the United States is generated by burning coal,” says Peter Van Doren, an economist at the Cato Institute in Washington, D.C. “That creates a lot of carbon dioxide. The big fight over the Kyoto Protocol isn’t about cars, but what we’re going to do with coal-fired generating plants. The higher the tax on emissions, the more competitive alternative sources of energy become.”
The Kyoto Protocol is an United Nations agreement on climate change that assigns mandatory targets for reduction of greenhouse gas emissions to signatory countries.
Nuclear plants generate about 19.3% of electricity in the United States; natural gas, 18.7%; hydro, 6.6%; petroleum, 3%; and renewable sources, 2.3%. The balance comes from propane and miscellaneous industrial gases.
Renewable energy sources are capital intensive and pose significant risk to investors compared with conventional sources of energy. Fulfilling the dream of hydrogen power, for instance, would cost trillions of dollars. Deregulated electricity markets mean there is no guarantee that investors will recover capital costs from customers.
“Accordingly, investors favor technologies that have higher marginal but lower capital costs,” says Van Doren.
That makes proven technologies such as coal-fired plants a far less speculative bet than alternative energy. Traditional energy and oil field services companies have been consistent winners in the IPO market, including Bill Barrett, TODCO, Hornbeck Offshore Services, JED Oil, Atlas America and Alon USA Energy.
Backers of renewable energy say demand for environmentally friendly power would increase if electricity generated at coal- or natural-gas fired plants were priced to reflect the cost of pollution. But critics say the added cost of additional pollution reduction would exceed future health benefits.
“Cracking down on greenhouse gas emissions to comply with the Kyoto Protocol would provide economic help for renewable energy technologies, but such initiatives would result in only a 7% market share for renewable energy and a 43% increase in electricity prices in return for benefits that are still very uncertain,” Van Doren says.
Plunkett Research, Ltd., a market research firm in Houston, says venture capitalists invested about $45 billion in alternative energy in 2005 and about $63 billion in 2006. Investments are expected to grow 20% to 30% a year through 2016.
“Concerns about fluctuating oil prices, energy security and global warming continue to fuel investments in alternative and renewable energy technologies,” says Jack W. Plunkett, founder of the company.
He says sales of solar panels grew to about $11 billion in 2005, up from $7.2 billion in 2004 and $5 billion in 2003.
There’s also increasing interest in ethanol. U.S. refining capacity declined about 5% between 1980 and 2005, but demand for gasoline grew about 21% during that period, making ethanol increasingly attractive. But the ethanol industry as it now exists couldn’t exist without government mandates and subsidies.
Nevertheless, the IPO market responded with two ethanol deals.
VeraSun Energy of Brookings, S.D. launched a strong IPO in June 2006, pricing 18.25 million shares at $23, above the originally filed 17.25 million shares at $18 to $20 each. The stock opened at $28, climbed to $30.75 and recently fetched $17.62. Aventine Renewable Energy Holdings of Pekin, Ill. launched its deal two weeks after VeraSun went public. Aventine priced 9.06 million shares at $43 each, the top end of the price range. The IPO opened below the offer price and the stock recently traded at $20.39.
“The ethanol story went from pop to flop in a week,” says John E. Fitzgibbon, Jr. founder and editor of IPOScoop.com. “Oil is down to about $50 a barrel from its high of $78.40 on July 14. Ethanol sounds much like the stories of riches from shale told in the 1960s and 1970s.”
In 2005, Microsoft co-founder Bill Gates invested $84 million in Pacific Ethanol through his investment company, Cascade Investment, and the stock nearly quadrupled. The Fresno, Calif.-based company plans to build at least five production facilities in the Golden State designed to turn grain into ethanol.
The U.S. Department of Energy estimates that 700,000 barrels a day by 2030 in about the limit for U.S. ethanol production from corn, or about 6% of the estimated U.S. transportation fuel market by that time.
“Corn ethanol is more a religion than a reasoned proposition,” Van Doren says. “People are entitled to their religious beliefs, but there ought to be a steep wall between church and state.”
Inside Shell Oil
CNBC's Sharon Epperson interviews John Hofmeister, Shell Oil president, at the CERA conference.