July 28, 2010 – This morning a reader asked us:

“What is your take on the outlook for renewable energy stocks with respect to whether Congress passes a national Renewable Energy Standard?”

Our take is that the states have been doing most of the heavy lifting to date, in terms of driving uptake of alt energy projects. At the national level, it does look like we are going to get some version of an RES but it is getting watered down each day. The opposition has effectively framed the debate pitting adoption of clean energy technologies on one side and jobs/economy concerns on the other.

After all, doesn’t renewable energy require perpetual subsidization given the fact that they are significantly more expensive than conventional sources of energy like coal, oil and nuclear? This point in itself is contentious given the fact that these industries continue to enjoy plenty of subsidies and breaks in their own rights.

Moreover, the math on conventional fuel and energy sources is a little fuzzy when it comes to true cost because it does not take into account the health and environmental costs of using them, and in many cases there are plenty of post-consumption costs that get passed through to consumers like decommissioning costs for nuclear.

In order to get a national RES, there is going to have to be sufficient votes on Capitol Hill, and in order to get sufficient votes on Capitol Hill, interests protecting conventional fuel and energy sources will be accommodated. So a national RES in itself is helpful in terms of ensuring that there will be a commitment on a national level to adopting cleaner energies, but we just don’t see this policy in itself doing much more work than what is in place today – at the state levels. DSIRE has a great website (http://www.dsireusa.org) which keeps up with the latest developments both at the state and federal level.

The RES is good for investors in alternative energy because it creates a framework and provides some level of certainty that there will be an ongoing commitment to clean technologies. It ensures a certain level of demand in the market place. But at the end of the day, alternative energy and clean technologies are going to have to compete on price on their own basis.

So the RES is a good thing and should be seen as a catalyst for alternative energy stocks. But it gets murky quickly from that point, in terms of where to invest. All alternative stocks are not created equally, and only the companies that are introducing and commercializing truly differentiated technologies that are capable of creating scale and driving costs per watt lower to the so-called level of grid parity are going to win in the long run.

For example, look at First Solar (Nasdaq:FSLR). In the solar space it quickly gained a leadership position by introducing a low-cost technology that could scale. While its modules are not as efficient as other crystalline modules, they are sufficiently lower priced to ensure strong demand. It has continued to add manufacturing capacity and improve manufacturing efficiencies driving costs of manufacturing per watt lower. Consequently, it has become the most profitable business in the solar market. It is the low cost producer of a leading edge technology.

That being said, over the past few quarters, First Solar’s module efficiency has flat-lined around 11%, while competitive crystalline technologies have gotten cheaper, and more efficient. Critics argue that First Solar is going to lose its competitive advantage on pricing and in the market as this gap closes. At some point it may. Advocates argue that First Solar has invested in R&D;and will be showing improvements in module efficiencies in the near term which will enable it to maintain its appeal in the market place.

This is an unfolding story, but gets to the heart of exactly how competitive the markets are and important shifts that can happen which can either keep a market leader in the lead, or cause them to lose share. In the background is the RES and other policies which will ensure that there is a consistent state (and potential federal) framework to support the industries. But it is still up to each company on a competitive basis to make the investment case.

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