by David Fessler, Investment U Senior Analyst
Tuesday, January 03, 2011: Issue #1678
No doubt you’ve seen plenty on the news the last few months about a certain solar panel maker, Solyndra.
The California-based company received a $528-million federal loan, with White House support, only to declare bankruptcy in September.
Beacon Power, which built flywheel energy storage devices, declared bankruptcy in late October, but not before drawing down the majority of its $43-million federal loan guarantee.
Should those companies have received the funding?
That’s a matter for Congressional committees to determine. But one thing is clear to me – the government shouldn’t be in the business of trying to pick winners. It will more often than not get it wrong – and taxpayers will turn out to be the losers.
And yet, here’s a news flash for you: No new energy source has ever been developed in the United States without government subsidies.
That’s right: The government has subsidized all energy sources that ultimately became viable. That includes oil drilling, which still receives a type of federal subsidy, in the form of the percentage depletion allowance, first put into place as part of the Revenue Act of 1913.
I’ve been perusing a 2008 report from the EIA, which lists the subsidy levels for all the different types of energy.
As a group, renewables (such as solar and wind) get the lion’s share of incentives and tax breaks ($4.8 billion). Refined coal (a treatment process that reduces carbon emissions in low-grade coal) receives about $2.3 billion. After that comes natural gas ($2.1 billion), nuclear power ($1.2 billion) and coal ($932 million).
But let’s look at federal support in a different way.
How many “subsidy dollars” does it take to produce one megawatt-hour (MWh) of electricity for each of those forms of energy?
Again, we turn back to the EIA data:
Refined coal: $29.81/MWh
Natural gas: $0.25/MWh
Go back and look at that last entry… natural gas. At $0.25 per MWh, it clearly gives the federal government its biggest subsidy “bang for its buck.”
It’s All About “Scale”
In the words of the famous American venture capitalist Vinod Khosla, “If it doesn’t scale, it doesn’t matter. Most of what we talk about today – hybrid, biodiesel, ethanol, solar photovoltaic, geothermal – I believe are irrelevant to the scale of the problem.”
Khosla’s hit the nail on the head. Natural gas scales. With the advent of new fracking technologies, it’s plentiful and cheap to pull out of the ground. That’s right now – not some time in the future.
And once a well is tapped, it continues to produce. There are no interruptions from sunless or windless days. No years of delay and public anxiety that come with building and maintaining a nuclear power plant. No additional and costly steps, like refined coal, where it has to be dug out of the ground and processed further (which uses yet more energy) before being sent on to market.
Alternative Energy’s Biggest Problem
Don’t get me wrong. When it comes to alternative energy, wind and solar in particular, the technologies are certainly viable.
As the industries scale to greater manufacturing volumes, cost comes out of the process.
Ultimately, I believe both will be successful without subsidies, but that day is three to five years away at best.
And even as they succeed in driving down manufacturing costs, alternative energy still won’t be able to produce electricity as cheaply as natural gas. At least not for a very long time.
Right now, we have more natural gas in this country than we’ve ever had. The cost of natural gas hasn’t budged in a year, and it’s not going to increase any time soon.
Storage levels are even higher than they were last year, and that was a record.
The bottom line is this: If it weren’t for the 36 states with Renewable Energy Portfolio Standards (RPS) that mandate utilities use renewable energy sources, solar and wind would still be science projects.
The Federal government, from the President on down, talk about getting us off foreign oil…
The reality is, they’re doing very little to foster the development of industries that’ll profitably achieve that goal. Instead, they’re trying to pick winners. Mr. Market will determine who the winners ultimately are. He always does.
Right now the winner is natural gas.
“The Tipping Point” For Natural Gas
And one of the biggest winners in that space is going to be Westport Innovations (Nasdaq: WPRT).
Westport is an “alternative energy” leader in its own right – it makes and sells vehicle engines and fuel-delivery systems that use natural gas for fuel.
Westport’s CEO said in early November that he sees 2011 as a “tipping point for the use of natural gas as a transportation fuel.”
And it looks like the company is seeing a corresponding leap in sales. Westport saw its revenue jump 80 percent in its most recent quarter, compared to year ago levels. And the company raised its forecast as well, expecting total revenue of $240 to $250 million this year.
Westport’s already linked some big marketing and supply ventures with the likes of Shell (the largest global LNG supplier) and General Motors, as well as three of the four largest makers of heavy-duty tractor-trailer engines.
The company now sells natural gas power systems for Ford F-250 and F-350 pickup trucks, as well.
So if you want to invest in the alternative energy “pioneers” (you know the kind… the ones with the stock market arrows in their backs), then gamble in the wind and solar sector…
Or buy a company like Westport that already has technology and timing on its side. And no government loan guarantees, either.