Green Investing: Clever Plays in Clean Tech

The prospect of new limits on carbon emissions is driving demand for clean technology in the energy sector. But investors need to take the long view

By David Bogoslaw

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For most of its nearly four-decade history, Earth Day has been a call to safeguard such precious resources as clean air and water for future generations, resources put at increasing risk by pollution. Lately, though, the annual April observance has also become a time for investors to take stock of the clean-technology opportunities in energy that have arisen in recent years.

One thing to keep in mind is that, despite virtually assured growth of these industries, bets on individual stocks require more patience than investments in sectors where companies are already serving fully developed markets. In some cases, what makes a company a really compelling bet is the fact that it hasn't yet turned a profit—and is priced accordingly.

Much of what's driving the push toward cleaner energy sources and greater energy efficiency is the prospect of legislation within the next few years that will effectively impose a carbon surcharge on companies that are producing carbon emissions beyond certain defined limits.

Tariffs Are a Risk

Such legislation will likely be in place by 2012 in order to enable U.S.-based companies to keep up with global emissions standards expected to be enforced in 2013, when the Kyoto protocol gives way to the next phase of global environmental compliance, says Kevin Book, senior energy policy analyst at Friedman Billings Ramsey (FBR).

Any country that hasn't taken steps to regulate carbon emissions from its own industries by then will probably be hit by tariffs from trading partners, predicts Book. "If the U.S. is not up to global standards, it could be disruptive from a trade and economic perspective," he says. "Any economy that wants to play in that game is going to want at least one year of lead time."

Another factor that's ushered in demand for clean technology is the much greater cost of adding electric generation capacity in the traditional way—by building new power plants, which would also soon face the uncertainty of carbon caps. The failure to build new power plants has caused spare capacity on the electric grid across the U.S. to fall off to the point where it's below comfortable safety margins in certain regions. That makes local communities more susceptible to brownouts and blackouts during peak-usage periods.

A Challenge for U.S. Investors

Also, 25 states have adopted renewable portfolio standards that mandate that utilities garner a certain portion of their generation capacity from renewable sources such as solar and wind. Some states are far ahead of the curve on this, such as Connecticut, which extended its standards to all utilities across the state in 2003.

Where can investors interested in clean technology start? Some of the most promising renewable energy stocks—including Vestas Wind Systems (VWSYF), SolarWorld (SRWRF), and Q-Cells (QCLSF)—trade only in Europe or over the counter in the U.S., making it hard for U.S. investors to get a piece of the action. But in each subcategory, there are stocks that are available on American exchanges.

Although solar power still has a way to go until it is priced comparably to coal- or gas-fired electricity, it's becoming more compelling to utilities that aren't able to build more power plants and want to meet renewable standards, and to consumers who like the idea of doing their part in reducing greenhouse gas emissions.

Silicon Solar Cells Will Be Edged Out

The dominant solar technology is currently based on silicon, a nonmetallic substance that is packed into wafers that fit into panels, which absorb sunlight and convert it into electricity and heat.