Stars Align for Renewable Energy

Around the world, investment in renewable energy projects is skyrocketing. S&P has buy ratings on three stocks poised to benefit from the boom

by Vaughan Scully From Standard & Poor's Equity Research

You know something is hot when Google (GOOG) wants in. The dominant Internet search company stunned investors last month with an announcement that it will begin hiring engineers and other energy experts for a project that plans to generate 1 gigawatt (GW=1 billion watts) of electricity—the output of a fair-sized nuclear power plant—from renewable sources. Not just any renewable source will do, however. Google's goal is to find sources that can generate power more cheaply than power from coal—the ultimate goal of any renewable energy technology.

Google said it will use its experience building energy-efficient data centers to invest in renewable energy technologies, particularly in solar, geothermal, and wind power. If it succeeds, the company would be in a position to provide a large amount of electric power while reducing carbon dioxide emissions. "We expect this would be a good business for us as well," says founder Larry Page, adding the company expects results "in years, not in decades."

Business Imperatives Meet Policy Initiatives

"Google is very focused on operating efficiencies and sees renewable energy as good not only for the environment but also for the company's bottom line," says Standard & Poor's equity analyst Scott Kessler, who has a hold recommendation on Google shares. Google does not disclose its annual power bill, but "energy-related expenses are becoming more material for Google and other corporations," Kessler says.

Around the world, investment in renewable energy projects is skyrocketing and will only increase further as calls grow for tighter restrictions on emissions of carbon dioxide and other greenhouse gases. Major U.S. corporations, including General Electric (GE), Johnson & Johnson (JNJ), DuPont (DD), and AIG (AIG), pledged their support in late November for "a comprehensive, legally binding United Nations framework to tackle climate change." It would supercede the Kyoto Protocol—a U.N.-sponsored treaty that commits developed nations to collectively reduce their greenhouse gas emissions below their levels in 1990—when it expires in 2012. "We believe that tackling climate change is the pro-growth strategy. Ignoring it will ultimately undermine economic growth," the group said.

In the U.S., a bill passed by the House of Representatives would force electric utilities to source 15% of their power from renewable sources by 2020. Nonhydroelectric renewable power sources contributed just 2% of the U.S. power supply in 2006.

While the money being spent on renewable energy projects is real and rising quickly, S&P Equity Research does not believe that every renewable energy stock is attractive. S&P has buy recommendations on just three U.S. stocks with significant exposure to renewable energy. All three companies are involved in solar power, which has so far lagged in development compared with wind power, and which is expected to expand rapidly in the years to come. Photovoltaic (PV) power uses silicon wafers, as well as other light-absorbing compounds, to produce power directly from sunlight—the same silicon wafers used to make the semiconductor chips found in computers.

Profitable PV Cells

MEMC Electronic Materials (WFR), the only one of the three with S&P's highest 5-STARS ranking, makes silicon wafers that are used to manufacture PV solar cells. With demand for wafers rising as sales of solar power cells increase, a silicon shortage has developed, which is driving up the price of MEMC's wafers.

Having started selling wafers to solar power customers only in 2006, MEMC now has more than $15 billion in orders for solar wafers for delivery over the next 10 years.