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When it comes to green investing and profiting from efforts to curb carbon emissions, stocks of companies that make light-emitting diodes (LEDs) and insulation offer better prospects than wind and solar power. "Clean energy investments are riskier today, but energy efficiency is a no-brainer," says Nino Tronchetti Provera, chief executive officer of Milan's Ambienta SGR, a private equity investor that manages a $294 million environmental fund.
Here's why: European countries have been cutting clean energy subsidies to slash budget deficits, and the U.S. failed last year to pass federal energy legislation to cut carbon emissions and boost alternative power. Increasingly, countries are turning to energy efficiency for "quick wins" in cutting power use and carbon emissions, says Ronan O'Regan, director of renewables at global accounting and consulting firm PricewaterhouseCoopers. "Payback on energy efficiency is anything up to 12 to 24 months," he says. "With renewable technologies, even with a subsidy you're talking about maybe 7 to 10 years."
Global revenue for energy efficiency companies probably will expand 13 percent a year through 2020, vs. 8.6 percent for wind, solar, and nuclear power providers, says Robert Clover, head of alternative energy equities in London at HSBC Holdings (HBC). Given the fiscal pressures on many governments these days, Clover says the current regulatory trends favor energy efficiency rather than low-carbon energy.
Efficiency measures include improvements to cars and trains that cut fuel use, lighting units such as LEDs that use less electricity, equipment that makes factories more productive, and smart-grid technology that uses computerized meters to regulate power. Companies most active in this market tend to be diversified giants such as Siemens (SI), General Electric (GE), and ABB (ABB), according to Tom Rowlands-Rees, an analyst at Bloomberg New Energy Finance. Companies with market caps above $1 billion that get more than half of their revenue from energy efficiency include Cree, a Durham (N.C.) maker of lighting components, and insulation companies Rockwool International in Hedehusene, Demark, and Kingspan Group in Cavan, Ireland, he says.
HSBC has "overweight" ratings on LED makers Epistar of Taiwan and Seoul Semiconductor, which may benefit from rules phasing out incandescent bulbs. HSBC analysts also like Germany's Vossloh, a maker of components for railroads and trains, and France's Schneider Electric, which makes power distribution equipment. Siemens is favored for its energy management systems for buildings, transportation, and factories. In a Jan. 28 note, HSBC said power transmission company Jyoti Structures and electrical equipment maker Compton Greaves, both based in Mumbai, may benefit from the predicted 16 percent annual growth in India's energy efficiency market through 2020.
The momentum in energy efficient stocks may continue with the price of oil about $100 a barrel, says Impax Asset Management Group CEO Ian Simm. The London company has £1.8 billion of assets ($2.9 billion) under management and invests in environmental sectors that include renewables, efficiency, and water. "We see energy efficiency as benefiting significantly from high and probably rising oil prices around the world, and we still see a downside in renewable energy," Simm says.
The bottom line: Stocks of companies aiding energy efficiency are set to outperform clean energy stocks, which carry higher political risk.