Investing Daily

A couple weeks ago Roger Conrad and I were discussing which aspect of the New World 3.0 tech sector I should cover in my next piece. We ambled through a number of possible sectors and technologies, but when we hit upon renewable energy I got a bit steamed.

I jumped on my soapbox about the limiting factors of a centralized power distribution model versus a distributed power model, and how renewables will never really take off on grids based on a centralized model. Roger said, “Whatever you write, write about that.”

And so I begin this piece on solar power with the caveat for you that I’ll have to rant a bit before I get to the meat of the sector. But it all works together anyway.

My broad point is, the US is a great market and has the potential for huge renewable energy contributions. Investors should be very excited about that potential. But you have to be aware of the fact that unless we change the way we generate and distribute power, all this will come to naught.

Right now we operate on a centralized power grid, which means there are massive power plants that ship power over large areas to where the demand is. For example, in the Washington, DC area we have a nuclear power plant about 65 miles south of the region and coal-fired plants even further away that supply power to this power-hungry (pun is purely inadvertent) area.

And as many of you remember, this grid is linked in to similar systems so that almost the grids on the entire East Coast out to the Ohio River Valley are links in a giant power production and transmission chain. In 2003, 50 million Americans and Canadians got a first hand lesson about the consequences of this antiquated system. A failure at a poorly run power plant in Ohio set off a chain reaction that took most of the Northeast offline--for days.

Although there was much harrumphing at the time about “infrastructure” and “upgrading the grid,” it all passed without Washington having to get involved. And the utilities did not have to lay out any cash. Good all around, right?

The centralized grid was a great idea, revolutionary when it was built out a century ago. But times have changed, and the benefits of a centralized grid, ironically, have created the significant challenges we face today. As electricity became available to everyone, more and more products came to rely on consistent, reliable power.

Look around you as you read this on your computer and count the electronic devices and appliances in the room where you sit. Almost everything we use depends on pulling current directly off the grid or delivering power to storage devices so we can take our electronics on the road with us.

The challenge is the stunning amount of demand required by a modern society on this aged system. Then add into the equation the fact that we now have 400 million people with all this electronic equipment. And then you have business and government that have come to rely on computer databases, server farms, networks and telecommunications equipment to do business.

If the demand side seems daunting, the supply side is no more encouraging. When energy was cheap to produce, either in real terms or artificially so, shipping power long distances meant you lost about a third of the power from the power producer to the end consumer. Copper wires, for example, are efficient, but they’re not even close to perfect conductors.

That means plants essentially have to overproduce power to meet demand. When there are power surges, in cold snaps or heat waves, some of these old plants just don’t have the get-up-and-go they once had. “Dirty power,” as it’s called, has become a real problem for utilities as it’s become increasingly difficult and costly to site new plants to bring more power production online.

These are the core challenges, but there are many more.

When some people talk about solving our energy challenges with renewables, it seems perfectly sensible. Even billionaire oil man T. Boone Pickens has a wind plan. The recently launched economic stimulus package is backing a huge amount of R&D in energy independence/green energy/renewables.

The problem is, if we stick with a centralized grid, it’s all for naught. If you have a centralized grid, the power put on the grid from wind, solar, or whatever, becomes part of the power package that needs to be delivered consistently. That means if you put a megawatt of wind on the grid, you have to have a megawatt available all the time. When the sun stops shining--on cloudy, rainy day(s) or at night--that megawatt still has to be available. And power storage is about as archaic as the current grid system, so effectively, at least for the next few years, the power storage element is off the table in real terms.

What that’s meant for centralized models is that you have to build “phantom power” plants. You have to build a 1-megawatt coal or gas-fired power plant that will come online when the wind doesn’t blow. The absurd reality then becomes apparent: Why build the alt. energy stuff in the first place if you have to build a traditional power plant to support it?

This is where distributed power generation--or a Smart Grid, which is a much cooler, high tech name for essentially the same thing--comes into play. I wrote a piece on the Smart Grid for New World a while back; it may be of interest to you to go back and check out my recommendations on how to play this side of game.

Bottom line: If you don’t change the distribution model, you can put up all the solar/wind/wave systems you want, but you don’t have a game changer. It’s like inventing toothpaste but not having a tube to put it in.

The encouraging piece to this economic maelstrom is the fact that the US has been brought to its knees after not tasting the canvas for a very long time. As we get up again, there are signs that we’re not going to think it was a lucky punch that dropped us and go back to the same game plan. If you buy this line of thinking, then it’s worth your while to read on. If you don’t, you can begin writing your invectives to me now.

For those of you still with me, I want to start my solar discussion with my pet peeve about this sector. You can’t swing a cat without hitting a solar company these days. I’ve always been partial to going with the “pick-and-shovel” companies instead of prospecting for gold. In this case, that means buying the people that make the equipment that makes photovoltaic (PV) panels instead of the PV companies themselves.

Another thing to bear in mind is that PV makers are going to have a rough go of it during 2009. Buying small companies with big ideas in a market seething with supply, tight credit markets, little venture capital spending and reduced demand would be quixotic at best.

The key point to remember is that even if the US decides against moving its grid into the 21st Century, Europe, Asia and many emerging markets are moving in that direction. All the companies I like have established positions in markets that have a proven commitment to distributed power generation and continue to make major investments in renewable energy technologies, with solar being the lead technology.

Two pick-and-shovel companies that I like are tiny companies, but they’ve been working smart, expanding their customer base and gaining strong international reputations along the way. Spire Corp (NSDQ: SPIR) is a Massachusetts based company that is closely held--about 80 percent of its stock is held by the CEO and executive officers--and has come into its own as a manufacturer of turnkey PV production lines.

Much of its recent business is selling facilities to power companies in Europe and Asia that are interested in making their own PV systems as opposed to contracting to large foreign PV firms. The advantage of these deals is it allows these companies to stay in control of the knowledge base.

If you buy German-made PVs, you rely on the German firm to build them and maintain them, and most firms aren’t interested in cross training local workers to develop the skill set to take over maintenance. If you build the systems from the ground up, you have control over production, which many developing economies are finding the best way to do business.

Although its business may suffer along with the sector, most of this has been priced in already, or, as Warren Buffett said of the market in general, overpriced in. Spire Corp is a buy at current levels if you have some risk capital you want to play with.

CVD Equipment (NSDQ: CVV) is another company that’s a worthy speculation if you’re interested in getting to the pick and shovel makers of the US PV industry. CVD is an acronym that stands for Chemical Vapor Deposition, which is a chemical process for building high-performance, high-purity solid materials by converting gases into solids and layering them on substrates.

CVD doesn’t make equipment for university and Fortune 500 research labs, but it has a uniquely skilled workforce that will partner with small companies to help develop technologies that pass scrutiny. For the startup, that means more money can go into materials and research than going about the expensive and time intensive process of staffing skilled scientists.

In these times especially, this strategic partnering is a very attractive possibility to start-ups and R&D facilities of big companies as well. CVD also has been very involved in flexing its nanotech muscles, which has certainly boosted its PV business, in particular thin film PV. Its First Nano product group manufactures the EasyTube equipment product line used by researchers around the world to develop and grow a wide variety of next generation nanowire, nanotube and thin film materials.

And the big kicker is, the company doubled its revenues in 2008. It’s even hard for me to believe they pulled that one off in such a lousy economy, but this is what’s so compelling about this little company. And management is solid and committed. CVD Equipment is a buy at these levels.

Now, after my spiel about the grid, my views about the solar sector for 2009, and my speculative options, if you’re still in the market for some solar companies, I’m not going to deny you.

In this sector at this point, I’m going with “bigger is better.” That said, the largest manufacturer of PV cells in the world last year was Germany-based Q-Cells (Frankfurt: QCE, OTC: QCLSF, QCLSFY). The company has seen extraordinary growth in the past five years on both the domestic and international sides of the business.

The company has noted in its recent reports that the solar panel market will be slow for 2009, so it’s only projecting 15 to 35 percent growth for this year. And it’s trading at a 52-week low.

One of the company’s partners and competitors is Ersol Solar Energy (Frankfurt: ES6, OTC: ERSLF). The company is 90 percent owned by privately held German manufacturer Robert Bosch GmbH. Of the two, I like Q-Cells prospects a bit more, but either is a good choice; buy on the Frankfurt exchange if possible.

Exposure in Europe and Asia is essential to PV makers in these times, and Germany has one of the highest deployment rates of PVs in the world. Plus the government is keen on supporting the industry--because the power grid is in place to maximize solar energy. China is building a distributed power grid as it develops its renewable energy resources; its goal is to spread electricity into the hinterlands to keep people from flooding into the cities more than have done already.

On the projects side of the equation, three companies come to mind. Keeping with the German theme, the first and most solar-focused is Phoenix Solar (Frankfurt: PS4), a company that builds and engineers the farms or structures so that PVs can be deployed on a given project. It works with all the top PV makers and has projects around the world. If you want PV exposure without buying a PV company, Phoenix Solar is a good hedge.

If you’re a “Buy American” kind of investor, which isn’t a very good idea as the years pass, the two solar standouts are First Solar (NSDQ: FSLR) and SunPower (NSDQ: SPWR). Both companies have solid reputations--and business prospects--in their home US market and abroad.

First Solar has come off significantly in recent weeks as the “solar glut” story hit the mainstream media, but the stock rallied in recent days when it announced it was buying crippled OptiSolar’s USD400 million in outstanding projects for stock.

SunPower has been a favorite of my colleague Elliott Gue for quite a long time. After perusing on my own, I’m going to agree with Elliott. Unlike First Solar, however, SunPower is way off its highs and is trading for a song. Again, I assume the market is overpricing bad news now and this could be a benefit to risk tolerant investors. First Solar and SunPower are buys.

I want to give a quick shout out to two diversified energy companies that rarely get any press in the US but that I like a great deal. They’re both Spanish energy companies that are proactive in developing renewable energy projects. Iberdrola (Madrid: IBE, OTC: IBDSF)) and Abengoa (Madrid: ABG, OTC: ABGOY) are interesting companies that few people have ever heard of. Roger Conrad has been a fan of Iberdrola for a while, and its acquisition of Scottish Power--one of the foremost developers of wave power--has only increased his appreciation for the company’s vision.

Abengoa hit my radar screen a couple years ago at MIT’s EmTech Conference. They had a rep there talking nanotech, not solar. But the work that was being done on so many levels was impressive--this isn’t your average energy company. In the next decade these companies and their business models will be standard operating procedure for global energy companies. Buy Iberdrola and/or Abengoa at current prices.

GS Early is Infratech Editor for New World 3.0. He’s also executive editor of KCI Communications; his free musings are available on At These Levels.