Cleantech: The Greatest Investment Opportunity Ever

I often focus on the companies best able to produce more energy to meet growing demand. But sometimes it’s a good idea to step back and look at the same puzzle from a different perspective: companies that are at the forefront of reducing energy consumption.

Elliott Gue, The Energy Strategist

The 1980s and 1990s were the greatest two investment decades in U.S. history and it was all due to technological innovation. The first wave of innovation centered on the microprocessor which ushered in the age of personal computing and mobile telecommunications, catapulting companies like Intel (NasdaqGS: INTC), Microsoft (NasdaqGS: MSFT), Dell (NasdaqGS: DELL), and Qualcomm (NasdaqGS: QCOM) into stock superstardom.

The second wave of innovation centered on the Internet which created a whole new advertising medium and significantly reduced the costs of commerce by connecting the entire world into one huge economic and social network. Companies like Yahoo! (NasdaqGS: YHOO), (NasdaqGS: AMZN), and eBay (NasdaqGS: EBAY) started the Internet boom in the 1990s, and it has continued to evolve in the 2000s under the tutelage of search giant Google (NasdaqGS: GOOG) and iPod/iPhone maestro Apple (NasdaqGS: AAPL). A new breed of Internet companies led by Facebook and Groupon are getting ready to continue the Internet revolution when they go public over the next couple of years.

The amount of investment wealth the microprocessor and Internet innovation waves has generated for savvy investors is staggering. Personally, I’ve made more money investing in these two tech industries than all other industries combined. It’s hard to imagine another wave of innovation coming down the pike anytime soon that could come close to matching the investment gains of either microprocessors or the Internet.

Wouldn’t it be great, though, if there was another tech wave coming soon? Luckily for us, there is.

CleanTech is the Greatest Investment Opportunity Ever

According to some very smart venture capitalists on Sand Hill Road in Menlo Park, California, the next tech wave is here now and . . . it will likely DWARF the microprocessor and Internet waves!

The new wave of innovation is “cleantech,” which focuses on energy efficiency. With Middle East turmoil likely to continue, keeping oil prices above $100 per barrel, maximizing the usable yield of energy is critical to corporate profitability. First, let me be clear: the venture capitalists are not talking about renewable energy sources like solar and wind power. According to Elliot Gue, lead advisor of the market-beating Energy Strategist investment service, renewable energy is not cost-competitive with fossil fuels except for massive government subsidies. Consequently, Elliott says that “both industries face massive overcapacity and falling profit margins.”

Rather, what the venture capitalists are excited about is technology that makes traditional forms of energy more efficient. According to the San Jose Mercury News:

Cleantech is poised to be the valley’s third great wave of innovation — not just the next big thing, but perhaps the biggest thing ever.

Cleantech Could Be 100 Times Bigger Than the Internet

Cisco Systems (NasdaqGS: CSCO) vice president Marie Hattar has gone even further, saying that cleantech will not only be the biggest innovation ever, but:

it will be 10 to 100 times bigger than the Internet. If you think about it, some homes have Internet access, but some don’t. Everyone has electricity access — all of those homes could potentially be connected.

Wow. Consider the following forecasts of cleantech growth:

  • Annual utility bills in the U.S., a large component of the country’s total energy costs, exceed $1 trillion — nearly triple the annual revenues of the global semiconductor industry;
  • The global market for all cleantech applications, which includes energy storage and the smart grid, will double to $3.6 trillion by 2020;
  • Morgan Stanley (NYSE: MS) projects that the annual smart grid revenues will double by 2014 and then quintuple to more than $100 billion annually by 2030;
  • According to Cisco Systems, the communications portion alone of smart grid investment is expected to reach $20 billion annually.
  • Goldman Sachs (NYSE: GS) sees smart grid investment of $750 billion over the next 30 years.
  • Over the last six years where data is available (2002 to 2008), cleantech’s portion of venture capital investments has grown from 3 percent ($908 million in 164 deals) to more than 25 percent ($8.5 billion in 567 deals).

These are all big numbers and an easy way to play the entire cleantech industry is the WilderHill Global Clean Energy ETF (NYSE: PBD) or the iShares S&P Global Clean Energy Index (NasdaqGM: ICLN). But these ETFs include renewable energy stocks that I have already stated aren’t the best investments.

AC/DC Conversion is an Important Part of Cleantech

Better returns can be achieved by selectively choosing those portions of cleantech with the brightest profit prospects. News came out last week (Feb. 23rd) on a niche area of the cleantech universe which looks especially promising to me: AC/DC conversion.

To be cost-effective, power lines need to transmit electricity at high voltage levels. The higher the voltage, the slower the current of electricity can be going through the line. A slow current is necessary from a cost perspective because power losses from resistance are equal to the square of the current. Besides power loss, the higher resistance caused by a high current would stress the power line and cause it to be damaged unless costly insulation and a larger diameter wire was used. All of these extra costs can be avoided by increasing the power line’s voltage and reducing the current.

But here’s the rub: virtually all consumer devices run internally on direct current (DC) and operate at much lower voltage levels than are used in power lines — if voltage isn’t lowered, the devices would fry instantly. Consequently, the power system needs to reduce the voltage level at the end of the power line before the electricity enters a consumer’s house. It turns out from a physics standpoint that alternating current (AC) is much easier to power down to a lower voltage via transformers than DC. This explains why AC is used in power lines and provided in homes via AC outlets.

It is the semiconductor process within consumer devices of converting AC to DC that ends up wasting a lot of electrical energy. Consequently, developing semiconductors that minimize conversion loss is the holy grail of energy efficiency. Less DC conversion waste would mean that consumer devices would need to pull less AC electricity out of a home’s outlets and tremendous amounts of electricity would be saved.

Transphorm’s Secret Formula Uses Gallium Nitride

The company at the center of last week’s press release is Transphorm, a startup company backed with $38 million in seed money from leading venture capital firms Kleiner Perkins, Google Ventures, Foundation Capital, and Lux Capital. UC-Santa Barbara engineering professor and Transphorm CEO Umesh Mishra claims that his company has developed a power conversion module that eliminates up to 90 percent of all electric conversion losses.

Current power conversion technology sold by AC/DC industry leader National Semiconductor (NYSE: NSM) is based on silicon semiconductors, which is only about 88% efficient in converting AC power in power lines to DC power used by consumer devices. In other words, 12% of all electricity is wasted as heat emissions, costing the U.S. economy $40 billion a year. By contrast, Transphorm’s technology is based on next-generation gallium nitride semiconductors which allegedly can reduce this 12% waste by 90%, resulting in a conversion efficiency of near 99%. Gallium nitride is already being used in light-emitting diodes (LEDs).

According to CEO Mishra, the energy saved using Transphorm’s AC/DC conversion modules equals hundreds of terawatts of energy, equivalent to 318 coal-fired power plants, which is more power than solar, wind, and every other form alternative energy combined.

Public Companies Engaged in Energy Efficiency

Transphorm is still a private company, so investors like you and me can’t participate yet, but there are publicly-traded companies involved in power conversion efficiency and/or other types of electrical transmission efficiency worth further investment research:

Invest in Energy Efficiency with the Help of the Energy Strategist

Elliott Gue, editor of the market-beating Energy Strategist investment service, has an entire portfolio dedicated to finding the absolute best alternative energy plays, including companies focused on energy efficiency. Only subscribers know which ones Elliott thinks are the most likely to succeed.

But Elliott is also a big bull on traditional energy companies, especially those leveraged to oil and natural gas. To find out the specific names of the stocks he likes best in the oil and natural gas space, give the Energy Strategist a try today!