Thoughts are again turning to the next big change in the energy landscape.
As it unfolds, I have been working on how to exploit this trend and will be rolling out my recommendations when I appear at the MoneyShow in Las Vegas next Tuesday and Wednesday.
Of course, before I sketch my new approach to the Caesar's Palace audience, I'll outline it here first. You can expect more on this in coming Money Morning editions.
Today, I want to extend on Saturday's discussion and set the stage for the revisions I will be begin sketching out in my next article.
This is once again about hedging.
Investing in Clean Energy Stocks Just Got More Risky
Despite its promising future, clean energy stocks have proved to be an investing minefield.
Even China-based clean energy stocks are no longer a safe haven. Yesterday (Monday) Suntech Power Holdings Co. Ltd. (NYSE ADR: STP) defaulted on its debt.
Heavy losses caused by plummeting prices for solar panels - which fell 73% from 2010 to 2012 - left Suntech unable to make the payment on a $541 million bond that was due Friday.
The news caused Suntech stock, already down 80% over the past year, to slip another 10%.
While numerous U.S. renewable energy companies have faltered, most notably the 2011 bankruptcy of solar panel maker Solyndra, Suntech is the first Chinese clean energy company that could go under.
What's new is a reluctance on the part of the Chinese government to keep pouring subsidies into money-losing companies.
Here's the Cold Hard Truth About Solar Energy
Not long ago, I wrote about the German drive to replace nuclear energy with solar and wind power.
At the time, Berlin was touting this overture as the "next great push" into a new energy age.
Turns out, plans haven't gone as expected.
This winter has provided a good example of how things can go wrong. Solar has a major drawback in that all panels shut off at the same time. That requires massive reliance on other sources of energy.
Despite its avowed decision to relinquish nuclear power, Germany must now import nuclear-generated power from neighboring countries and resort to coal, despite an earlier move to the contrary, in the face of the highest energy costs in Europe. The government is even opening taboo fuel oil generators to make up the power slack.
A move against fracking has prevented the development of domestic unconventional gas, leaving the country dependent once again on importing volume, primarily from Russia. What had begun as a bold experiment in rebalancing energy sources has resulted in a developing pricing crisis.
The cost of German energy needs has begun stifling economic development. That is likely to become a more pressing issue moving forward. The solar energy industry in the country has been the recipient of massive subsidies, including what is known in the American market as "renewable energy portfolio standards."
These "standards" require utilities and distributors to purchase a certain percentage of their power from more expensive renewable energy sources, passing those added costs on to already besieged consumers.
Rates are now projected to go up as much as 60% in the wake of the nuclear shutdown.
And the problems for end users and renewable energy sources are going to get worse.
Four Timely Moves For The Next Three Crises
As I wrote last Thursday, the aftermath of the fiscal cliff deal requires some restructuring of energy sector holdings.
We are currently in a brief period between crises. Nothing was resolved in the eleventh (and a half) hour compromise.
The truth is there are still three huge fights on the horizon - revisiting the sequestration (automatic spending cuts) portion of the fiscal cliff, spending versus taxation in the budget, and raising the debt ceiling.
All will hit by early March.
So the reprieve gained on New Year's Eve will be brief.
The spike after the accord was huge. Unfortunately, as we witnessed late last week, the market rally has no legs. VIX (volatility) has been abnormally low, but that will be drifting up, to accelerate as we get closer to the next round of legislative paralysis.
We cannot predict how protracted this next round will be, but early indications are hardly encouraging.
That's why investors need to be more defensive and identify energy components that are more likely to withstand the gridlock and even profit from it.
Overall, you should divide the energy sector into four segments:
- Processors/Distributors; and,
Here's what you need to know...
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The Path to Energy Independence is More Rocky Than It Seems
You might have seen yesterday's headline in the Wall Street Journal: "U.S. Redraws World Oil Map."
As the article explains, U.S. oil production is now on pace to surpass Saudi Arabia by 2020. This would make the United States world's largest oil producer. We're already the second-largest natural gas producer, according to 2010 EIA estimates.
It's all thanks to the U.S. shale boom that has unlocked billions of barrels of oil and trillions of feet of natural gas from the Appalachian Mountains to the Pacific Coast, from the Bakken in North Dakota to the shale fields of southern Texas.
But all of this fracking has caused some serious economic and environmental problems.
And while I greatly advocate increased drilling and domestic production, we still must address a wide-range of problems now plaguing the shale oil and gas sectors.
After all - with apologies to Voltaire and Spiderman - with such great fortune comes greater responsibility.
That's why I am in the third day of what has become a very interesting conference here in Pittsburgh. It was convened to set the agenda moving forward to deal with the almost invisible aspects of shale oil and gas drilling.
In fact, for the first time, the conference's primary focus will be on the negatives caused by the drilling.
We also have questions surrounding the amount of water required to frack these formations (the process needs a lot of water to break open rock and release hydrocarbons), as well as the ongoing public health fears from the chemicals used.
Now, we are seeing parallel economic problems as well.
In the Marcellus basin, researchers are now recording some of these shortcomings and placing them in four basic categories.
The real concern is that these four problems - in infrastructure, labor, local inflation, and the environment - will remain well after the drilling (and the revenue) has moved on.
So before you decide to declare "energy independence", take a look at some of the downside that may come along with it.
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Hydrokinetic Power is the Next Wave in Cheap Energy
In an era of cheap capital, emerging technology companies could provide investors the biggest bang for the buck we've seen in years.
The key is finding a market that already has billions of dollars in pent up demand - like cheap energy.
Of all the cheap alternatives available to us today, I'm most excited by hydrokinetic power systems for the simple reason that the oceans contain enough energy to potentially support more than 50% of US demand alone, according to the US Department of Energy.
In case you are not familiar with the term, hydrokinetic systems produce power from the water's kinetic energy. It's quite literally power from the motion in the ocean.
Critics charge there are limits involved because the technology we need to make, transmit and store wave-based energy is primitive and prohibitively expensive.
And they're right... it is, or at least has been to date.
That's why despite years of effort and billions of dollars in government-sponsored financing, there are a mere 5 megawatts of wave-generated energy being created worldwide.
According to Forbes Magazine, that's only enough to light 4,000 U.S. homes.
Yet studies estimate that two-thirds of the world's economically feasible hydropower has yet to be exploited. Perhaps not surprisingly, much of this untapped energy is concentrated in South America, Asia and Africa.
That's my kind of opportunity - but it will require a sea change in our thinking (pun absolutely intended).
The Rising Tide in Hydrokinetic Power
That's because traditional "alternative" power choices tend to evolve in terms of how applications like solar, hydro, thermal and gas production ties into the grid. As such, they're dependent on environmental variables that come and go.
On the other hand, hydrokinetic systems really are the grid. By placing turbines, bobbers and impellers into large bodies of water, they become part of the very system they're tapping into.
And it's a whopper of a system.
An Unlikely New Supporter for Alternative Energy
During a biofuels conference at Mississippi State University last week, Navy Secretary Ray Mabus announced that his branch would be leading the charge to lessen the U.S. Department of Defense's (DOD) dependence on fossil fuels.
This involves a rather large chunk of traditional fuel usage.
On average, the federal government consumes about 2% of the fossil fuels used in the United States - and the DOD accounts for about 90% of that.
With the Obama administration emphasizing a move to alternative and renewable fuel sources, Mabus is signaling that the military is on board - sort of.
The Trouble with Foreign OilAs a former governor of Mississippi and ambassador to Saudi Arabia, Secretary Mabus knows something about the position of oil in American foreign policy.
He noted during the conference that, for every $1 rise in the cost of crude oil, the Navy has to come up with at least $32 million.
So when the Libyan crisis hit earlier this year, and oil spiked $30 a barrel, that translated into almost $1 billion of additional costs to the Navy. It's no wonder, then, that Mabus is committed to meeting 50% of the Navy's onshore and fleet fuel needs with non-fossil sources by 2020.
Additionally, in what is now mantra from both sides of the political aisle, reliance on foreign oil sources presents a national security problem.
"When we did an examination of the vulnerabilities of the Navy and Marine Corps, fuel rose to the top of the list pretty fast," Mabus said. "We simply buy too much fossil fuel from actual and potentially volatile places. We would never allow some of these countries we buy fuel from to build our ships, our aircraft, our ground vehicles - but because we depend on them for fuel, we give them a say in whether our ships sail, our aircraft fly, our ground vehicles operate."
The push seems serious enough, and it does reflect similar statements coming from other branches of the military.
But questions remain: What are the alternative sources? How much volume can each genuinely give to the effort? And what are the possible drawbacks of such alternatives?
Biofuels to the RescueFrom the Navy's perspective, biofuels have shown some serious promise.
In certain theaters of operation, bio additives are already in use for both jet fuel and lighter vessel options. And the initial results have been quite encouraging.
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Looming Loss of Federal Incentives Darkens Future of Solar Power Stocks
The reduction or elimination of several federal energy subsidy programs later this year could further dim prospects for solar power stocks - bad news for a sector already in a months-long slump.
The goal of the programs, which include loan guarantees and grants, was to support the early stage growth of renewable energy companies until they became viable enough to attract conventional investors.
But several of the federal programs created as part of the 2009 stimulus package have expiration dates that assumed the economic woes of the recession would have eased by now.
Instead you have a solar power industry worried about what happens after the programs begin to expire - the first as soon as Sept. 30.
"Is the solar industry going to die if we lose these programs? No, but we're going to stall," Roger Efird, managing director of Suntech America, a subsidiary of Suntech Power Holdings Co. Ltd. (NYSE ADR: STP) told USA Today.
Helped by such programs, the solar industry grew 67% last year, but could see that growth flatten as cash-strapped governments both in the United States and Europe begin to cut back.
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China Traffic Jam Just a Brief Bottleneck on the Road to Growth
Besides recently being crowned the world's second-largest economy, China now has the dubious distinction of spawning the world's longest traffic jam. And it's all directly attributable to China's voracious appetite for energy and automobiles.
A line of cars and trucks 60 miles long (100 kilometers) has snarled the road along the Beijing-Tibet 110 Expressway for the past nine days.
The bumper-to-bumper gridlock, which finally began to ease yesterday (Wednesday), was created by a surge in trucks carrying coal from the province of Inner Mongolia to the suburbs of Beijing, where power plants continue to suck up and incinerate millions of tons of the black rock.
Energize Your Portfolio With These Four 'Smart-Grid' Technology Plays
Larry Fisher spends all his time lately designing new ways to conserve electricity.
As the research director of NextGen - the division of private, New York City-based ABI Research that tracks smart grids worldwide - Fisher has more and more on his plate these days. That's because the wave of new investment in this emerging sector is just beginning.
NextGen also serves as an incubator for brand-new approaches in electronics and smart-grid technology. Over the past several years, the groundwork for smart grids has emerged in a number of countries, Fisher says. For that reason, the rates of both investment and implementation are increasing.
In a brand new report, Fisher's research team estimates that we will spend some $45 billion worldwide between now and 2015 on smart-grid-related transmission-and-distribution (T&D) infrastructure, implementation of related components at the level of utility companies distributing the power to consumers, and smart meters. (These last ingredients allow you to measure usage and redistribute power on your own.)
When compared to the trillions spent on generation and transmission, $45 billion may seem like a pittance.
But it certainly does indicate that a change is approaching. And for certain companies that find themselves in the middle of this significant energy revolution, it's going to mean lots of profits.
Let's take a closer look...