Rethinking renewable energy

The renewable energy resources sector is rapidly growing, thanks to more consumers and companies turning their attention to green matters. With that in mind, it may be worthwhile to consider adding renewable energy exposure to client portfolios, says Shechar Dworski, an investment analyst with Mackenzie Financial.

“One reason people are paying attention to alternative energy is energy independence and the desire to run your own energy supply,” he told attendees at a recent Mackenzie Financial road show. “Energy is the lifeblood of an economy, and every country wants to have that choice, especially in the last few years where there’s been more political unrest.”

Dworski says one of the more promising areas is solar power, which has grown 40% in the past 10 years. Silicon companies are another area to watch, since power cell manufacturers use silicon to create solar panels. “These manufacturers are expected to consume more silicon this year than the semiconductor industry,” Dworski wrote in a paper last month. “The combined demand for silicon is proving greater than the capacity of the industry supplying it.”

If clients are interested in capitalizing on this trend, he suggests investors look for companies that make silicon and have enough for the future, or look for companies who are creating solar power cells without the material. That said, in the next few years, he says, “we expect there will be enough demand that all these different types of solar cells will find use.”

The ethanol industry, meanwhile, is another area advisors might want to consider. In the past five years, ethanol production has grown 16% and is expected to increase to 55% growth this year. Dworski says the demand for ethanol is at an all-time high, since the “U.S. government got excited and increased their mandate.” The latest American proposal plans include increasing ethanol production to about 35 billion gallons by 2017, triple the current order.

“There is a good opportunity to buy ethanol-related companies right now at below fair value, given lower sentiment for the industry caused by a recent hike in corn prices,” writes Dworski. “Over the next few years, we think there is room for this industry to more than double.”

He says advisors should also examine wind power, which today makes up only 0.064% of the renewable energy market. “Wind energy is now close to being competitive in cost with fossil fuel energy sources.” As well, he says the latest generation of windmills are larger, wider and more efficient. “They sit on taller towers, capturing the strong air currents on high.” Since 1997, the industry has grown 27%.

It’s clear, though, that the alternative energy sector is still only emerging. Despite the promise, Dworski admits that integrating these resources into mainstream use isn’t cheap. Solar power is by far the most expensive, costing 30 cents a kilowatt per hour, compared to nuclear energy, which costs less than a nickel. Fortunately, government grants are keeping the renewable resources industry in business. “A lot of these are being propelled forward because of government incentive,” says Dworski, “but you have to be very careful to monitor government policies, which can change quite rapidly.”

Making matters more complicated is the fact that renewable resources make up only 13.1% of all energy sources. As a result, Dworski says, it’s imperative that investors take a global approach when investing in alternative energy. “The renewable energy industry is evolving quickly, making it necessary to actively manage investments,” he wrote in his report. “As each area of the industry develops in waves, it creates cyclical opportunities to buy and trade. A few well-selected long-term holdings could persist through the years.”

Filed by Bryan Borzykowski Advisor.ca, bryan.borzykowski@advisor.rogers.com