8/4/08

Congress and Alternative Energy

Congress has left for August recess without extending renewable energy tax credits, which are set to expire at the end of 2008. Congress will meet for three more weeks this year, in September.

The debate in the Senate, where Republicans blocked the latest attempt to extend the tax credits, is not about renewable energy. Everyone seems to be in favor of it. The argument is over how to fund it. The most recent plan, for a short term credit extension, was to levy more taxes on hedge funds and to delay certain tax breaks for multinational companies. Republicans did not like it. They also wanted to focus more on domestic oil drilling.

A compromise may be in the works. A group of ten senators--five Republicans and five Democrats--has proposed opening up parts of the Gulf of Mexico for oil drilling. The tax revenues generated from these new projects can be used to fund renewable energy. Even if the plan is not adopted, it shows that progress is being made. Come September, a bill will probably be sent to President Bush for his signature. But with the government we never know.

Alternative energy ETFs, like GEX, PBW, PWND, PZD, QCLN, FAN, and TAN, whose holdings include companies such as Vestas Wind Systems, First Solar (FSLR), MEMC Electronic Materials (WFR), and Suntech Power (STP), have traded sharply lower since the end of June. Until the energy tax credits are renewed, this trend is likely to continue.

The nascent alternative energy industry is greatly dependent on subsidies. Demand for solar and wind energy products is likely to fall if the tax credits are not renewed. Given that companies require around half a year lead time for financing major projects, plans for next year are starting to come on hold. If nothing happens by the end of September, projects will be dropped. Solar and wind shares will likely continue falling as a result. General Electric (GE), a chief proponent of the renewable energy credits and the largest wind turbine manufacturer in the US, also stands to be hurt (although much less so) if credits are not renewed.

As solar and wind shares are likely to spike if/when the tax credits are renewed, there are opportunities for investors wishing to speculate. Those thinking the credits will be extended next time congress meets might consider buying near term calls. Those thinking congress won't do anything may consider buying puts. If interested in a diversified approach instead of individual stocks, consider KWT, FAN, PBW, PZD, and TAN, which have options.

For those not wishing to speculate on alternative energy stocks but still wanting to make a profit (over the longer term) from congress' continued trouble in creating a sensible energy policy, oil drillers may be a safer bet. Some companies to consider for further research are Transocean (RIG), Noble Corp (NE), and Diamond Offshore (DO). These have traded along with the price of oil lately. Day rates for their deepwater rigs, however, are increasing, as are contract lengths. Oil companies face production declines, which should keep demand for deepwater (where most oil in the future will probably be found) rigs growing. When the market realizes that earnings at companies like Transocean are not directly related to the price of oil, drillers' share prices should go up.


Disclosure: At the time of writing I owned shares of General Electric.