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12-20-2005
Distributed Energy Sector Prospects - Read Past the Headlines
Jamie Wimberly, California Onsite Generation Newsletter
Lions and tigers and bears! Oh my! Current headlines have been filled with dire news and predictions about energy price increases and scarcity. A savvy investor could rationally deduce from this news that the construct of the current energy industry is unsustainable and a great opportunity exists for alternative energy technologies and solutions. And in fact, the sterling Q3 performance of our Distributed Energy Stock Index (DESI) would seem to bear this out.
However, when considering individual DESI companies, a different picture emerges. Yes, major hurricanes, high energy prices and increasing scarcity impact the sector, but the impact is uneven and at times counter intuitive.
DESI companies produce energy, but they also consume energy to produce their goods and services. Part of the gain in sales from customers seeking alternative and economical solutions is offset by the higher costs associated with producing those goods and services. Most commodity prices have gone up significantly, including lead, steel, silicon, and other inputs into the production process.
High commodity prices, including energy, are and will continue to be a drain on the cost structure of most of the DESI companies, resulting in lower operating margins. However, the impact on different DESI segments varies.
For the renewable segment, in direct competition with prime movers that are using natural gas and other relatively more expensive fuel inputs, higher energy prices are generally a net plus for renewable products. Higher energy prices also seem to be more beneficial for technologies and companies in the Demand Management, Metering & Controls segment that offers relatively attractive ways to manage energy. For the other segments, including Power Quality and Storage, it is mostly a wash, with benefits cancelled out by higher costs.
Hurricanes and other major weather events would seem to be a clear positive for the sector. Millions of consumers have been left without power for extended periods of time, highlighting the value proposition of alternative energy technologies.
Well, yes and no. It greatly depends on the weather event itself. With the complete devastation wrought by Hurricane Katrina, alternative energy technologies were just as much under water as conventional technologies. Plus, with the dependence of many of the DESI companies on the government for some portion of their revenue and contracts, a cut back in government spending to pay for Katrina’s costs could be a drag on profits into the mid-term.
The DESI sector is primed for growth. As mentioned in the last Outlook, growth will be driven by: 1) Reliability and power quality needs; 2) State actions and policies; 3) Capital markets; and 4) Cross-over applications.
Additional drivers arise in international markets. Green-field applications in China, India and developing nations that have the means to acquire investments are a boost for the prime mover segment. Further, a growing demand for clean and green energy in Europe, Japan and other developed nations will boost sales of enabling technologies. DESI companies that successfully establish partnerships, distribution networks, and manufacturing globally should do relatively better than other companies.
Investors who simply read the headlines, though, may be missing the real opportunities, challenges and drivers in the sector.
Jamie Wimberly founded and currently serves as the CEO of the Distributed Energy Financial Group (DEFG, www.defgllc.com) LLC, a specialized consulting and financial services firm focused on innovative energy technologies and solutions. He has over 10 years of experience in finance and the energy industry. Jamie also co-founded and currently serves on the Board of the Center for the Advancement of Energy Markets (CAEM). For more information on DEFG or to become a free subscriber of the Distributed Energy Stock Index (DESI) Quarterly Report, please feel to contact Jamie at jwimberly@defgllc.com or by calling (202) 483-4443.
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