Renewable Energy Investing

I’ve been writing a lot more lately about renewable energy than I have analog electronics, but I think with good reason. There has been added interest on the part of many because of Barack Obama’s election to the presidency and his promise to invest $15 billion per year for 10 years in order to create 5 million new “green collar” jobs. But where and how do we separate the promises and the politician from the reality? How do we know that renewable energy will help pull America out of our economic recession? And most importantly, once we are confident that this idea of a green economy could work, how do we know where to put our money and invest?

I think the most important thing to point out is that there are going to be a LOT of bad investments out there. My last entry about EEStor is a good example; a company that could potentially be doing great things, but more likely will look for lots of investments and then not deliver on their promises. Like any other engineering activity, renewable energy is an iterative process. On average, the solar technologies in 2 years will be better than the technologies we see today (especially because of the higher interest in renewables and the notion that eventually oil prices will return to extremely high prices). Further, there will be other companies “green washing” (basically talking the talk of being an energy friendly company, but not walking the walk). If you decide to invest in solar, wind, geothermal, etc, you should realize that beyond the usual risk of investing, there are risks associated with unknown, unproven technologies. Prices on renewable companies haven’t gone through the roof yet, but human nature tells us that there will be an overzealous buying of stocks at some point. Let’s look at what we should do when investing so we avoid any unnecessary losses:

1. Are they forthcoming with details? — Companies like EEStor might try to be secretive because they have a breakthrough technology, but there are limits on how much a company should really withhold information. Mostly it comes down to whether or not you want to roll the dice on a company that keeps you in the dark. I would much rather see a proven technology (heck, a prototype would be nice) and then make my decision based on that. You might not get the 1000% returns that people expect (perhaps they’re nostalgic for the dot com days?), but you will go into an investment with facts you can hold companies to when things get tough.
2. Do you understand everything about what they are doing? — This is important for two reasons. First, it is important because you should not invest in what you don’t understand. If you don’t get how a solar cell works, don’t get how it could benefit society and are only sure that it will somehow produce power, then it is not a good idea to dive headfirst into investing in that company.  Second, some of the best investing ideas are the simplest ideas; if you cannot explain to someone in 1 sentence what the company does, it is probably too complex to form a productive, sustainable company (a generalization, of course). Examples of this might be Apple (“They sell computers and music players”). Of course the internals of their products are more complex, but the products are simple to describe and sell. If you have a company that is producing a chemical that is required in the fabrication of GeAs solar cells for the 3rd implantation process…yeah, might not be such a great buy at first glance.
3. Have they brought in good management? — The best ideas in the world are worthless if you can’t sell them. It’s not greedy; it’s business. Sure, the truly great ideas will always rise to the top (eventually), but since we’re talking about investing here, we need to concentrate on ideas that are likely to get to market quickly and ones that will be successful for the long term. Good management will include a proven track record at start ups (there are very specific skill sets) and some experience in the industry. Note that these people can sometimes be the founders, but unless the creators of the new idea or technology have significant soft skills, don’t expect it.
4. Are they digging for the gold, selling the gold or selling the shovels? — This was always an analogy and investing idea that I liked: the ones who made the most in the California gold rush were not the ones digging the gold, but instead those selling shovels.  To give an example for each, the diggers here would be the solar companies (cell manufacturers), the sellers of the gold would be the energy companies and the sellers of shovels would be fabrication equipment manufacturers. The best case scenario is when you find a great company supplying the shovel with little competition. If the “shovel-maker” can continually sell their product to each new technology that pops up, then they will be well positioned to outperform the rest of the market.
   
5. Do they have a simple product that can be produced quickly and efficiently? — Really, I’m thinking about GreenField Solar Corp, which I recently read about in the Cleveland Plain Dealer. They have a simple solar concentrator that can mostly be built from off the shelf components. However, the best part of their implementation is that they would license and franchise the production facilities (making the start-up cost lower for the actual company) and they would only retain sales ownership of their proprietary software, control systems and solar cells (a very specific type). It is reminiscent of the lean manufacturing idea that Solar Automation eschews and Henry Ford pioneered. If you have TONS of money you want to invest, you could always try to start a solar factory.

For my part, I am staying put on renewable energy stocks for now. In reality, it’s always a very difficult climate when you try to guess what technology will come out on top. It happened with the biotech stocks in the early- to mid-2000s, it happened in the dot-com era (post-bust), it happened in the 90s with the PC and chip makers, it happened in the 80s with banks and so on back through time. If you are reading this post, you likely either found my site through searching or you were linked here; in either case, if you are not sure about renewable energy stocks, stick with what you know and continue to monitor the industry. Then when you see a disruptive technology that you think WILL revolutionize the industry, maybe buy a few shares to help support the company. However, do not expect to make money for a few years and continually research your target company. If you are REALLY looking to invest in your favorite solar or wind company, go buy a solar array or turbine and try powering your home. You will help the company and yourself.

If you have any questions about investing in renewables or if you have any favorites you would like to let others know about, please leave them in the comments.