US Energy Bill: Where the Sun Don’t Shine

Last week, US lawmakers destroyed US chances for energy independence by renewing tax subsidies for oil companies at the expense of supporting a strong domestic industry for clean energy. As noted in Friday’s Wall Street Journal, “Overall, the big winner in the endgame that produced final passage of the bill … was major oil companies.” This haphazard move should have the Middle East and Venezuela cheering because it will drastically weaken US competitors who are seeking to become global super powers of solar, wind, biomass, and other forms of renewable energy.

At the moment, most clean energy technologies are in early adopter stages. As a result, products are relatively expensive when compared to mature energy inputs such as oil, coal, and natural gas. Although these fossil fuels have been heavily subsidized by tax payer dollars (i.e., receiving welfare) since WWII, the oil lobby has done an excellent job filling the mainstream media with barrels of spin to make the average citizen believe ethanol and solar are the big welfare enemies. The lobbying and PR worked because the oil industry has emerged with tax subsidies that common sense would have redirected toward the renewable energy credits. Apparently, the oil industry is more important than preventing terrorism and creating strong domestic industries.

Politics and safety aside, the new US Energy Bill leaves high-flying solar stocks in a very precarious position. Renewable energy credits are a critical component to the business models of solar companies. Without such credits, all of these companies will see margins shrink, and some of these companies will not be able to make their products cost competitive. Thus, I am placing the solar industry on the SGS watch list for opportunities to short stocks and play put options.

I was completely bewildered on Friday when solar stocks failed to react like Barry Cinnamon, president of Akeena Solar Inc. (AKNS), who said U.S. companies trying to compete internationally in solar “won’t continue to grow as quickly as they could have.” Cinnamon and other executives are announcing to the world that their growth will suffer, yet Piper Jaffrey suspiciously upgraded the sector on Friday and had ignorant speculators pushing solar stocks much higher. Given the industry is trading as irrationally as tech stocks during the dotcom bubble, I recommend waiting for reality to set in before attempting any bearish plays.

In recent years a ton of socially responsible investment (SRI) funds have burst on the scene to capitalize on the green movement. Thus a ton of hot money is chasing a relatively small universe of stocks. As these funds have put money to work to take advantage of the media frenzy surrounding climate change, sexy solar stocks have soared like Icarus (and we all know what happened to him). Moreover, newbie fund managers who are trying to capitalize like their predecessors during the tech bubble may continue to buy sell-side analyst calls because these inexperienced managers are not skilled enough to do otherwise. Consequently, we may see more irrational highs before these stocks revalue to account for the new US Energy Bill.

In addition to AKNS, JA Solar (JASO), Yingli Green Energy (YGE), Suntech Power (STP), Solarfun Power (SOLF), Sunpower Corp (SPWR), First Solar (FSLR), Evergreen Solar (ESLR), LDK Solar (LDK), Canadian Solar (CSIQ), MEMC (WFR), and Applied Materials (AMAT) will all feel the heat. Those with higher domestic exposure will get burned worst. On November 12, all of these stocks sold off on reports that the renewable energy credits would be left out of the bill, but for some reason people were less concerned now that this negative rumor has become harsh reality.

Skeptics will say we have another year to renew the renewable energy credits, but realists don’t bet on Washington getting anything done in an election year. Further, the renewable energy credits were left to expire last time before being renewed retroactively. If we have a repeat performance in 2009 or 2010, as Cinnamon noted in the WSJ, this lack of visibility will still stall investment in solar.

The stage is now set for a possible bursting of the solar bubble … but we need to wait until the bag holders realize they are fully exposed to the high noon sun.