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Is the boom over for alternative energy – or just getting started?

Think long term for solar and wind investments, three experts say.

March 21, 2008

Everyone it seems has been investing in green energy – from Google to ExxonMobil. But this year the booming sector is suddenly in a serious funk. So is this time to get out – or jump in and snap up some long-term winners? To find out, the Monitor's Laurent Belsie recently talked with three experts who closely follow the field: Matt Patsky, portfolio manager of the Winslow Green Growth Fund, Paul Hilton, director of advanced equity research at Calvert, and Eric Becker, portfolio manager with Trillium Asset Management. Here are edited excerpts of their conversation:

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Matt, you've had the No. 1 fund of all small-cap growth funds over the past five years. This year the sector has tanked. What happened?

Patsky: It obviously has been a very difficult market overall in the beginning of 2008. In addition, our focus, particularly in our Winslow Green Growth Fund, is small-cap growth. And small-cap growth has been particularly under pressure..... You've seen stocks that run [up] the most come down the hardest, even if everything's fine in terms of fundamentals.

So is the green-energy boom over?

Hilton: I don't think so. If you look at the long-term trends that are supporting alternative energy, there's no doubt that this really is a good play.... There will be short-term volatility. But if you look at things like the price of oil, the amount of new investing that's going into promoting new companies in this space, all the potential climate-change legislation that we're seeing, this really does create a perfect long-term [opportunity] for this sector.

How important is the price of oil going forward?

Becker: I think the price of oil is important mainly for psychological reasons, because most of the alternative-energy companies we focus on are producing electricity. And electricity is not produced from oil for the most part. It's from natural gas and coal. But those prices have also jumped significantly. The price of electricity has pretty much followed the price of natural gas and oil. In the past six months or so, it's practically doubled – the wholesale price of electricity in some regions. And so that makes for an environment that's very good for solar and wind companies [and] others that are producing electricity from alternative sources.

So if oil prices stay high, it's full speed ahead for green energy?

Patsky: There's a couple of factors. One is prices. And that's certainly a major factor globally. But you also have to remember that there's now renewed concern about energy security, which has changed the debate in this country to being one of bipartisan support for developing reliable energy supplies domestically. And that has to include renewables. So I think there is tremendous growth ahead over the next decade for renewable energy.

But what happens if alternative-energy tax credits expire at the end of this year as they're slated to?

Hilton: We certainly are concerned about the tax-credit issue. And, in fact, many of the new projects that would be coming on line, if they're not done by March, will not be able to qualify for the tax credit if it doesn't go through.... In effect, what's happening is the Republicans don't see any real incentive in getting it through, and the Democrats on the other side would love to be able to point to the fact that there's a failure. So when it comes to election time, they can come back and say: "Hey, look, we tried to get this through and it was blocked."

So prospects are bad for passage.

Becker: Prospects are poor in the very short term. But if you take one step back and look at the three main contenders for the presidency right now, all three support climate-change legislation and, I think, policies that are going to be supportive of renewable energy..... In the next administration, you're going to see ... some climate-change legislation and strong support for renewable-energy technologies.

But wouldn't a gap in tax credits hurt the companies you're investing in?