From the July 2008 issue of Research Magazine • Subscribe!

Energy Investing 2.0

Even if you don't buy all of the hype and news coverage surrounding green investing or alternative energy, it's getting harder to ignore. With crude oil prices at record levels, finding new energy sources is quickly becoming a national priority.

Then there are people like T. Boone Pickens. The legendary oilman made his fortune with petroleum but has been publicly vocal about his support of the new energy movement. In a recent CNBC interview, he made an urgent call for the development of alternative energy sources like wind power. Pickens is not the kind of guy you bet against.

Someone smack dab in the middle of it all is Robert Wilder, J.D., Ph.D., the CEO of WilderShares. His Encinitas, Calif.-based firm produces a lineup of stock market indexes to follow companies that are developing and producing alternative energy.

He recently joined Research for an interview.

Research: How and when did you first get interested in alternative energy?Wilder: During the late 1980s I was finishing my Ph.D. and I was looking for cleaner alternatives to the classic fossil fuels. I became involved in this field because it was all part of my work for completing my Ph.D. at U.C. Santa Barbara.

In fact, a few weeks ago I went to the university library and looked backed at books that were published in the mid-to-late 1980s to see the predictions about energy in the future, and it was funny. There was a lot of hope, a little bit of hippie optimism but a lot was wrong. Some books, for example, were too optimistic about solar power, which there isn't a lot of today and some did not foresee the boom we've had in wind power.

Investors are betting that power utilities and other industry sectors will shift away from traditional energy to renewable sources like hydropower (water), solar, wind, geothermal and biomass. Which of these areas in your view is most promising?Here in the U.S., hydropower is a mature industry so there's not much growth there.

Solar, I think, is regarded as an area that has a lot of future growth potential. There's enough energy striking the Earth every day that we can power all of our energy needs in concept. But problems still exist. How do you store solar power or transmit it? The power grid is not set up yet for solar energy power. Looking forward we could eventually see a scenario where solar thermal panels in Northern Africa (Sahara Desert) can transmit power to Europe.

Nearer-term solutions are crystalline solar electricity and thin-film solar. The stock prices of publicly traded companies focusing in these areas have been pushed up.

Wind is competitively priced when compared to other energy sources. If coal gets regulated there will be more interest in wind. If you talk to the utility executives in just the last 12 months, there's been a real shift within the utility industry. There's a lot of volatility in their fuel cost as witnessed by the rising prices of coal, natural gas and even nuclear power. Wind is free, which provides a fixed-cost element that makes it attractive.

The cost to build a new nuclear power plant is great -- $10 billion to $12 billion, so the financial risk is high.

Geothermal is getting a lot more interest because it provides baseload power, which means it's always on. Geothermal relies on heat from the Earth, and hot springs are an example of this kind of power source.

Ultimately nobody knows which areas will be the future winners and that's why we offer indexes that cover these areas.

A 2007 report by the U.S. Energy Information Administration (EIA) showed that, for electricity generation, the government subsidizes $23.37 for wind, $24.34 for solar energy, and $29.81 for "clean coal." By comparison, natural gas receives 25 cents, hydroelectric 67 cents, and nuclear power $1.59. Aren't fossil fuels more cost effective versus "green energy"?The EIA has made predictions that have been wrong before. Oil today, for example, is in the neighborhood of $125 per barrel and it's not very hard to find old reports where they were wrong about that.

I think they've favored the status quo, which is very supportive of fossil fuel sources.

How have the WilderHill clean energy products been performing?Alternative energy can and does drop like a rock and people need to be aware of this.

PBW [PowerShares WilderHill Clean Energy Portfolio] is down around 25 percent YTD, but last year it was up by 58 percent. It's not surprising to me that clean energy stocks have declined. It's probably regression to the mean.

In 2006 we included First Solar (FSLR) as a component of PBW at around $30 per share and late last year it traded around $300 per share. So it shouldn't come as shock if it drops back to $225.

One of the amazing things about your Clean Energy Index, is that it doesn't contain any well-known oil or energy companies. What's that telling us? Is it saying there's still a dearth of innovation in alternative energy with these established companies?As a clean energy index, we ought not include a major oil company that has maybe less than 1 percent of its activity in clean energy. They may advertise and discuss about how they care about the carbon footprint in energy, but that's not what drives their stock price. Other times a large traditional oil company may say they're spending billions in wind, solar or biofuels, but it's mostly spent on natural gas, which is not clean renewable energy.

These companies may be innovative at refining and at enhanced oil recovery, but not so much at producing clean energy.

Our indexes aim to have pure-play companies.

What are the basic differences between the PowerShares WilderHill Progressive Energy Portfolio (PUW) and the original PowerShares WilderHill Clean Energy Portfolio (PBW)?PUW addresses the fossil fuels. It focuses on technology that moves from dirty coal to natural gas and from oil to cleaner transportation fuels. It also includes safer technologies for nuclear power. This, by the way, is the first index of companies that benefit from a response to climate change.

In contrast, PBW focuses on solar, wind and geothermal power.

There's no overlap in stock holdings from PUW and PBW.

Several new ETFs that focus on alternative energy like GEX, TAN and KWT track competing alternative energy benchmarks. What are the main differences between these underlying indexes and WilderHill's?The first generation of clean energy ETFs are risky, but still more diversified compared to some of the newer funds.

It should be emphasized that some of these newer ETFs are focused on narrow subsectors within clean energy, which are extremely volatile.

I hope these providers are telling their clients about the volatility of these sectors.

Many companies with financial and political influence have their roots in traditional energy. Are these companies supporting the clean energy movement or are they taking a wait-and-see attitude?I think they're taking a wait-and-see attitude.

Some oil companies have funded opponents of climate change, but I think that is largely ending because there's been an attitude shift. For instance, companies like General Electric are really tackling clean energy. They're saying, "If we can sell $1 billion or $2 billion worth of wind turbine, why not?"

Some analysts say the alternative energy sector is risky. For example, the cost of building power plants that use solar-thermal energy and other infrastructure is substantial, with no guarantees those huge investments will pay off. What's your view?A wind farm can be built for $100 million and I don't think alternative energy is a huge investment risk. Sure, wind blades may break and wind turbine gear boxes might jam, but those are warranty claims and they can be fixed. These are not risks on the same level as constructing a $12 billion nuclear power plant.

Utilities buy their power at a wholesale rate. They may purchase at a rate of 5 cents a kilowatt hour, but may sell that same power at 20 cents. Solar can compete at 20 cents on somebody's roof and that's where power is needed, but it cannot yet compete at 5 cents. Even though solar energy is still pretty expensive today, it's getting cheaper by the month.

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Ron DeLegge is the San Diego-based editor of www.etfguide.com.

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