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.