Nov 15 - Business Week

After the Democrats won control of both houses of Congress on Nov. 7, companies across the alternative-energy spectrum saw a pop in their share prices -- a preview, they hope, of gains to come. Conventional wisdom holds that Dems are more sympathetic to developing alternative power sources and may crack the whip on fossil-fuel companies. After all, oil and coal outfits overwhelmingly favor Republicans with their political contributions, according to the Center for Responsive Politics.

But the green-power brigade may be getting their hopes a little too high. New sources of energy may eventually pay off handsomely, but since many of the most exciting renewable-energy technologies are still in development or deployed on a limited basis, it remains a tricky bet.

The Democrats have done plenty to encourage alternative-energy bulls. A pre-election paper released by House Democrats calls for the audacious and improbable goal of "energy independence for America by 2020," a strategy that would depend heavily on new sources of energy. But with solar, wind, ethanol all growing in importance -- and lesser known power sources like geothermal and ocean power elbowing in -- investors have barrels of options.

Rising Heat "Our strategy, and a strategy we would recommend, would be to invest in a basket of [renewable energy] companies," says Tony Tursich, portfolio manager at Portfolio 21 (PORTX), a mutual fund investing in companies it deems environmentally sound. "Investing in one particular stock in the renewable-energy sector is very risky," he adds.

Nonetheless Tursich is bullish on fund holdings such as SunPower (SPWR), a manufacturer of solar cells, and Ormat Technologies (ORA), a profitable geothermal-energy outfit. [Geothermal energy channels heat within the earth to generate electricity, producing fewer emissions than traditional fossil-fuel sources such as coal.]

Eric Becker, a co-portfolio manager at environmentally focused Green Century Funds [which also holds Ormat], says the Democrats are likely to accelerate the implementation of a carbon trading system that will penalize excessive greenhouse-gas emissions. "Getting the price tag on carbon right will drive innovation toward solutions in all these areas," Becker says.

Cultural Shift Investors in the alternative-energy space need to be aware that some of the most promising technologies aren't yet ready to deliver profits, though. Among others, cellulosic ethanol, which is made from plant waste [think of the corn cob instead of the corn kernel] tends to excite environmentalists much more than the corn ethanol that makes up the vast majority of the U.S. supply. But it isn't yet considered commercially viable.

Additionally, Becker thinks Democrats are probably more supportive than Republicans of a national renewable portfolio standard, or RPS, which would require that utilities generate a certain proportion of their power from renewable sources. Under the new Congress, a national standard is "going to get batted around in Congress for sure," Becker says. For example, Ormat, a company with its U.S. operations concentrated in two states which already support RPS -- California and Nevada -- could benefit from wider implementation.

Despite the Democrats' apparent enthusiasm for alternative energy, observers say any major benefits for the sector will likely play out gradually. Another boon for green power, observers say, could be a more receptive environment in the U.S. for companies in the sector [see BusinessWeek.com, 9/12/06, "A Slow Burn for Ethanol"]. "We have at least 50% of our investments overseas because we think they're more efficient," says Maurice Schoenwald, chairperson of the eco-focused New Alternatives Fund (NALFX). He finds the political climate in Europe is friendlier to renewable energy companies. But that could be changing now.

Shades of Green There's also the possibility that huge companies not known exclusively, or even primarily, for their green bona fides will dominate the "pure play" alternative-energy companies in these segments. Industrial giants such as General Electric (GE) and Siemens (SI) have emerged as major players in wind power, and U.S. agribusiness group Archer Daniels Midland (ADM) is the largest ethanol producer in the U.S.

ADM has certainly benefited from its association with ethanol, but these large companies aren't alternative-energy plays. This also applies to oil companies such as BP (BP) and Marathon Oil (MRO), which have some ethanol-related operations but aren't at the point where they can be characterized as alternative-energy players.

But beyond getting fuel from corn, grain, sunlight, or wind, environmentalists are also keen on using fuel from existing sources more efficiently. Becker says that this sector may contain some of the smarter bets for eco-savvy investors, since their users can potentially save money.

Big Brass Ring In this category Becker likes Green Century-held companies including Johnson Controls (JCI), a provider of systems that can help reduce energy usage in buildings, and Baldor Electric (BEZ), a manufacturer of a range of electric motors that he says are more energy efficient than competing products.

Baldor is "a green story, but they're not marketing it to greens, they're marketing it to decision-makers at companies," Becker says. Maybe the best way to achieve wider adoption of earth-friendly energy technology is to convince corporate brass that it can save the other kind of green.