Alternative energy-related stocks are often an alluring to investors. And given all the talk concerning carbon regulation and the stimulus package over the past year, interest in the group has been running at a fever pitch.

But despite the group’s potential for long-term growth, I remained cautious on alternative energy plays for most of 2009–a contrarian view. The rationale behind my skepticism has largely borne out this year: As I predicted, neither the US stimulus package nor carbon legislation acted as near-term catalysts for the group–in fact, alternative energy stocks have underperformed as a whole.

Several developments have conspired to cool investors’ interest in alternatives. Many environmentalists have labeled the United Nations’ Climate Change Conference that took place in Copenhagen a failure, and poll numbers indicate that support for a US cap-and-trade bill is on the wane.

Now that the hype is subsiding, I am becoming more constructive on the group. More specifically, I remain cautious on the near-term prospects for wind and solar companies but see upside for energy storage and efficiency plays.

In This Issue

I briefly revisit Exxon Mobil’s (NYSE: XOM) proposed acquisition of XTO Energy (NYSE: XTO) and talk about two new additions to the Portfolios. See Natural Gas.

Those of us who didn’t believe the hype missed out on alternative energy stocks broad underperformance. I revisit the logic behind my caution on this group and summarize the returns generated by my Alternative Energy Field Bet. See Alternatives’ Underperformance.

The straight story from the UN’s Climate Change Conference in Copenhagen and what it means for investors. See Copenhagen Conundrum. 

I provide an update on my recommendations in the Alternative Energy Field Bet. See Playing the Trends.

The Stocks

Range Resources (NYSE: RRC)–Buy @ 60
Petrohawk Energy (NYSE: HK)–Buy @ 30
First Solar (NSDQ: FSLR)–Hold
SunPower Corp (NSDQ: SPWRA)–Hold
Vestas Wind Systems (Denmark: VWS; OTC: VWSYF)–Hold
Hexcel (NYSE: HXL)–Buy
Itron (NSDQ: ITRI)–Buy
Ener1 (NYSE: HEV)–Buy

Natural Gas

Before delving into this week’s issue on alternatives, I would like to remind all subscribers to check out my lengthy Flash Alert on Exxon Mobil’s (NYSE: XOM) deal to acquire Wildcatters Portfolio recommendation XTO Energy (NYSE: XTO) in a USD41 billion deal released late last week.

To make a long story short, I see the deal acting as a blueprint for a wave of merger and acquisition activity in the unconventional natural gas space that will occur next year. In the alert I detail 10 potential takeover plays: seven in North American unconventional gas, two oil services firms and one play on Australian coal. All 10 recommendations rate buys in How They Rate.

I have also decided to add Range Resources (NYSE: RRC), a major gas producer in the Marcellus Shale, to the Wildcatters Portfolio as of this issue as a buy under USD 60. And I am adding Petrohawk Energy (NYSE: HK), a major producer in the Haynesville Shale, to the aggressive Gushers Portfolio as a buy under USD30.  

The rationale for both recommendations is included in last week’s detailed Flash Alert, Ten Takeover Plays.

Alternatives’ Underperformance

After the 2008 US presidential election, just about every financial publication imaginable ran at least one article purporting to identify stocks to benefit from an Obama administration. After all, with Obama in the White House and Democrats controlling both the House and Senate with commanding majorities, the administration appeared to be in a good position to follow through on campaign promises that would affect a large number of market sectors. 

Alternative energy was one of the groups most frequently flagged as a beneficiary of the change in guard. One of President Obama’s major policy goals was to address carbon-dioxide emissions, pledging to seek additional funding for alternative energy sources such as wind and solar power. One of his first acts as President was to push through a massive fiscal stimulus package that included significant funding for alternative energy projects.

Although the basic argument for an Obama boom in alternative energy was straightforward and possessed some degree of logic, I viewed this investment angle as terribly overplayed; the thesis was too obvious, and investors failed to appreciate the risks alternative energy companies faced.

On several occasions I’ve advised investors to favor investments in conventional energy companies over alternative energy names. In the Feb. 8, 2009, issue of TES, The Leviathan and Energy, I took a closer look at the American Recovery and Reinvestment Act of 2009, the USD787 billion stimulus plan, detailing the provisions that most directly impact the energy industry. In that issue I stated:

Many investors believed this stimulus package would constitute a huge giveaway for alternative energy companies. There does appear to be significant funding that will flow into the sector over the next few years. I also expect we’ll see more energy-focused bills out of the Obama administration in coming years that will, quite likely, involve more money flowing into the alternatives industry.

But don’t buy into the hype. If you’re using the American Recovery and Reinvestment Act of 2009 as a reason to buy alternative energy stocks, you’re reading too much into the stimulus package.

Alternative energy stocks are currently facing significant headwinds. For one thing, still-weak credit markets make it harder for companies to finance major wind and solar farms. And the slowdown in residential construction spells a decline in household solar installations.

Another USD42 billion will help at the margin, but it can’t offset these headwinds. Moreover, as I’ve noted, a large portion of the cash to be spent on energy won’t hit the economy this fiscal year or next; it’s hardly a short-term catalyst.

When I wrote this piece these sentiments did not represent the conventional wisdom or the popular trade on the stimulus package. But that call proved broadly correct.

Source: Bloomberg

This graph tracks the performance of a handful of major indices and energy stocks since Feb. 18, 2009, my last update on the stimulus package. The two indices tracking the performance of clean and alternative energy companies are the Bloomberg World Alternative Index and S&P Clean Energy Index. The former is the worst performing index depicted, while the latter has performed in step with the S&P 500 Energy Index.

And the S&P 500 Energy index has a heavy weighting in slow-moving, safety-first integrated oil companies such as Exxon Mobil, while both alternative energy indices are quite volatile–on a risk-adjusted basis alternative energy’s underperformance is stark. Plus, both alternative energy indices have underperformed the Philadelphia Oil Services Index and the broader market S&P 500 by a wide margin.

Finally, in a twist that many investors find particularly ironic, longtime favorite Peabody Energy (NYSE: BTU) trounced all of the indices depicted in the graph. Peabody is the world’s largest coal mining firm and operates primarily in the western US and Australia.

Early in 2009 many pundits called for coal stocks to underperform because coal would be the hardest-hit fuel under any carbon-dioxide regulation scheme. Furthermore, many analysts noted Obama’s outright hostility toward the coal industry, citing comments made during the campaign about “bankrupting” the industry.

But buying alternative energy and shunning coal didn’t pan out this year. Of course, that isn’t to say that no alternative energy firm performed well; rather, the average performance of the group was notably worse than for other energy-focused stocks. Meanwhile the coal industry has flourished thanks to a strong reacceleration in demand from the developing world. And if anything, the stimulus package was a boon for coal, pledging billions in research dollars for clean coal technologies.

While in Europe for last year’s G8 Summit, I wrote a piece entitled The Politics of Carbon, which addressed the hype over alternative energy and the newly passed House Resolution 2454, “The American Clean Energy and Security Act,” more commonly known as the climate bill. HR 2454 would set up a carbon cap and trade system designed to reduce US greenhouse gas (GHG) emissions 17 percent by 2020 and 83 percent by 2050.

The bill also proposed a renewable energy standard (RES) that would require retail electricity suppliers to meet least 20 percent of electricity demand via renewable energy sources such as wind, solar, waste-to-energy and geothermal power.

In the issue I noted that HR 2454 only passed the House of Representatives by the narrowest of margins and had little or no chance of passing the Senate in its current form. There was a brief surge in interest surrounding clean and alternative energy companies in early summer; the timing coincided with the passage of HR 2454 and extensive discussions about carbon regulations at the G8 in L’Aquila, Italy.

I once again reiterated my call that neither event should be considered a catalyst for stocks related to alternative energy. Moreover, I noted that hammering out a global agreement on carbon emissions would be considerably harder than most pundits realized.  I warned:

To the extent that HR 2454 does benefit alternative energy, I would prefer to focus on wind power and efficiency firms over those involved in the solar industry. Solar PV is among the most expensive sources of energy on a per kilowatt basis, even if you factor in current subsidies. I have no doubt that solar will see strong growth, but wind power is a more practical near-term option for companies looking to meet RES.

And the solar power industry faces other headwinds. Companies overbuilt their capacity to produce PV panels, and the excess supply has depressed prices measurably. As the global economy recovers and credit markets revivify, the number of solar installations should increase, reducing the glut of unsold panels. Although HR 2454 included no such provisions, I wouldn’t be surprised if the US or other countries introduced new energy bills that offer more generous subsidies to PV firms.

Still, with most of the solar names trading at sky-high valuations, there’s ample room for further disappointment.

Wind power, on the other hand, is cheaper than solar and a more viable option for companies seeking to meet RES. According to Exelon, wind costs about $40 to $60 per metric ton of carbon abatement compared to $250 for PV. And wind-power firms don’t face the same oversupply issues as solar-power companies.

As my graph shows, most alternative energy companies had topped out by mid-summer. G8 Leaders more or less kicked the proverbial can down the road at the G8 Summit, pledging only to continue discussions on carbon and climate change at the Copenhagen talks that concluded earlier this month.

Excitement surrounding HR 2454 has also abated when Congress shifted its focus to contentious health care legislation. As I explain later on in today’s issue, further delays to climate legislation are likely, as public support continues to decline; few Senators and House members are keen to support an unpopular initiative in an election year. Moreover, the Copenhagen Summit predictably ended with few meaningful results. The lack of a global agreement on carbon emissions makes a climate bill along the lines of HR 2454 an even more remote possibility near-term.

Although energy stocks generally have performed well since July, the alternative and clean energy indices depicted in my graph have traded lower.

Longtime readers know that I prefer to play alternative energy via a “field bet,” similar to the biofuels fields bet I outlined in the December 2, 2009, issue, Bumper Crop.

For those unfamiliar with this concept, it’s a diversified mini-portfolio designed to play major multiyear trends in certain energy markets. Instead of recommending just one or two high-risk plays, I offer a list of five to 10 specific picks in each sector. I recommend that subscribers place a small amount of capital in each stock, around 20 to 25 percent of what you’d invest in a normal TES recommendation.

Although each pick may be risky on its own, the basket represents a safer, more-diversified bet on these long-term trends. This general strategy has paid off handsomely for us in the past; we’ve racked up some nice gains on field bets in nuclear, biofuels and alternatives. Keep in mind that I rarely advise selling a field bet recommendation outright because they’re designed to play long-term trends. Instead, I simply recommend that investors be selective and avoid putting new money to work in the sector.

Here’s a rundown of my current alternative energy field bet and the returns since my last update on July 1.


Source: Bloomberg, The Energy Strategist

Picks in my alternatives field bet are down an average of 3.76 percent since the beginning of July. Although I’m never happy to report a decline in recommended stocks, my call to be cautious on the sector was correct back in July.

Moreover, while it’s cold comfort, the TES alternatives field bet actually outperformed the S&P Global Clean Energy Index (down 4.5 percent) and the Bloomberg World Alternative Energy Index (down 4.9 percent) over this period.

It’s never as gratifying to correctly identify underperforming sectors as it is to recommend big winners, but identifying the stragglers is just as important as picking the winners. We haven’t avoided alternative energy stocks this year because we’re permanently bearish on the group; other energy-oriented sectors have presented better opportunities.

Copenhagen Conundrum

Longtime readers know that I don’t enter the global warming debate in this newsletter. I’m not here to save the world or make judgments about whether global warming is real or caused by humans, or the extent to which it will affect the global climate.

However, that does not mean we can afford to ignore the issue; the energy industry and the alternative energy industry in particular is impacted by regulations aimed at controlling carbon emissions. To ignore the impact of new greenhouse gas (GHG) regulations and the politics of climate change on our investments would be pure folly–not to mention a waste of potential opportunities.

Judging from the scathing editorials and sometimes violent protests, many in the environmentalist camp were disappointed by the tepid statement that emerged from the summit in Copenhagen.

The official statement from Copenhagen is broadly similar to the agreements signed after the G8 Summits in Hokkaido, Japan in 2008 and this year at L’Aquila, Italy. The statement noted that climate change is a challenge and that the total increase in global temperatures should be limited to less than 2 degrees Celsius. The agreement also noted that achieving this goal would require deep cuts in carbon emissions. There were no hard targets included in the draft and the agreement was nonbinding.

But the lack of consensus in Copenhagen was predictable; the developing world is unlikely to accept hard targets for greenhouse gas emissions because such an agreement would act as a major drag on their economic growth. China and other emerging-market economies depend more heavily on energy-intensive manufacturing industries than the developing world; this higher energy intensity makes cutting carbon emissions even harder.

And it’s equally unlikely that the US and other developed countries are going to agree to major subsidies that help developing economies mitigate the costs of reducing emissions. The simple fact is developed countries simply can’t afford to do so. Moreover, in the US public sentiment regarding climate change regulation is deteriorating rapidly.

A recent poll conducted by ABC News and the Washington Post poll found that 65 percent of Americans support regulations to reduce global warming, down from around 75 percent over the summer. However, when Americans were asked if they still supported regulations if it would raise energy costs by $25 per month, support drops to 55 percent. Just 39 percent of respondents said the US and other developed countries should agree to offer $10 billion in aid to developing countries to help with carbon dioxide mitigation–$10 billion is a tiny fraction of the sums developing countries are seeking.

As for President Obama’s handling of climate change policy, only 45 percent of Americans approve, down from 61 percent last spring. And the big slump in approval has come from independents; 62 percent approved of President Obama’s handling of climate change policy in April, but that figure has fallen to just 36 percent as of the Washington Post’s most recent poll.

Other polls show that less than 60 percent of Americans even believe in global warming, the lowest level in years. Undoubtedly, the so-called “Climate Gate” is weighing on sentiment. For those unfamiliar with Climate Gate, hackers managed to obtain a large number of e-mails from the Climate Research Unit at the University of East Anglia in the United Kingdom. Some of the e-mails suggest that scientists may have manipulated or otherwise altered climate data to support the idea the case for global warming.

Some scientists have since come out to say that even if true, these e-mails don’t change the broader picture. However, in the court of public opinion, perception is reality; the text of those e-mails is enough to impact public opinion on climate change legislation. You can bet Climate Gate will loom large in any debate about climate change legislation next year.

With midterm elections looming, it’s becoming increasingly unlikely that Congress will pass climate change regulation in 2010. According to the latest numbers from Intrade–a website that allows participants to risk real money on a variety of issues–the odds that a comprehensive cap-and-trade bill will pass in 2010 is less than 40 percent.

It’s possible that Congress will pass some form of renewable energy standard (RES) as a stand-alone legislation. It’s also possible that the US Environmental Protection Agency (EPA) will proceed with plans to regulate carbon emissions without Congress’ influence. But any RES passed in 2010 is likely to be relatively benign, and even many Democrats that support a cap-and-trade bill are wary of the EPA pushing ahead with its own regulations. In any event, sorting out the details of an EPA plan will take time and could provoke some sort of a backlash from Congress.

But with the prospects for a US climate bill in 2010 receding and the hype surrounding alternative energy stocks abating, I’m becoming incrementally more bullish on the group. I see three major factors on the horizon that could help turn around the performance of alternative energy stocks in 2010.

First, as I noted in The Leviathan and Energy, the stimulus package passed early this year included very little spending in 2009.  But spending on alternative energy, energy efficiency and grid improvements under the stimulus package ramps up in 2010 and 2011–a marginal positive for the industry.

Second, one of the biggest problems facing alternative energy companies in early 2009 was financing. With credit markets in turmoil it was tough for companies to get the funding they needed to undertake capital-intensive alternative energy projects. But check out the graph below.

Source: Bloomberg

This graph depicts the spread between bonds rated BBB by Standard & Poor’s and the yield on a 10-year US government bond. The higher this spread, the more troubled credit markets; the so-called credit crunch that spanned most of the second half of 2008 and the first half of 2009 is clearly visible.

But, the current spread on these bonds has returned to levels last seen in the middle of 2008, prior to the Lehman Brothers bankruptcy. Although spreads are still above the levels last seen at the height of the 2007 credit bubble, the debt markets are open once again.

Third, and most important, China and India took a great deal of heat in the press and from environmental groups for failing to agree to hard emissions targets. But the reality is that both countries have announced detailed targets and plans that are extremely favorable to the growth of the alternative energy industry. In fact, these developing countries look likely to drive growth in these industries more so than policies in the developed world.

In particular, China has indicated that it plans to reduce its carbon intensity 40 to 45 percent from 2005 levels by 2020. Carbon intensity compares the quantity of carbon dioxide emitted in China to the size of its economy as measured by Gross Domestic Product (GDP). The graph below depicts the carbon intensity for a handful of different countries.

Source: EIA

As you can see, China and India have higher carbon intensities than any of the developed countries listed on the chart–this is hardly surprise. However, it’s worth noting that both China and India have made significant strides in terms of reducing intensity.

If China were to reduce its carbon intensity 40 to 45 percent by 2020, that would imply a drop from 2.85 metric tons of carbon dioxide per USD1,000 in GDP to around 1.70 metric tons. Because China’s economy is growing rapidly such a reduction would still imply a significant increase in total carbon-dioxide emissions but nevertheless would represent a significant savings from a “business as usual” approach to energy.

China plans to pursue a number of different policies to meet this target. The list includes continuing to close down older, smaller coal-fired power plants and replace them with new plants that are more efficient. Although environmentalists in the developed world go to great lengths to protest the building of new coal-fired plants, replacing America’s fleet of three- and four-decade old plants with newer, more efficient plants would be one of the cheapest and fastest ways to reduce US carbon (and pollutant) emissions.

China is already modernizing its coal-fired plants. The nation’s best plants operate at higher temperatures and convert the energy in coal to electricity far more efficiently. According to recent data from the International Energy Agency (IEA), the most efficient plants being built in China today can cut carbon emissions by more than a third compared to its oldest and most polluting plants. If current trends persist, the average efficiency of China’s fleet of coal-fired plants will exceed the efficiency of US plants.

China and India also plans a major build-out of nuclear power capacity. There is a growing consensus that the world won’t be able to reduce its carbon emissions without nuclear power. Consider that the current energy intensity in France is 0.284 metric tons per USD1000 in GDP while Japan’s intensity is 0.24 metric tons.

As these are the lowest carbon intensities of any of the large developed countries, their energy mixes could be considered a model of best practices–at least from the perspective of carbon emissions. Both Japan and France rely heavily on nuclear power, a large base-load source of power that produces no carbon emissions.

And then there’s natural gas. The UK reduced its carbon intensity by about 36 percent between 1991 and 2006 and has a far lower-than-average intensity of just 0.35 metric tons per USD1000 in GDP.  As I’ve explained in prior issues, the main reason for its rapid drop in carbon intensity is that fact that the country has replaced coal-fired capacity with gas-fired capacity en masse since 1991.

Natural gas will be a major beneficiary of any drive to reduce carbon emissions, as it emits half the carbon of coal to produce the same amount of energy. And in some countries, including the US, it’s in abundance. China and India are both planning major increases in gas-fired power capacity. Ultimately, I suspect the US will also turn to gas as a cheap way to reduce emissions without disrupting the economy.

Finally, renewable and alternative energy will play a part in China and India’s plans to reduce their carbon intensity. In 2008 China had a total installed base of roughly 12.2 gigawatts of wind power capacity; it’s estimated that capacity could grow more than tenfold to 150 gigawatts by 2020. This is impressive when you consider that current EIA projections show total US non-hydropower renewables reaching less than 130 gigawatts of capacity by 2030.  

For its part, India has ambitious plans for solar power. The country recently announced that it plans to add 22 gigawatts of installed capacity by 2022, up from a negligible amount today.

There are two ways to look at these announcements. On the one hand, China and India’s planned growth in solar and wind power capacity spells significant growth in demand for both technologies. When you couple that with continued growth in the developed world, you have the recipe for a big expansion in the wind and solar industries.

However, it’s also important to remember that even if China hits its goals, non-hydroelectric renewables will amount to just around 3 percent of its power generation by 2020. Under the most optimistic scenario published by the IEA, wind power–the most cost-effective renewable power source–could account for 12 percent of global power production by 2050. The IEA estimates that achieving this target would require major investment in new plant construction, grid modernization and worker training totaling USD 3.2 trillion. That’s a massive investment equivalent to close to one quarter of US GDP.

Investors must recognize the growth potential in alternative energy without falling prey to the pie-in-the-sky idea that these technologies will replace fossil fuels and nuclear power in the foreseeable future. Renewables are important but limited power sources.

In many ways, the developing world’s approach to carbon intensity, which incorporates more efficient coal plants, natural gas, nuclear and renewable, is more sensible than the artificial solar and wind-focused mandates and subsidies pursued in many developed countries.

Playing the Trends

The long-term growth potential for alternative energy remains bright. And despite all the negative headlines about China and India’s refusal to agree to hard targets on emissions reductions, these countries are actually leading the world in terms of pushing alternatives.

As I noted earlier, I am turning more bullish on the group given the fact that expectations are lower after months of underperformance. I also see the stimulus bill, credit conditions and strong growth in the developing world as potential catalysts this year.

That being said, investors looking to commit funds to alternative energy must remain highly selective. I am not yet ready to recommend jumping back into solar power stocks in a big way.

Solar power companies continue to face an oversupply of solar panels, which has pushed prices lower and eroded profit margins. To worsen matters, key solar power markets such as Germany and Spain have rolled back subsidies for solar energy, and some fear that the new government in Germany will reduce those incentives further.

First Solar (NSDQ: FSLR) is the leader in thin-film solar panels made from cadmium telluride. Although thin-film solar cells are less efficient than traditional polysilicon photovoltaic cells, they’re also cheaper and First Solar has long been considered a leader in terms of price per watt generated.

That said, the price of silicon has fallen sharply since mid-2008 thanks to a capacity glut; prior to that time there was a major shortage of this key raw material. This has dropped the cost of making traditional polysilicon panels and has eroded some of First Solar’s cost advantage. First Solar has been offering rebates in some of its key markets as a way of maintaining its market share. The threat of a price war looms over First Solar and the rest of the industry.

SunPower Corp (NSDQ: SPWRA) makes the most efficient polysilicon-based cells and has a solid position in the utility-scale solar market. But the company faces the same basic headwinds as First Solar.

In addition SunPower revealed some minor accounting discrepancies in November related to the timing of some of its revenues. The scale of these accounting issues is minor but that doesn’t mean it can’t act as a near-term headwind for the stock. Both First Solar and SunPower continue to rate a hold.

The top performers in solar this year have been the Chinese panel manufacturers like Yingli Green Energy (NYSE: YGE) and Trina Solar (NYSE: TSL). These firms are now the lowest-cost producers of polysilicon solar panels besides First Solar. In addition, the Chinese manufacturers have benefited from excitement over the strong growth potential of their local market.

These firms have been among the only alternative energy stocks to outperform this year. I regard the recent run-up in both companies’ share prices as overdone and due for a correction. I won’t add either to my field bet for now; however, both remain candidates for future addition.

Wind power is the most economically competitive of the major alternative energy sources and requires either far lower subsidies than solar or, in some markets, no subsidies whatsoever. Growth in wind power is less dependent on politics.

However, the wind-power market is also showing signs of a slowdown in demand and building supply overcapacity. In October the world’s largest wind power solutions provider, Vestas Wind Systems (Denmark: VWS; OTC: VWSYF) forecast that its profit margins would drop from 11 to 13 percent this year to 10 to 12 percent next year. This decline is hardly disaster but does indicate rising price competition.

In addition, Vestas is closing a plant in Colorado through at least the second quarter of 2010. All 500 workers will be furloughed until orders pick back up. If that isn’t the sign of an industry with too much capacity, I don’t know what is.

As noted earlier, I am beginning to turn a bit more bullish on wind power and the long-term trends are positive. However, 2010 looks like a transition year, and I have a hard time getting more excited about the industry until we see signs that orders are reaccelerating and the supply overhang is easing. Vestas Wind Systems rates a hold.

My favorite alternative energy themes right now are energy-efficiency plays, smart grid technology and energy storage. The alternatives field bet already includes two plays on these trends: Hexcel (NYSE: HXL) and Itron (NSDQ: ITRI).

Hexcel manufactures carbon-fiber composite materials. Carbon fiber is used in a wide variety of applications from automobiles to aircraft and wind turbines. One of the most important applications is a new generation of fuel-efficient, carbon-fiber aircraft–for example, The Boeing Company’s (NYSE: BA) 787 Dreamliner.

The aircraft cycle has been a negative all year; the credit crunch in late 2008 and early 2009 weighed heavily on orders for new airplanes. However, lighter airplanes such as the 787 are the wave of the future, and the long-delayed Dreamliner’s maiden test flight was an upside catalyst for Hexcel.

Hexcel also manufactures carbon fiber used in wind turbine blades. Blades made of carbon fiber are lighter and increase the conversion efficiency of turbines, generating more power than traditional turbines under the same wind conditions. Hexcel continues to rate a buy in the alternatives field bet and has performed well since mid-year.

Itron, which I added to the field bet in July, makes smart meters and is already a leader in automatic meters. Traditional gas and electric meters require a utility technician to manually read each display in each home and business. Automatic meters, however, transmit data via a radio signal directly to technicians, accelerating the meter reading process and cutting costs for utilities.

Itron has a 50 percent market share for automatic meters in the US and close to a third globally.

Smart meters are the next step. These meters will not only transmit data about how much energy a residence or business uses but also valuable data about how energy is used– information that can be used to cut costs and enhance efficiency. For example, businesses could benefit from performing certain energy-intensive tasks at off-peak hours when total demand for power is low. Data from smart meters can be used to identify those potential savings or even to automatically manage power demand. Buy Itron.

In recent years interest in battery technologies has increased. Hybrid vehicles like the fuel-efficient Toyota Prius are already hot sellers. Meanwhile, there is considerable interest in a new generation of plug-in hybrids and all-electric vehicles such as the Chevy Volt and an all-electric Ford Focus scheduled for debut in 2011.

Right now, gasoline and diesel dominate the US and global transportation industries, but there is a growing likelihood that more cars will run off electricity in coming years. Current estimates are that as much as 30 percent of all light passenger vehicles sold in Europe and the US could be electric or hybrids by 2020. Even if the reality is half that figure, it’s a huge market.

And many alternative energy solutions are highly variable–that is, the wind doesn’t blow at a constant rate at all times and the sun doesn’t always shine. With the current grid, there is no way to store power; supply and demand must balance.

Grid-attached storage could solve this problem. If companies could store power generated by renewable energy technologies, these technologies would be more economic and more practical as a source of base-load (always-on) power.

Ener1 (NYSE: HEV) designs and manufactures lithium-ion batteries and systems, focusing primarily on the market for batteries used in electric vehicles, though the firm does have a smaller grid-attached storage business. In fact, Ener1 is the only manufacturer of auto-grade lithium-ion batteries with a manufacturing plant in the US.

Lithium-ion batteries can produce and store the same amount of power as equivalent nickel-metal hydride packs but weigh half as much. This is particularly important in the auto industry where size and weight are key factors in design.

Ener1 is a risky play and will struggle for some time to come. However, the company has over 200 discussions ongoing with potential customers and more than 30 active programs. And the stimulus package includes significant funding and low-cost loans for electric vehicle companies–this spending should be a nice tailwind for Ener1. A small company that’s a leader in a potentially huge market, Ener1 rates a buy for aggressive investors under USD7.50.