Fossil Fuel and Alternative Energy Investments Can Coexist

The energy industry has always had a precarious relationship with politics. From the days of land grants to the timber industry in the 1800s to government-backed loans for the energy industry today, the U.S. government has always had some sort of influence on the outcome of energy policy. Whenever an industry straddles the line between business and politics as closely as energy does, people's opinions on the subject can get very entrenched. 

The issue for investors, though, is that these opinions can lead to several biases for or against certain parts of the industry. This can lead investors to not see opportunities that are available to them. Take two industries on the far end of each spectrum: coal and solar energy. In some way or another, each of these two energy sources has been shunned by its opposition, but those who let political biases control their investments are missing out on some very lucrative opportunities. 

The old guard
Coal has been what you can consider the whipping boy for the environmentally conscious crowd for years, and now fans of natural gas are taking a couple jabs at it as well. For those looking for a case against coal, there are some truths to back up that stance. Exelon CEO Christopher Crane has gone on record saying that 19,000 megawatts of coal-fired plants will be permanently shut down by 2015 because of stricter environmental regulations. Also, U.S. Energy Information Administration data shows that natural gas has been gaining market share against coal for the past couple of years. 


Looking at these trends might lead one to believe that the glory days of coal are numbered, and these companies are certainly priced to fail. All four of the country's largest coal companies trade at values well below the average for the S&P 500.

Company Price to Tangible Book Value P/E Ratio (TTM)
S&P 500 5.40 17.7
Peabody Energy 1.09 9.22
Arch Coal 0.41 N/A
Alliance Resource Partners 

2.52

10.68

Alpha Natural Resources   0.39 N/A

Source: S&P Capital IQ

Yet despite the sentiment surrounding the industry, several coal companies have posted record quarters. This quarter, Alliance shattered its previous earnings record and beat Wall St. expectations by over 40%. Also, nearly every coal company is ramping up their export capacity to meet demand for coal overseas. A recent report by the International Energy Agency estimates that coal will pass oil as the largest source of energy by 2017, with China and India being the premier drivers of demand. 

Coal has been a major source of energy for over a hundred years, and it looks as though this trend will continue for quite some time. 

The new kid on the block
The solar industry has its own bad reputation, it can't shake the claim that the industry is artificially held up by government subsidies. Epic failures like Solyndra have given anti-solar advocates much to preach about. But, just as the government will always have a hand in the energy sector one way or another, each energy industry will have its winners and losers. 

By simply looking at the losers in the solar industry, you would be overlooking some of the successes in the industry as well. In the first quarter of 2013, 83% of all electricity capacity that was added to the grid came from either wind or solar, and 100% of March's power additions came from solar alone. Much of this has come as a result of greater efficiency from solar panels, making the construction of these facilities comparable to fossil fuel plants. According to a recent article in The Economist, it costs about $4.74 per watt to construct and install a solar generation facility, where it costs about $3.00 per watt to construct a coal facility and $1.00 per watt for a natural gas plant. Keep in mind, though, that once these facilities are on line, only one of them has a free fuel source. 

If we were to pinpoint a company that embodies this success as of late, it's First Solar . It just sold a 139 megawatt facility to utility giant -- and large coal consumer -- Southern , and recently signed a power purchase deal with El Paso Electric that will supply El Paso with electricity for half what it pays for power from coal. These deals also come with the announcement that the company upped guidance earlier in April which sent share prices up by 46% in one day. 

Solar is still a rapidly developing technology, and with every advance in technology or manufacturing, it becomes more and more economically feasible. Granted, it has its obvious weaknesses, and its not suited for every situation. The industry will be able to stand on its own in due time, though, and there are some companies worthy of investment within the space.

What a Fool believes
Coal and solar could be considered nemeses. Since each of these two energy sources is ideally suited for electricity generation, they will naturally compete against each other for clientele. Unlike two gladiators who fight to the death, though, one doesn't need to exceed in spite of the other. The energy pie is so large and growing so fast that both can carve out a healthy piece.

For the past several years, President Obama has advocated that the government should follow an "all of the above" energy policy. As investors, we could learn a a lot from this approach. Every part of the energy industry has great companies and attractive investments. Our challenge should be to pick the best companies in each space, not worry about which one will beat the other. 

If you're looking for continuing updates and guidance on First Solar whenever news breaks, The Motley Fool has created a brand-new report that details every must know side of this stock. To get started, simply click here now.

The article Fossil Fuel and Alternative Energy Investments Can Coexist originally appeared on Fool.com.

Motley Fool contributor Tyler Crowe has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners, Exelon, and Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Gumby

Lets suppose that we invest enough in clean energy to help destroying future demand of fossil fuels by about 5% over 20 years or the lifetime of clean energy investment. If that 5% demand destruction will result in , let's say, about 5% lower prices for fossil fuels over the same period. Take into consideratoin that fossil fuels are many times larger than clean energy today. Today, fossil fuel sales is about 2 trillon dollars every year if you take into account of everything we make out of crude oil, nat gas and coal. You will be surprised at what we can make with fossil fuels other than plain gasoline or lighter fluid, etc. Farm fertilizers , plastics, kerosene, diesel, asphalt, you name it!! So take into consideratoin the trajectories of future prices going forward, it is almost a no brainer that we will pay almost nothing for clean energy because we will enjoy unrealized gains through savings on fossil fuel prices that will go up slower than without adequate investments in clean energy that might seem like nonsense to many of us at present. Investors is not concerned about consumers and what they will have to pay based on supply and demand mechanisms, nor are they aware that they are consumers themselves as well. If we spend and invest tens of billons or hundreds of billons in clean energy for next 20 years and we can really count on same amount of savings coming from lower prices for fossil fuels because of changing trajectories of supply and demand mechanisms that will likely happen. It is a set of dices that I am willing to toss! and bet !

May 06 2013 at 5:26 PM Report abuse rate up rate down Reply
Gumby

We are blaming coal for pollution that is mixed up with firewood smoke. how big a part of the soot pollution comes from firewood , we have yet to know or even bother to. Firewood is so popular that it is a sin !

May 06 2013 at 12:38 PM Report abuse rate up rate down Reply