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Companies in Value Line’s Power Industry grouping are primarily involved in the development and marketing of novel solutions for the generation and distribution of electricity. Companies herein cover a wide spectrum of underlying science and end-market applications. A good number are focused on reducing the developed world's traditional reliance on fossil fuels (i.e., oil, natural gas and coal) for power generation. This major subgroup includes solar panel and wind turbine makers, as well as operators of geothermal and municipal waste-to-energy power plants. Other manufacturers target less transformative niche solutions and enhancements to the existing electric grid. Their products include superconducting wire for power lines and fuel cells used to power wireless base stations and clean-running city buses.

The group has a relatively short history, since the adequacy and suitability of the existing power infrastructure has only really come into question over the past couple of decades. Increased concern over carbon emissions and global warming has led to greater interest in clean, renewable (non-fossil-fuel) sources. Continued reliance on fossil fuels imported from certain non-allied petroleum-rich nations has also been a factor spurring interest.

To a degree, these companies seek to reshape the global economy. Transforming a power infrastructure, which is so deeply entrenched, carries high risk. Many alternative power companies have only recently turned profitable, as market adoption has just reached key levels and product development costs are slowly receding. Still, a good number in the power group won't become self-funding anytime soon and must, therefore, turn to the capital markets for continued financial support.

Generally speaking, power stocks are best suited to venturesome growth investors, willing to assume significant risk for the prospect of high returns. These stocks carry high betas, meaning that they tend to increase the risk/reward profile of portfolios in which they are held. The broader economy affects these companies, but strong secular trends help to minimize the impact of economic hiccups.

A Helping Hand

Success within the Power Industry requires keeping a keen eye on the political and legislative landscape. Many of the companies would be significantly less viable if not for generous government subsidies aimed at increasing market adoption. Such subsidies include Feed-in Tariffs (above-market prices paid by distributors) and investment tax credits, which effectively lower product prices for customers. Investors should be aware that subsidies might target very specific applications. A tax break, for example, may cover rooftop solar installations but not ground-based ones.

Caps on regional subsidies have raised concern about the solar sector's overall health. Other changes in the tax code and in government mandates also risk disturbing the sometimes-delicate supply/demand balance within certain subsectors. That said, the political landscape usually favors the power group. A rising number of countries are instituting renewable energy mandates, requiring utilities to generate a set percentage of overall power from clean, renewable sources.

The underlying value of clean power generation may increase, should new legislation make carbon credits a reality, worldwide. In the U.S., renewable energy companies stand to benefit from a strengthening push to restore the country's industrial base. Years of overseas outsourcing have eroded America's capacity to produce everything from automobiles to refrigerators. Green-power suppliers, including solar panel and wind turbine makers, may help replenish the manufacturing base over the longer term.

Grid Parity

Investors should closely monitor cost trends. Initially, many new technologies don't deliver power at a base-line cost that is competitive with those of traditional fossil fuel-reliant suppliers. Power producers should make progress toward so-called "grid parity" within a reasonable period. Incremental product enhancements and improvements in manufacturing help them to close the cost gap. We recommend that investors concentrate on the lowest cost suppliers, given the likelihood that they will grab market share from direct competitors in the nontraditional power space. "Cost per watt produced", while not entirely a standardized measure, is arguably the most important metric to monitor.

Risks

Nontraditional power companies face their share of challenges. The prices of crude oil and gasoline have a notable impact. When fossil-based energy costs are at high levels, it's easier for renewable producers to compete. But when the prices of traditional fuels are low, consumers and commercial businesses don't feel compelled to call for new, cheaper forms of energy. Access to credit is another import factor. Tight funding markets will cause a good number of large-scale alternative energy projects, like wind farms and commercial solar installations, to be delayed or cancelled altogether.

The Power Industry comprises a mix of companies, many of which are engaged in the development of alternatives to fossil fuels. Often, their products either are in the pre-commercialization stage or have yet to reach requisite market acceptance. As such, early ventures are typically unprofitable and thus risky investments. Times of low oil and gas prices can be a hindrance. Heightened environmental and geopolitical concerns generally provide a boost to the sector. Also, green power may be the key to revitalizing America's industrial base. All in all, we think that venturesome investors will be well served by some exposure to the power group. Power stocks offer wide, albeit speculative, long-term appreciation potential.