5 Companies Standing To Benefit From Cap And Trade

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

My, what a difference a few years can make in the world of environmental stewardship. In 2008, John McCain visited worldwide wind turbine leader Vesta's (NASDAQOTH: VWSYF) North American headquarters in Portland, Oregon, and declared acknowledgment of the dangers of climate change, and provided unequivocal support for a cap and trade program in the United States. By 2010, McCain reversed his support for cap and trade. With recent climate change talks in Qatar, I wanted to take a look at how cap and trade would affect a handful of publicly traded companies. This takes on greater urgency, now that California appears set to go on its own cap and trade system.

Whenever California adopts a significant change in state law, it has impacts both real and perceived on the country as a whole. California's gross “domestic” product in 2010 was just over $1.9 trillion, which would place the state as the world's ninth largest economy if California were an independent country. California's economy also provides over 13% of the overall gross domestic economy of the United States.

California's plan will be the second largest cap and trade plan on earth, after the European Union's. The utility industry in the Northeast United States also has a cap and trade plan. If the California plan works, it most assuredly would lead to a national cap and trade plan. If California's plan fails, it would likely kill the idea of a national cap and trade plan for a generation. Of course, cap and trade specifically, or climate change generally, was scarcely a national issue in this election cycle. Yet, as oceans continue to rise, glaciers continue to retreat, and odd storms continue to affect tens of millions, at some point this country will no doubt change course away from profligate fossil fuel use.

The difficulty of analyzing any domestic cap and trade system is that no plan is currently under discussion, so we will just act as if the rules of the California plan were extended nationally. California is hardly synonymous with the rest of the country from an energy generation or usage context. California has virtually no coal based generation, and has in place a requirement that utilities generate 33% of its sales from renewable sources by 2020. There are several of the nation's largest nuclear facilities in California, along with massive wind, solar, and hydrological power stations.

The first big issue in any cap and trade plan is whether existing energy generation, and discharges, would be “grandfathered” in. But no matter what, where would be some clear winners in the energy generation market. Nuclear energy has an enormous carbon footprint during the lengthy construction process, and after that obvious safety and decommissioning issues, but for the life of the plant, the actual carbon footprint is mild. The nation's leading nuclear power producer is Exelon (NYSE: EXC), a holding company including Illinois' Commonwealth Energy, Maryland's Baltimore Gas and Electric, and Pennsylvania's PECO Energy. Over 80% of Exelon's nearly 35,000 megawatts of generating capacity comes from nuclear, making it the largest nuclear operator in the United States.

Exelon's financial reports have not been real pretty of late. Its main appeal in recent times has been its dividend of an annual $2.10, or 7% dividend that stands to be cut by the second quarter of 2013. The company has also deferred over $2 billion of capital spending plans that were to have gone toward upgrades to the company's nuclear fleet. These are not moves by a company sanguine about its long term prospects. And, if management does not have confidence about Exelon's future, then it is hard for me to have confidence either.

One problem with nuclear energy in general is that the plants that cost many billions of dollars do not last forever. There are hundreds of nuclear facilities well over 30 years old, and decommissioning these plants requires special expertise. Utah based EnergySolutions (UNKNOWN: ES.DL) has domestic and international divisions with expertise in the field. The company has had substantial positive earnings surprises each of the past two quarters, with third quarter earnings of eleven cents per share nearly doubled Street estimates of six cents per share. The company does not have the strongest balance sheet in the world, largely due to carrying over $300 million of goodwill. But with nations across the globe scurrying to wean themselves from nuclear operations, including Germany and Japan, EnergySolutions promises to have a profitable future.

If we really want truly clean energy, then wind and solar require continued penetration into America's energy portfolio. In recent times, a vast majority of Americans, and some 98% of scholarly papers, agree that human activities are contributing in whole or part the process of climate change. Americans want more clean energy. I want to focus on solar today, an energy source promoted by no less than Thomas Edison in 1931. Solar panel prices have fallen by roughly 80% over the past five years. Efficiencies are at all-time highs, and if the lengthy sighting and permitting process were streamlined as they are in Germany and Australia, solar would be making a dramatic impact on our energy needs. That free fall of solar panel prices allow solar to already undercut fossil fuel prices in much of the world, once environmental and health costs are factored into the equation. The city of Los Angeles announced committing to secure enough solar power for over 300,000 homes.

The two largest solar panel makers in this country are First Solar (NASDAQ: FSLR) and Sunpower (NASDAQ: SPWR). They have fundamentally different business models, as First Solar focuses on utility scale projects, and Sunpower focuses on “main street” retail and commercial projects. Both of these companies would, of course, get a major lift form any sort of cap and trade program. First Solar had the dubious honor of being the sole member of JPMorgan's (JPM) list of stocks to avoid in 2013, citing overcapacity by solar power makers worldwide, and the floundering European economy. Recently passed tariffs on Chinese product are not likely to help because of loopholes in those tariffs. First Solar's profits have been solid this year as it got boosts from accounting rules allowing income to be realized on projects under construction. But that cannot go on for long, and 2013 profits are likely to trail 2012. On balance, I agree with JP Morgan, and would not be a holder of First Solar in 2013.

Sunpower is a different animal. Its silicon based nodules, while more expensive than First Solar's, and are also more efficient. And nearly 100% of its business comes from either the United States (65%) or Italy (33%). It dominates the domestic roof top retail market, in no small measure because it leases its panels to homeowners who pay little or nothing down. The lease costs are offset by savings on customers' electric bills. But what it has in market share, it does not have in costs. Its average installed cost is higher than First Solar's or the Chinese competition, so things are not very profitable at present. Analysts have a negative outlook on the stock of 3.3, and it is already trading slightly above the mean 52 week target. There is not much here that would appeal to most investors. 


StockCroc1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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