Two years ago, I speculated that alternative energy would prove to be the biggest speculative bubble in history. Could this be the beginning of the end?
Shares of American Superconductor (Nasdaq: AMSC) – a maker of components for wind farms – tanked almost 50% at the open today. (Talk about getting the wind knocked out of you!)
Turns out the company’s primary customer, Chinese wind power company Sinovel, is refusing shipments until it reduces its own inventory.
I’ll concede that a nasty price decline for a single stock hardly sounds the death knell for the entire alternative energy space. But it’s definitely not a good sign when demand in China’s wind power market – the fastest-growing in the world – is waning.
The truth is, though, we knew this day was coming…
Hopped Up on Government Subsidies
In each year since 2005, China has doubled its wind power capacity.
But it’s not because all its citizens have suddenly jumped on the green bandwagon. Heck, no.
Like most alternative energy initiatives, we can thank hefty government subsidies for the dramatic demand spike.
Under China’s 2008 Special Fund for Wind Power Manufacturing, companies can receive grants between $6.7 million and $22.5 million, depending on the size of the project. The Office of the United States Trade Representative (USTR) estimates that grants provided under this program could already total several hundred million dollars.
The problem with so much free money? It eventually leads to overcapacity. And Sinovel’s refusal to take shipments is proof positive that China has reached this point.
China Stumbles… And Triggers a Global Domino Effect
As Steve Sawyer, Secretary General of the Global Wind Energy Council said, “China has become the single largest driver for global wind power development. In 2010, every second wind turbine that was added anywhere in the world was installed in China.”
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In other words, China represents the leading edge of the wind power movement.
But China’s current overcapacity hiccup isn’t just restricted to China. On the contrary. It’s bound to impact wind power companies the world over. Especially in the United States.
I say that because President Obama’s budget proposes $150 billion over 10 years in clean energy and efficiency programs. So we’re essentially repeating China’s recipe for overcapacity.
When the Economics Don’t Add Up… Bail!
At the end of the day, economics ultimately prevail in business and investing. And when it comes to alternative energy space, they just don’t add up.
As I said in 2009, “Without tax breaks and government subsidies, not a single alternative energy will be able to compete.”
Even the chief executive of Vestas Wind Systems (Other OTC: VWDRY.PK), the world’s largest wind turbine maker, unknowingly admits the same.
Just this week, Ditlev Engel said, “We’re looking to create thousands of jobs somewhere in Europe, but we haven’t decided exactly where yet.”
The problem? Uncertainty over the size of government subsidies.
Or as he said, “We need commitments from customers and politicians.”
Sorry, folks. When your business relies on politicians handing out free money, in addition to customer demand, you’re destined to fail. So I’m not really surprised that shares of Vestas are trading 40% below their 52-week high.
Two years ago, I predicted, “We’ve got another two to three years before we hit the peak… green euphoria will ultimately be replaced with despair and massive losses.”
And American Superconductor’s tumble could prove to be the first shoe to drop. Caveat emptor!
Ahead of the tape,