Big Government and Green Investing

Following James Pethokoukis's cover story in this week's U.S. News on the return of Big Government, it seems like a good opportunity to consider how government largesse affects a few popular corners of Wall Street—specifically, green tech companies where subsidies are the only thing keeping most of the industry economically feasible.

A new report by Laurence Alexander, Paul Clegg, and Michael McNamara at Jefferies & Co. says the technology is great and demand sound, but the real catalyst for successful green gains remains support from governments.

Here's a quick breakdown of what to watch in wind, solar, and biofuels:

Wind
Investors need to keep an eye on the U.S. production tax credit, which doles out $0.019 per kilowatt hour of juice generated. It's set to expire at the end of 2008, and analysts say the program's extension "remains the single most important issue facing the wind industry today." Past failures to extend the credit have had "a devastating effect." In 2004, installations fell 77 percent from 2003 after the credit was revoked. Analysts don't expect a repeat of that disaster but caution that "anything is possible" in an election year.

Solar
Here, tax and subsidy structures in Spain and the United States matter most. Both have existing plans being revisited this year; Spain in September and the United States by year's end. The industry is hoping to make headway in breaking open the "potentially enormous" U.S. market, but even if those two major subsidy plans get trimmed a bit, Jefferies expects the overall size of subsidies available to rise.

Biofuels
Ethanol has been all the rage in the sector, but the resulting surge in the price of corn used to produce the stuff could change the future of subsidies in the sector. Technologies that can move biofuel away from the "food vs. fuel" debate like biodiesel, cellulosic ethanol, biobutanol, biochemicals, and bioplastics could get a boost, Jefferies says. But fledgling firms remain risky as turmoil in the broader markets hampers new investing.

What to own now
Jefferies likes wafer maker PV Crystalox, solar panel and battery stalwart Energy Conversion Devices, and biofuel maker Nova Biosource.

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