January 22, 2009 – Obamarsquo;s inauguration this week signals a change in the level of support that the alternative energy and clean tech sectors will get in Washington, and other world leaders know it. This week at the World Future Energy Summit in Abu Dhabu UN Intergovernmental Panel on Climate Change chairman Rajendra Pachauri said he expects the U.S. position on climate change at Decemberrsquo;s meeting in Copenhagen will be critical and will set the tone. Bush never took a lead role.

That being said, attention to climate change issues has never been greater on a global scale because countries, all facing economic erosion on an unprecedented level, are all moving to a strategy which effectively kills two birds with one stone: infrastructure investment and investment in green technologies as a primary catalyst for stimulating their own economies. Obamarsquo;s $800 billion fiscal stimulus package is no different. nbsp;

The United Nations said that the upside (if there is any) to the current global crisis is that world governments are increasing their environmental initiatives including renewable energy and energy efficiency. Just last week South Korea and Japan announced their own respective ldquo;Green New Deals.rdquo; There has never been more support on a global governmental level for alternative energy and clean technology.

So why have solar, wind, geothermal and other alternative energy and clean tech stocks been so battered? The 3, 5, 10 and 20-year forecasts for alternative energy remain pretty bullish, and continue to get more so, implying that there is a long-term growth trend which will be a common theme to alternative energy and clean tech stocks for the foreseeable future. Yet growth has been almost totally priced out of these stocks lately.

To be sure, there are near-term headwinds that each of these sectors face. Biofuels run up against a wall of challenges created by feedstocks. Issues of sustainability, food vs. fuel, and rising prices have all but crushed the U.S. ethanol industry. More promising are next generation biofuels, cellulosic technologies which promise to be immune from many of the challenges that the first generation faced, but carry some of their own ndash; like ability to scale. Brazil seems to be the only legitimate model, helped tremendously by its climate and geography. Because of that, it is a difficult model to replicate on scale.

Solar stocks have been battered, trading at fractions on a PEG basis and low-single digits against earnings, EBITDA and sales. No one questions that growth for solar for the foreseeable future will be dramatic. Though Wall Street is presently piling on with criticism and concerns in the near term about oversupply in the polysilicon and module chains which will lead to margin compression, as well as concerns about the current economic environment creating credit constraints and delays for projects.

Wind and geothermal companies face the same headwinds in the near term, relating to economic conditions and a typically higher level of capital expenditure required to get these projects off the ground. Interestingly, valuations in wind and geothermal havenrsquo;t compressed to the level that solar stocks have.

One of the areas that we think should be more immune to economic headwinds is energy efficiency. While solar, wind and geothermal will all be critical contributors to making the U.S. more energy independent, less carbon intensive and in the longer-term, more energy efficient, technologies exist today which can dramatically reduce energy consumption, costs, and carbon footprints while reducing dependence on fossil fuels. And most importantly, they carry the cap ex requirements on the front end to be implemented and donrsquo;t depend as much on government subsidies to validate return on investment, or incentivize it, at best.

Energy efficiency is the lowest hanging fruit, we think, to dramatically improving energy efficiency. Through creating better building efficiency (buildings are responsible for about 70% of U.S. energy consumption), utilizing more efficient motors (electric motors represent more than 50% of all electrical energy consumed in the U.S.) and lower-energy lighting there is potential to cut billions of oil per day-equivalent of consumption.

A recent study from McKinsey and Company states that nearly 40% of the countryrsquo;s emissions-reduction potential by 2030 is from improving energy efficiency. President Obamarsquo;s stated goal is to improve energy efficiency by 50% over that period. His $800 billion stimulus plan includes more than $21 billion on energy efficiency programs with $7 billion earmarked for grants to state and local government for energy efficiency programs.

That we need energy efficiency programs on a national and global scale is generally not controversial. However, as with concerns about demand for renewable energy sources like solar, wind and geothermal, it can also be said about energy efficiency that the economics need to be compelling. Achieving these economic objectives to maximize energy efficiency and minimize energy waste requires less cap ex, and the ROI is faster.

A few companies that we think are well-positioned as ldquo;pure playrdquo; energy efficiency companies are Power Efficiency (OTCBB:PEFF) and Energy Recovery (Nasdaq:ERII).

Power Efficiency designs, develops, markets and sells Motor Efficiency Controllers (ldquo;MECSrdquo;) under its E-Save Technologyreg; brand and on an OEM basis.

Products

sect;nbsp; Three Phase MECS are developed for sale into the industrial and commercial markets. Commercial Launch in Summer, 2008

sect;nbsp; Single Phase MECS are developed for sale into the residential appliance markets. Commercial Launch in Fall, 2008.

We mentioned above that more than 50% of all electrical energy consumed in the U.S. is used by electric motors. The energy costs of running motors is typically many times greater than its initial purchase price. At a rate of $0.04/kWh, a typical 20-horsepower continuously running motor uses almost $6,000 in electricity each year, about 6x its purchase price.

Power Efficiency is launching motor efficiency controllers into the industrial/commercial markets (three phase product) and residential appliance markets (single phase product). Estimates for the market opportunities here are $392 million (global three phase market) and $615 million (global single phase market).

It has established OEM and channel partnerships with leading international firms like KONE, OTIS Elevator, ThyssenKrupp, Barrick Gold, Mitsubishi Electric and Berry Plastics, amongst others with installations for its three-phase product in Caesarrsquo;s Palace, the Denver International Airport, Macyrsquo;s, JFK International Airport and the Smithsonian, amongst others. And it has demonstrated energy savings of up to 40% for industrial applications and internal rates of return up to about 70% on its products.

The company estimates that in the U.S. alone, the impact of its E-Save Technology on the manufacturing industry could produce up to $1.7 billion in cost savings, a reduction in 21 billion kWh, and a reduction in CO2 emissions bynbsp; 16 million tons.

It recently launched its single phase motor efficiency controller for the massive residential appliances market, and entered into a partnership with IXYS (Nasdaq:IXYS) a semi-component firm to sell its product to IXYSrsquo; more than 3,000 customers worldwide that include major appliance manufacturers. We noted above the estimated global market opportunity here is about $615 million and think Power Efficiency is well-positioned to begin establishing sales in this market in 2009.

Energy Recovery (Nasdaq:ERII) develops energy recovery technology that is utilized in the water desalination industry.

Products

middot;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp; PX Pressure Exchanger optimizes the energy intensive sea water reverse osmosis (SWRO) process which is about 98% energy efficient and reduces energy consumption by about 60% compared to conventional processes.

The International Water Management Institute (IWMI) projects that by 2025, 33% of the worldrsquo;s population will live in countries with water scarcity. SWRO is a process which has grown at a rate of about 55% annually since 2002. nbsp;It is installed in more than 300 desalination plants worldwide and its technology is leveraged by more than 60 OEMs including GE, Veolia, Acciona and Doosan. Management estimates that its technology in the field has resulted in reduction of about 300MW relative to comparable plants with no energy recovery devices.

At a rate of $0.08 per kWh-hour, the deployment of PX devices in plants in the field would result in annual electricity cost savings of about $210 million, and a reduction in CO2 of about 1.5 million tons per year.

Our Take

We remain bullish an solar, wind and geothermal, and less so ndash; near term ndash; on biofuels (except in Brazil), and think the sector poised to best navigate the economic headwinds is energy efficiency. Costs to achieving energy efficiency goals are lower for implementing these technologies and the rate of return is faster. We think Power Efficiency and Energy Recovery are both well positioned in this respect, for near and long-term growth.

Important Disclosure: The SCPEditor is LONG PEFF.OB and has no position in ERII. The information provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. The SCPEditor is the managing partner of Aspire Clean Tech Communications which is LONG PEFF.OB, and is on a monthly retainer of $6,500 to provide PEFF with corporate communications and strategic advisory services. Aspire has also received 40,000 shares of PEFFrsquo;s restricted common stock to provide these services. For any additional information about Power Efficiency, Aspire, or Small Cap Pulse, please contact Todd M. Pitcher at 760-798-4938.
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