What crisis you might ask could be brewing in the renewable and green energy sector? After all, it is seemingly the hottest investment sector in the capital markets, green is en vogue, and anything with the word "renewable" attached to it is politically palatable these days. Washington is throwing money out the door faster than the renewable market can deploy it.

Recent Washington packages include:

-- The $780 billion stimulus package offers incentives, with $94.1 billion

worth of programs targeting renewable energy over 10 years. They include

a 30% manufacturing tax credit for companies building renewable energy

production facilities in the U.S., $8 billion in loan guarantees for

renewable energy projects, $4.5 billion in grants for smart-grid

electric transmission systems and $2 billion for carbon-capture and

-storage technology, among others.

AND

A cap-and-trade bill, which mandates that electric utilities to meet 20 percent of their electricity demand through renewable energy sources and energy efficiency by 2020. According to the Congressional Budget Office (CBO), the U.S. cap-and-trade program will cost $22 billion annually, or about $175 per household, by 2020, including:

-- Invests $190 billion in new clean energy technologies and energy

efficiency, including energy efficiency and renewable energy ($90

billion in new investments by 2025), carbon capture and sequestration

($60 billion), electric and other advanced technology vehicles ($20

billion), and basic scientific research and development ($20 billion).

-- Mandates new energy-saving standards for buildings, appliances, and

industry.

-- Reduces carbon emissions from major U.S. sources by 17 percent by 2020

and over 80 percent by 2050 compared to 2005 levels. Complementary

measures in the legislation, such as investments in preventing tropical

deforestation, will achieve significant additional reductions in carbon

emissions.

Yet the simple fact is that for renewables to survive long term, they must be able to compete with fossil fuels, primarily natural gas and coal economically without government assistance. Estimates of the potential contribution to US energy supply of renewables vary from 10 per cent to 20 per cent in 20 years. These targets remain just that, targets on paper.

It seems like almost every utility and power producer in America is jumping on the renewable energy bandwagon. So what could be wrong with that? Well, one thought is that the current valuations across the entire renewable and green energy sector are not justified by realistic or realizable forecasted cash flows or current enterprise Values measured by hard assets which generate actual electricity or create some other form of tangible value.

This should remind one of the internet boom, in which hundreds of billions of dollars changed hands on the back of a paper napkin essentially, and was the domain for high risk venture capital, distressed investor capital and hot money, which ran the sector from 0 to 100 almost overnight, only to abandon the technology sector as quickly as they entered in what became one of the largest boom and bust cycles the U.S. has ever seen.

Now, the fact is that the venture capital remains substantially underinvested in the Renewable Energy Sector, which is by definition a sector that is designed for their type of capital. It is characterized by high technology and implementation risk, and plagued by substantial government involvement, regulation and environmental constraints, and long term developmental requirements.

Simply put, the renewable and green energy sector has not developed to a point in time where it is appropriate for pension, insurance, endowment, family office or retail investors at any meaningful investment levels at this point in time.

Additionally, a majority of the renewable and green energy projects being developed and contracted or purchased by regulated utilities and other power producers in North America are either in developmental stage or are substantially disadvantaged by lack of transmission or other environmental or permit restraints, thus the net realizable gain in usable renewable generation continues to be negligible.

Does this sound familiar, perhaps similar to the recent "Ethanol boom and bust", or the "Dash to Natural Gas" fired generation in the mid 1990's. Hold that thought, as we will revisit these failures and potential lessons not learned in a moment.

What about t the substantial "hidden pass through" cost of the current Renewable and Green Energy initiative which is fast becoming a liability to regulated utilities, and has not been fully realized by the retail consumer through substantial regulated rate increases, which will be required to the tune of billions of dollars across the U.S..

While some of these regulated rate increases are pending in almost every State in the U.S. and involve almost every major and mid cap regulated utility holding company, the majority of the required pass through remain hidden in what we will refer to as a combination of "Phantom Contracts" and "credible contracts". Others would refer to this simply as window dressing.

What is a Phantom Contract you might ask? Well these are also commonly referred to as "Frame Contracts" in the energy sector, whereby a utility might sign a contract with a Renewable Developer, for say 100 MW of generation to be built and delivered under a long term contract. So what's the problem, after all, the frame contract has all of the bells, whistles, headline numbers and statistics Utilities like to make public, for example: "Utility XYZ Today announced that they have signed a contract with Developer ABC for 100MW of Renewable Generation to be brought on line by some future date".

What is the catch? Well what is not disclosed is that commonly in frame contracts, the developer has not fully permitted the energy projects, or not secured the land, has not purchased turbines, has environmental problems, transmission constraints, financing constraints, or all of these issues and many more. To be clear, there is nothing illegal or nor visible rule violations with such contracts, with the exception that they greatly distort the true generation metrics of the market when they are made public by utilities.

Then there is what we will call "credible contracts" for renewable energy projects being signed by Utilities across the U.S., which have some realistic hope of being built and brought on line to generate actual electricity. The full "pass through" cost of these renewable contracts to the retail consumer has yet to be fully comprehended by the marketplace and regulators and thus the true value of the entire renewable and green energy sector remains unquantifiable and I must thus conclude as previously mentioned that current inflated valuations across the entire renewable and green energy sector are not justified.

The measurement I use is realistic forecasted realizable cash flows or current enterprise values measured by hard assets which generate actual electricity or create some other form of quantifiable tangible value.

To be clear, this has not stopped regulated Utilities from continuing to sign phantom contracts and credible contracts for renewable and green energy generated electricity. Alternatively, it has not stopped the capital markets from financing renewable energy and the various developer and power producers who are sponsoring the projects.

Recent examples of renewable transactions just to name a few include:

Source: The Daily Deal 2009

-- FPL Group Inc., the parent company of Florida Power & Light Co.,

through its unit NextEra Energy Resources LLC, FPL has become the

country's top producer of renewable energy from wind, with 65

projects in 16 states with a capacity of nearly 6,400 megawatts of

electricity, or enough to power more than 1.5 million homes and

businesses.