A good year for renewable energy?

It could be a strong year for alternative energy as a whole, according to a new report, but the second half of 2008 could pose a problem for solar stocks.

The report from Thomas Weisel Partners, Alternative Energy: 2008 Outlook, said investor interest in the sector remains extremely high, with solar and demand response likely to get the biggest boosts in the new year.

"Public and government opinion is rapidly shifting toward increased action on global warming, carbon emissions, renewable energy generation and new energy-efficiency technologies," said Jeff Osborne, an analyst at Thomas Weisel, in the report.

Over the past six months there's been a pronounced shift in the types of investors inquiring about stocks that Thomas Weisel covers, according to Osborne, with portfolio managers appearing to be building a cleantech theme for part of their portfolios.

St. Peters, Mo.-based MEMC Electronic Materials (NYSE: WFR) gets top marks in the cleantech sector for 2008 in the report, with Osborne raising Thomas Weisel's year-end price target on MEMC to $105 from $81.

In October, MEMC amended its long term agreement to supply solar wafers to Taiwan's Gintech Energy, increasing the value of the contract to between $3 billion and $4 billion (see MEMC, Gintech amend solar supply deal).

But all will not necessarily be well for solar.

The report sees a solid start to the year for solar on growth in the Mediterranean, but sees the second half of 2008 as a "black hole," citing subsidy changes in Spain, Germany and the U.S. and uncertainty around new polysilicon entrants in China and elsewhere.

In the U.S., new energy legislation failed to include an extension of tax credits for the solar industry.

The report sees heavy lobbying in early 2008 by the wind and solar industries to seek a separate bill, but the timing and specifics of any new legislation remains unclear (see U.S. solar & wind incentives on the way?).

Although the growth of solar is often tied to government incentives, the Thomas Weisel report highlights that demand response does not need government help to be economically viable.

"We continue to be bullish about the demand response industry as we enter 2008, particularly in the Commercial and Industrial (C&I) segment of the marketplace, which we favor over residential," said Osborne.

Utilities and grid operators are increasingly adopting demand response in their open market programs as well as forward planning, according to the report.

It notes that demand response capacity bid into the open market does not require separate state Public Utility Commission approval for pricing unlike demand response capacity committed to individual utilities under long-term contracts.

"We expect that C&I demand response aggregators like EnerNOC and Comverge's Enerwise will be active participants in these markets," said Osborne.

And unlike solar, demand response received a big incentive from the recently passed energy legislation in the U.S., with the new energy act creating a smart grid regional demonstration initiative.

The initiative allocates $100 million to support research and development in the industry.

As for fuel cells and biofuels, the other two alternative energy industries covered in the report, at least biofuels is likely to do well.

The report said the hydrogen and fuel cell industry is still in the very early stages and remains too fragmented.

"We do not see sustainable profits for many of the participants over the next three to five years," said Osborne in the report.

In November, Vancouver, British Columbia's Ballard Power Systems (Nasdaq: BLDP) agreed to sell its struggling automotive fuel cell business to Daimler (NYSE: DAI) and Ford Motor (NYSE: F) (see Ballard selling auto fuel cell business to Daimler, Ford).

On the other hand, biofuels, which received a big push from the energy act in the U.S., are likely to do well.

The new law sets a Renewable Fuels Standard for annual production of 36 billion gallons of biofuels by 2022, a fivefold increase from current production levels.

The new standard includes a 9 billion gallon biofuel mandate for 2008, but the report cautions that high corn prices and infrastructure issues are likely to weigh on the stocks for at least the next two quarters.

And it won't just be transportation fuels getting all the attention. The report said diversification away from petroleum-based products will be a key theme in 2008.

"Products such as bio-plastics are likely to receive further attention as producers look to diversify their feedstocks out of the volatile gasoline markets," said Osborne.