Caution: High Voltage

From batteries to solar, from fuel cells to flywheels, there are lots of new opportunities out there. But as energy prices fall, investors could get a jolt

The power industry has gone through its own version of dot-com mania. Driven by deregulation, sky-high power prices, and technological innovations, there has been a surge of interest and investment in companies that are figuring out new ways to generate and store electricity. More than a dozen such companies have gone public in the past two years. True, a Banc of America Securities index of 38 energy technology companies is down 40% from its high last September, but it's still double what it was at its January, 2000, launch.

Investors looking to cash in on higher electric bills and rolling blackouts need to do their homework. However, many of these companies are still in their infancy. Their technologies are expensive relative to conventional power. If electricity prices continue to fall, as many economists say they will, investors could get a jolt. "It's important to separate the solid stuff from the fluff," says Maurice E.P. Gunderson, a venture capitalist whose firm, Nth Power Technologies Inc., invests in alternative energy companies.

One of the most talked-about new companies is Capstone Turbine Corp. (CPST ) of Chatsworth, Calif., which uses jet-engine technology to build small power sources for businesses. Capstone sold 421 generators in the second quarter of this year, twice what it did in the same period last year. But Banc of America Securities analyst James P. LoGerfo notes that Capstone's products are still too small for most industrial applications. It could take years for Capstone--which lost $10.3 million on sales of $13 million in the most recent quarter--to justify its $800 million stock market value.

Another promising technology is fuel cells, which generate electricity through a chemical process. Not all of the cells are alike. Within the fuel-cell industry, individual companies are pursuing a variety of technologies and customers. Ballard Power Systems (BLDP ) produces low-temperature fuel cells that company Chairman Firoz Rasul believes will one day replace internal combustion engines in cars. With sales of just $13 million in the first half, Ballard sports a market value of $3.8 billion.

Plug Power Inc. (PLUG ) will market its fuel cells to residential and small commercial customers to supplement utility-purchased power. Plug Power won't say how much electricity from its cells will cost. Analysts figure the price will be at least 10 cents per kilowatt hour when its products hit the market in the next few months. That's much higher than the national average of 7 cents for utility-bought power--and it could be a recipe for disappointment. "Ultimately, economics will drive purchases," cautions Jeffries & Co. power analyst Brooke Glenn. Given the outlook, the onetime $140 stock still looks overpriced at today's $13.

Economics is also an issue for flywheels, metal cylinders made to spin with electricity from traditional sources. When a company's main power goes down or weakens, a flywheel's spinning cylinder generates backup juice. Flywheels compete with batteries, which are still cheaper. Flywheel fans say the machines can last 20 years, while batteries, particularly in hot climates, must be replaced as often as every two years. The two leaders in flywheels, Active Power Inc. (ACPW ) and Beacon Power Corp. (BCON ), are both unprofitable, with earnings at least two years away.

Green-power fans will be happy to hear that solar is making a comeback. Given the high cost of solar panels and the limited amount of time that they can run, solar is still the most expensive form of power, costing upwards of 17 cents per kilowatt hour. Still, a number of state and federal programs give subsidies to solar buyers. Unlike most alternative energy companies, solar-cell maker AstroPower Inc. is making a profit. At a recent price of $40, however, it trades at a rich 77 times this year's estimated earnings.

Investors might be better off in a stock such as C&D Technologies Inc. (CHP ), one of the largest makers of batteries for backup power. Although the company has said that sales to telecom clients are weakening, C&D shares sell for $30, just 13 times the $2.37 the company is expected to earn this year. Now that's security in the event of a blackout.

By Christopher Palmeri

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