Green vs. Black – Divergent impacts of CA’s global warming bill on alt energy and refiners

What follows is a report from Chi Chow discussing the potential impacts of AB 32 on the refining industry and California’s economy if Prop 23 fails to pass — which he expects to be the case.   For the full report, click on the PDF link at the bottom of the front page summary.

Green vs. Black – Divergent impacts of CA’s global warming bill on alt energy and refiners

Beat Texas Twice: Go Giants. No on 23!
–Buttons seen last week at the World Series, AT&T Park, San Francisco for tomorrow’s vote on Prop 23.

Prop 23: critical vote tomorrow on CA’s global warming bill

California voters head to the polls on Tuesday, 2 Nov 2010 to determine the fate of Proposition 23, a ballot initiative backed largely by Texas–based refiners designed to delay implementation of California’s Global Warming Solutions Act (AB 32). A “yes” vote on Prop 23 would essentially delay AB 32 indefinitely, while a “no” vote would allow the state to move forward on its greenhouse gas (GHG) program. This note examines AB 32′s impact on two industries, refining and solar, that are at polar opposite ends of the debate. For investor sentiment within each industry, a “no” vote on Prop 23 is generally good for alternative energy and not so good for refiners. As of mid-October 2010, the polls showed a sizable lead for opponents of Prop 23.

Impact on refiners

A “yes” vote on Prop 23 would represent a business-as-usual case for California refiners. A “no” vote could very well result in long-term negative impacts not only for refiners but potentially also the California economy itself. We believe a defeat of Prop 23 would result in higher refiner compliance costs to meet both emissions and low carbon fuel regulations, which would undoubtedly be passed on to consumers in the form of higher prices for gasoline and diesel. We suspect US$5.00/gal retail gasoline prices could very well become reality in California. In turn, the implicit fuels tax would hurt consumers, raise the cost of doing business in the state and potentially stall any rebound in the California economy with resulting expected job losses. Actual impacts of a Prop 23 defeat are likely years away, but long-term strategic concerns could accelerate for refiners with CA exposure including Alon USA Energy (ALJ US), Tesoro (TSO US) and Valero Energy (VLO US).

Impact on solar

For the solar stocks, a “no” vote on Prop 23 would suggest business-as-usual – and strong long-term growth in the US market. Because California is critically important in setting US renewable energy policy, we think a “no” vote is a risk for all alternative energy stocks. While current solar installs lie outside the scope of AB 32 and any deferral would not have a meaningful impact on 2011 fundamentals, we expect a downward knee-jerk reaction if Prop 23 prevails. Opponents have focused on preserving their home-grown, high growth cleantech industry and the beneficial impact of ‘green jobs’. They’re also pushing back against Texas oilmen telling them how to run their state. All indications point to defeat of Prop 23 tomorrow so we are comfortable reiterating Trina (TSL US), ReneSola (SOL US), JA Solar (JASO US) and SunPower (SPWRA US) as our top picks. SPWRA is the most levered to the US market given its impressive pipeline and residential/commercial solar leadership.

For full report, click here.