Dear Subscriber,

Many Americans are disgusted by the fact that, faced with an energy crisis, the government seems to produce nothing but hot air. I think the government is paralyzed because there's no one clear solution.

Instead, there are a multitude of options — more drilling, nuclear power, hydrogen cars, solar power ... you name it. Every alternative has a lobby in Washington to press its case, but there's no one to tell our elected officials which is the best route to take.

I field these questions all the time, from friends and co-workers who ask me if this or that particular energy solution is the next big thing. So let me give you my appraisal of three alternative energy solutions that work and three that DON'T — along with some choice investments you can make to power your own bottom line.

Let's start with ...

Energy Solutions That Don't Work

You probably already know that corn-based ethanol isn't the right solution, for the simple reason that nearly as much energy is used making corn-based ethanol as you get out of it. So I won't waste a lot of time except to point out that the U.S. Department of Agriculture STILL anticipates corn ethanol production of 9.3 billion gallons for the crop marketing year 2007/2008. That will use more than one-fourth of our corn crop (and drive your food prices through the roof). Now, here are three more solutions you may think will work ... that probably won't.

Bad Idea #1 — Oil from Algae

Not all algae are created equal. Some are just pond scum, and some algae, properly cultivated, can produce biodiesel — that is, diesel you can grow right in your own back yard (or converted swimming pool).

Biodiesel from algae is still a ways off from large-scale viability.

So what's the problem? Scale.

While it is true that algae can produce more biodiesel per acre per year than many land crops, it takes either lots of ponds or land covered in clear plastic algae-growing tubes, which have to be made from the oil you're trying to grow.

So algae-based biodiesel will become a viable solution when the technology improves or we convert Lake Michigan to a biodiesel refinery.

Bad Idea #2 — Hydrogen Cars

What many people don't understand is that hydrogen isn't a fuel, it's a storage medium. So, whatever energy you store in a hydrogen-powered car has to be generated some other way (coal, natural gas, nuclear, etc.).

And then there's the danger factor. A tank of compressed hydrogen can explode with an earth-shattering "KA-BOOM" if hit hard enough. So you end up with highly pressurized, reinforced storage vessels which are three to four times the size of conventional fuel tanks.

Then there's the cost — the price of a hydrogen car easily runs over $150,000. Sure, costs will come down, but not that much.

Why does this idea have so much traction? Because both Washington and Wall Street love expensive boondoggles, making hydrogen fuel cells into black holes for your tax dollars.

Bad Idea #3 — Shale Oil

There is a big difference between oil shale and shale natural gas, and it is confusing the heck out of people. Let me make it simple: Shale natural gas works. Shale oil doesn't — not yet anyway.

Oil shale is a rock that contains an organic compound called kerogen. Left on its own, kerogen might turn into oil in 100 million years. Oil shale is different from shale natural gas in a lot of ways. For one thing, shale gas is economically feasible, but shale oil hasn't proved profitable (yet).

To harvest the kerogen, the rock is dug up and heated to 700 degrees Fahrenheit. On average, you have to process about two tons of rock to get one barrel of synthetic oil. The rock expands during the heating process, so you can't put it back in the hole you took it out of (or at least, not all of it). And the kerogen-harvesting process makes the rock carcinogenic, so you have to be careful how you store it.

Newer technology removes the kerogen without digging up all the rock, but that process still has bugs that are being ironed out.

Finally, three barrels of water are needed to make one barrel of synthetic crude from oil shale.

The Bureau of Land Management estimates the shale formation in western Colorado, where a lot of activity is focused, could yield as much as 1.8 trillion barrels of oil. However, that part of Colorado is dry country. It will also probably take a lot of energy to crack the oil out of the rock, though nuclear power could provide that energy.

Royal Dutch Shell is trying to prove naysayers wrong — it is investing a lot of money in oil shale. Petrobras, one of the world's best-run and most forward thinking oil companies, is also experimenting with oil shale. So maybe it will work eventually. But right now, the technology isn't there yet.

In fact, the problem with many solutions that sound good on paper is that the technology just doesn't work yet. But ...

Here Are Three Energy
Solutions That Work Right Now

These three sources of energy can work — today — to power our homes and rev up our cars.

Solution #1: Wind Power

Critics will point out that the wind seems to stop blowing when you want electricity most — on hot summer days. And that is a problem. However, a study last year by Stanford University shows that wind power from interconnected farms can be used as reliable base load electric power.

Wind power, especially when used on a large scale, is a great alternative source of energy.

As one might expect, not all locations make sense for wind farms.

But legendary oilman T. Boone Pickens says the United States should take advantage of the so-called "wind corridor," stretching from the Canadian border to West Texas. Energy from wind turbines built there could supply 20% or more of the nation's power by 2030, according to a new report from the Department of Energy.

U.S. electrical demand is expected to grow another 39% through 2030, so wind would help fill the gap.

And although wind is expensive, costs per unit should come down with a larger scale operation. Besides, with the cost of coal and natural gas rising, wind is already becoming more competitive.

Solution #2: Solar Power

Unlike wind, we tend to get the most solar power when most electricity is needed — during hot summer months. And the technology is working now.

There are two general forms of solar power. The first is PV or photovoltaic, which converts energy from photons directly into electricity. The second is thermal, which uses the sun's heat, concentrated to heat liquids to transfer that heat, boil water and turn a turbine.

A rooftop photovoltaic system is fairly expensive — about $35,000 to $40,000, though the cost can be reduced through tax incentives and rebates. In sunny Florida, where I live, the system would probably pay for itself in 15 years or less — a lot less if electricity rates go through the roof, as Florida Power & Light is now threatening.

Solar thermal is also expensive, though cheaper than PV-based solar power. The Mojave Desert in the southwest is home to the largest solar thermal system in the United States. This Solar Energy Generation System (SEGS) has a total capacity of 354 megawatts.

New technology allows for better, cheaper storage of solar energy even when the sun isn't shining. Of course, wind and solar aren't widely used to power cars ... but that can change.

Solution #3: More and Better Electric Cars

There is technology available today to plug an electric car into your home power grid. In short, it turns a fleet of electric cars into a network of mobile generators that can draw energy from the power grid and send electricity back to the grid during periods of peak demand. It's called a vehicle-to-grid system, or V2G.

Only 20% of cars are in use at any time, so the rest could work as plug-in batteries and load buffers for the electric grid. By combining new electric cars with wind and solar power we'd have a 1-2-3 integrated solution to the energy crisis.

America's existing electric grid could support 180 million electric cars, and a concerted effort to upgrade the grid could let it support 200 million.

There are other advantages, too. With the same amount of electricity, you can drive an electric car three times farther than a hydrogen car. On 100 kilowatts of electricity you can drive an electric car 75 miles while a hydrogen fuel cell car of similar size can do only about 16 miles.

Are there obstacles? Yes! First of all, many electric cars can't keep up with the speeds on America's highways.

The easy solution to that is to lower the speed limits for all cars (55 or 60 mph) and allow electric cars to go at even lower speeds (45 mph or so) on major highways.

As Ronald Reagan said, when confronted by government-mandated 55-mph speed limits, "Speaking just personally, I think it's not a bad thing if we all slow down just a bit and enjoy the scenery a little more."

The second problem is that manufacturers simply can't make electric cars fast enough. U.S. consumers buy between 15 million and 17 million new cars per year. Meanwhile, Toyota only makes 20,000 of its Prius hybrid models a month, and GM is planning on building just 60,000 of its new Volt electric cars in 2010.

The new battery-powered Think City, which will enter the U.S. market at the end of 2009, will be able to travel up to 110 miles on a single charge, with a top speed of about 65 mph, and be priced below $25,000. Yet the manufacturer plans to sell only 10,000 units at most in the U.S. during its debut year.

But that's where the government can help, too. World War II saw U.S. auto makers go from making cars to tanks in a matter of months. With can-do spirit, government money and a big ol' pair of scissors cutting through red tape, Detroit could become the electric car capital of the world.

Look, there is no "silver bullet" solution. It's a bunch of bullets strung together for just one possible solution. And I haven't covered other workable alternative energy solutions including nuclear power, electrified rail or cars powered by compressed natural gas.

Moreover, the best thing we can do is use less energy — conservation. The cheapest oil is oil you don't use.

Still, I want you to know that there are workable solutions right now. And not only can they help our country, but they can reward investors, too ...

How You Can Profit in Alternative Energy

There are a bunch of great funds in the alternative energy space. Here are two that focus on two of the solutions I talked about today — wind and solar.

The Claymore/Mac Global Solar Energy Index ETF (TAN) holds a basket of 25 stocks in the solar space, and it is a fund with a global portfolio, as its name implies.

The PowerShares Global Wind Energy ETF (PWND) is a basket of 32 companies, also worldwide, that are focusing on wind energy.

Yours for trading profits,

Sean