HomeLink Magazine Summer 2017: Clean Energy Investing

Unconventional Wisdom – A Ten Year View of Renewable Energy Markets

By Sam Jones, All Season Financial Advisors

Ten Years Ago

            Ten years ago, the wind and solar industries, including investment in associated companies, were enjoying their proverbial day-in-the-sun. In 2007, the solar industry was riding the wave of a shortage in Crystalline Silicon used in solar panels combined with robust global demand for residential through utility scale installations. The price of a solar cell was hovering at a temporary high of almost $3.50/watt. Similarly, as the efficiency of wind-powered electricity improved to challenge conventional fossil fuel generated power, giant utility-scale wind farms were installed, on and off shore. Early adopter states embraced wind power to meet their RPS (Renewable energy Portfolio Standard) mandates. First Solar (FSLR) arrived on the scene in 2006 as one of the first publicly traded Thin Film solar cell manufactures and its stock price rocketed from $24 to $309 in less than two years handing investors a handsome gain of 1,140%. Sun Power (SPWR) rode the same wave, as did Canadian Solar (CSIQ) and Sun Edison. Wind companies like Gamesa and Vestas Wind Systems, traded on foreign exchanges, churned higher right into the same top in late 2007. The renewable energy industry was at the top of its game—literally.

In hindsight, we know that December of 2007 through May of 2008 proved to be the high point and a final top for renewable energy in terms of revenues and profits.  What happened? Well beyond a massive global recession that began in 2008, the price of wind power and solar cells began to fall precipitously. Solar module costs went from $3.50/watt in 2007 to a current price of… wait for it… $0.49/watt as of July 15th, 2016 according to PV insights.com. In fact, looking at the chart below, we can see the larger historical context of solar prices back to the 70s and understand that solar prices are just extending a much longer cycle to a final cost competitive level now helping to drive more and more installations!

Wind power costs didn’t top out until 2009 at nearly $70/MWh (Megawatt hour) but have since fallen to below $25/MWh last year. What drove prices down? In 2008, fracking technologies for extracting natural gas came on line. The boom in natural gas drilling exploded in the final Bush era years driving the cost of natural gas lower by 98 percent over the same ten year period. Renewable energy prices track the price of natural gas very closely as the next-best competitor in electricity generation. It was the perfect storm for renewables.

So these are ugly numbers if you happen to be in the renewable energy business as a producer. Imagine if the price of your own company’s product fell by 70 – 90 percent in less than ten years. Making a profit would be difficult or nearly impossible. Not surprisingly, share prices of public renewable energy companies fell by the same amount leading several, such as Sun Edison, into bankruptcy. Even now, it’s not hard to find headlines in 2016 suggesting Sun Power, First Solar or newer Sun City might be “challenging” holdings for investors. I’ll take that challenge. As the Chief Investment Officer of the New Power Fund, an investment portfolio of clean energy and emerging technology stocks, I’m a buyer at these levels.

The Next Ten Years Will Surprise You

            Conventional wisdom suggests that, under the Trump administration, renewable energy or anything associated with clean technology, green energy and the health of our environment, doesn’t have a chance. The new administration promises to tear down regulations associated with carbon emissions or high fuel economy standards in vehicles.  They say that coal will rise from the ashes as we get America back to work. Drill baby drill! None of this will happen. In fact, I will speculate that 2017 will mark the beginning of a very profitable era for renewable energy, energy efficiency and associated companies. Here’s why in a few bullet points.

  • Electricity generated from coal is now more expensive than utility scale wind and solar, not because of carbon emission regulations but because the costs of renewable energy are permanently lower.  “Clean” coal is an oxymoron; like saying “Diet” Coke is good for you.
  • Natural gas and nuclear are also cheaper and cleaner than coal
  • Natural gas prices are building a long-term base as utilities shift more to natural gas and export to foreign countries. Remember renewable energy prices track natural gas prices!
  • Nearly 70 percent of our country supports legislation and public policy that protects the environment. Trump’s agenda continues to swim against the tide.
  • Renewable energy companies that are still around are survivors. They are lean and mean now and beginning to turn a profit again even at today’s historically low prices.
  • The electrification of the transportation system is just getting started, driving new demand for low cost electricity (renewables, natural gas and nuclear)
  • Once you drive an electric car, you will never go back—I know, I have one.
  • Our energy evolution to clean power is already well established and growing exponentially including 20 year power purchase contracts firmly in place. Trump cannot change the direction of this evolution beyond slowing it down
  • Technological innovation and energy efficiency are a powerful combination.  Tesla versus GM is a great example

3 year total returns through 4/10/2017

Tesla (TSLA)              GM (GM)

53.0%                          15.5%

  • Prices of renewable energy companies are dirt cheap in a stock market that is wildly overvalued. Investors will find and invest in value.

 

While the last ten years was tough for the renewable energy industry, I see this period as a necessary evil. Costs had to come down to a competitive economic level with traditional fossil fuels. There was a great deal of pain on the way. But now we have an environment that favors renewables on the basis of good economics. Seasoned investors know that the strongest returns are generated from out-of-favor companies with prices trading at all-time lows. Conventional wisdom is traditionally every investor’s enemy, so this may very well prove to be the time to step up.