MARKET COMMENTARY

Is Renewable Energy a Sustainable Investment?

Rapid innovation and worldwide support may spur growth

04.01.2016 - Michael Firestone

We live in a unique time of extraordinary technological advances that are exponentially changing the way we live our day-to-day lives. Throughout history, it has been common for certain technologies to develop at a slow to moderate pace until a critical breakthrough is achieved or a policy change is made. Only then does everything seem to fall into place to facilitate unexpected rapid expansion and growth. We believe renewable energy technologies, such as solar and wind power, may be transitioning to this point.

Innovation Will Surprise

For instance, consider the evolution of the smart phone. In April 1973, a Motorola engineer named Marty Cooper gave the world the first handheld portable cell phone. From that time until the summer of 2007, the technology, although slightly improved, remained roughly the same. Over that 34-year period, these phones went from a lumbering brick to a more manageable pocket device with better range and a few modern-day improvements like email and digital screens. However, the development of the first iPhone in June 2007 by Apple changed everything. 
 
One could draw similar comparisons to the recent rapid advancements in renewable energy technologies. Although the creation of the first solar cell dates back to 1953, it was not until the 1970s when solar power became economically feasible for some businesses that did not have direct access to power lines. Ironically, it was through the financial backing of the Exxon Corporation, which needed a new source of electricity to power small applications on their off-shore oil rigs, that helped drive solar cell prices down by a factor of five. Around the same time, a few other key factors, such as growing concerns about supply shortages and OPEC’s oil embargo against the US, pointed out the need to develop alternative energy resources as a national security measure. These issues helped provide the building blocks for moderate advancements in renewable energy technology over the next three decades.

Worldwide Support of Clean Energy May Spur Growth

A few months ago, 196 nations met in Paris at the Conference of the Parties to the United Nations Framework Convention on Climate Change. The goal was to establish a new international agreement on climate change to, at the very least, limit global warming to 2 degrees Celsius—a threshold that scientists generally support. By most accounts, the conference was a huge success. Some of the highlights included a greater responsibility to curb greenhouse gasses from the biggest culprits, an even lower temperature threshold to protect island nations from rising sea levels, and a targeted donation of $100 billion per year from developed countries to help poor countries transition to clean energy starting in 2020.
 
The guidelines are voluntary but the urgency exhibited at the conference left many with hope that countries will adhere to their respective pledges to limit global warming. At the very least, the conference played an important role in providing potential tailwinds for global renewable energy deployment.

Private Sector Investment Trends Are a Clear Positive

The climate conference also provided a headline-grabbing announcement that a group of the world’s most influential billionaires would join the party to invest in renewable energy technologies. Bill Gates, one of the many co-founders of the Breakthrough Energy Coalition,1 published a report outlining the urgency of immediate action, and provided a few examples of technologies that the group is looking to invest in. While many ideas are just concepts, such as using painted surfaces as solar panels, these technologies, if developed, have the potential to be transformative.

Interest from the private sector in the renewable energy industry is nothing new. Some of the world’s largest organizations have already made massive investments in solar and wind power. Well known industry leaders like Google, Amazon, IKEA and Walmart have committed billions to help provide clean energy to their power intensive businesses. Some have even set targets to become energy independent within the next decade. Not to be outdone, Apple announced the largest solar energy deal ever last year for a non-utility company. At the time of the announcement, CEO Tim Cook explained that the electricity generated will power all of Apple’s California stores, offices, headquarters, and a data center. The estimated cost was about $850 million.

“Honesty Is the Best Policy—when There Is Money in it”  - Mark Twain

Other benefits aside, there is little reason to believe that businesses and investors would dedicate their resources without some type of financial incentive. In the same research paper where Bill Gates elaborated on the need for clean energy to save the world, he also acknowledged that clean energy could be a multi-trillion dollar industry one day.2 Investors don’t make investments to lose money.

Somewhere deep in the heart of Omaha, Nebraska, Warren Buffet is nodding his head. His utility company, Berkshire Hathaway Energy, has already committed $15 billion to solar and wind projects. And he recently pledged to double down on his investment. Aside from staying ahead of the curve, Berkshire has a strong financial incentive to join the cause because of the government tax credits that are in place to help encourage this type of investment. Ingeniously, Buffet can use the tax credits earned from his renewables business to offset profits at his other businesses, making renewable energy investment a win-win for his shareholders.
 

An Inflection Point May Be Near

Recently, the United States provided even more runway for big investments that have been historically motivated by favorable renewable energy subsidies. Congress passed a budget deal in December that included multi-year tax credit extensions to solar and wind technologies. Supportive government policies like these are critical for renewable energy investments to remain economically attractive, for now. Experts estimate all-in project costs will decrease by an average of 32% for wind energy and 48% for solar by 2040.3
 
A closer look at recent trends lends credibility to the idea that renewables have more momentum than ever. In 2015, new investment in clean energy hit record levels despite 18 months of falling crude oil prices and persistently low coal and natural gas prices. Slowing global economic growth did affect certain regions like Europe and Brazil, but key players like the US and China were unfazed. In fact, China’s renewable investments surprisingly grew by 17% and almost doubled that of the US, which was the second largest country investor in 2015.4

A Good Time to Invest?

The potential for renewable energy is very exciting. Nonetheless, numerous steep challenges for the industry remain. Some of these issues can be solved by additional investment dollars and time, such as upgrading power grids that were not originally designed to efficiently integrate renewable energy sources. Other more challenging problems, such as intermittency, require further innovation in specialized areas like battery storage. Regardless, many industry experts now agree it’s a matter of when, not if. 

At Fiduciary Trust, we identify companies that we believe can provide durable growth that is in line with solid revenue and earnings prospects. Although the number of firms listed in the US stock market is vast, the number of investable pure renewable energy companies is not. Distinguishing the clear winners in this rapidly-evolving industry is only a small hurdle. The bigger issue is the heightened volatility that comes along with these types of investments. Simply put, the risk-adjusted returns exhibited from pure play clean energy companies have yet to justify portfolio implementation.

We believe growth opportunities should eventually come, and we will continue to monitor this sector for new innovation, consistent trends, and breakthroughs that may present attractive opportunities for select firms in this industry.

 


1. The members of the Breakthrough Energy Coalition include some of the world’s most well-known investors and entrepreneurs such as Bill Gates, Jeff Bezos, Richard Branson, Jack Ma, Mark Zuckerberg, and many more.
2. Energy Innovation, Why We Need It and How to Get It by Bill Gates.
3. Bloomberg New Energy Finance.
4. Bloomberg New Energy Finance.