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.
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.
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.
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.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
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.
SUSTAINABLE INVESTING
04.20.2017 Carin L. Pai, CFA
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