“Renewable energy will beat any other technology in most of the world without subsidies.” – Michael Liebreich, Chairman of Bloomberg New Energy Finance
At the end of March, President Trump signed an executive order to unwind the Clean Power Plan (CPP), which was enacted during the Obama administration. The goal of the CPP was to reduce carbon-dioxide emissions to 32% below 2005 levels by 2030. Obviously, the CPP hit the coal industry the hardest since coal fired power plants produce the most CO2 per unit of energy versus other options here in the US (natural gas, nuclear, solar, wind, etc.) and President Trump wanted to make good on his campaign promise to restore jobs to Middle America workers, specifically those in the coal industry. It is with this backdrop that some clients have questioned our investment recommendation in the renewable energy space.
Unfortunately, renewable energy has become a partisan issue where (in general) it receives support from those on the left and pushback from those on the right. The arguments from the left are typically morally based while those on the right are economic in nature. In today’s post, we are going to make the argument for one particular renewable energy investment we like which satisfies both the moral and economic arguments regardless of who is in the White House.
Most people don’t realize that for every single job in the fossil fuel industry here in the United States there are 2.5 clean energy jobs. For example, Texas is a state with a long history in fossil fuels (oil), but it also happens to be the nation’s leading wind energy producer. And wind is not the only renewable source hitting widespread adoption. Last year, roughly 1/3 of all new power generation came from solar. Back in 2015, UBS predicted that global solar capacity would triple by 2025 and then triple again between 2025 and 2050. In fact, renewable energy (along with natural gas) is one of the only energy sources expected to see any growth over the next two decades (with or without the CPP).
Now I know what many of you clean energy opponents are already thinking, “yeah, but all that is only possible because of government subsidies.” First off, there is merit to that argument. The clean energy industry would not be anywhere close to where it is today without financial assistance from subsidies, but let us also remember the oil industry has also been and continues to be subsided by the US government as well. But that comparison is neither here nor there because what really matters is the fact that for the first time ever, renewable energy is now able to compete with fossil fuel on a non-subsidized basis thanks to advances in technology and economics of scale. According to a recent Bloomberg article, solar projects in India and Chile came in at roughly half the price of competing coal power. In that same article it also mentioned that on the global basis, more clean energy capacity is being added every year than that from coal and natural gas combined.
We think this trend will continue and we are not alone in our belief. Berkshire Hathaway, Warren Buffett’s company, now owns 7% of the country’s wind generation and 6% of its solar power. According to the 2015 annual report, they have already deployed $16 billion into the renewable energy space with plans to double that amount in short order. Additionally, Goldman Sachs is targeting $150 billion to finance and invest in clean energy. These are just two prominent examples, but there are many more examples of smart money being deployed into renewable energy.
So why is renewable energy attracting all this investment? As someone who started their career working at a Fortune 500 utility company I can tell you the reason is quite simple, and it all comes down to supply and demand. The first thing to understand is that the infrastructure in the United States is very old and expensive to maintain. Over half of the power plants on the US grid are over 30 years old. As these old power plants become more and more expensive to maintain and keep operational, power companies are deciding to mothball these old facilities in favor of investing in renewable energy.
“Because of the competitive price of natural gas and the declining price of renewables, continuing to drive carbon out makes sense for us,” Lynn Good, CEO Duke Energy
“Going forward, we anticipate an increase in renewable generation capacity and declining utilization of coal,” Terrell McCollum, Spokesman for Southern Company
Another source of demand which is a huge tailwind to the industry are the mandates some states are putting on their utility companies to increase their usage of renewable energy. Twenty-nine states now have renewable energy mandates including two of the most populated states, California and New York, which are requiring that 50% of all their power come from renewable sources by 2030. Now whether you agree with these mandates or not is beside the point. The fact of the matter is that they exist and are here to stay. As such, the demand for renewable energy is non-cyclical since power companies are signing contracts with renewable generation facilities regardless of the economic environment (expansion or recession). A dynamic I experienced first-hand at my aforementioned job.
It is very rare when you can find an investment with the types of tailwinds and non-cyclical demand we are seeing in the renewable energy space. Fortunately we think we have identified one in Greenbacker Renewable Energy Company, which is a publicly registered, non-traded LLC. Greenbacker takes a very low risk approach to investing in renewable energy by purchasing small solar and wind facilities that already have long-term contracts in place with high credit quality power companies. To make a real estate comparison, Greenbacker is like a landlord who is in the business of collecting rents rather than a developer or land speculator looking to turn a huge profit. We think Greenbacker has the potential to deliver annualized high teens returns from the yield it earns on its assets and the aggregation premium it might be able to command on its portfolio. In summary, Greenbacker satisfies both sides of the aisle with its moral and economic appeal while providing excellent diversification due to the non-cyclical demand for its assets.
Author Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.
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