Season Investments


No Longer Niche

Posted on December 4, 2018

“Renewable energy is no longer a niche fuel.” – Ratih Birol, Executive Director of the International Energy Agency

2018-12-04_Windmills.jpgAs many clients and long-time readers of our blog already know, I started my professional career working at a large utility company in California. During my short four year stent in the industry I learned a great a deal about the economics of the highly regulated utility business. Although I don’t regret switching into finance, I still have a healthy interest/curiosity in energy related businesses. One of my main areas of interest is in utility grade power generation. Fifteen years ago when I worked on RFPs to procure new long-term power purchase agreements, renewable energy was a very niche industry that was heavily reliant on government subsidizes and mandates. But today, the story is entirely different.

Over the past decade, the cost to produce renewable energy (primarily through utility scale solar and wind) has dropped precipitously thanks in part to advances in technology and realizations of economics of scale. According to Lazard’s latest Levelized Cost of Energy Analysis report, since 2009 solar costs have dropped an eye popping 88% while wind has dropped an impressive 69%. Meanwhile, coal and nuclear prices have increased by 9% and 23% respectively. Right here in Colorado, Xcel Energy has already announced plans to shut down several coal-fired facilities ten years ahead of schedule and replace them with new renewable energy projects at a net cost savings to the consumer.

2018-12-04_Unsubsidized_Wind__Solar.PNG The cost to build and operate utility scale solar and wind assets has dropped so far that in some parts of the United States they have reached parity or better with the cost of simply operating existing coal-fired power plants which continue to age and cost a fortune to maintain. According to a recent study, 42% of all global coal-fired power plants operate at a loss. The chart below from the same Lazard study shows that the marginal cost of operating a coal fired facility is somewhere between $27-$45/MWh (a mid-point cost of $36/MWh). To be clear, this is not the new construction cost, but just the marginal cost of keeping a coal-fired power plant in operation. When we look at the lower bound for the unsubsidized cost of building brand new wind ($29/MWh) and solar ($36/MWh) assets, we see that there are cases where it would make economic sense to replace existing coal-fired power plants with new renewables on an apples-to-apples, non-subsidized basis. Throw in the subsidizes and cost savings get even better.


The National Renewable Energy Laboratory estimates that based on the current glide path and absent any major breakthroughs in technology, utility scale solar costs will decline another 60% and wind another 30% by 2050. As renewables continue to come down in price, it will make the decision to switch from fossil fuel to renewable generation a no-brainer, and we aren’t the only ones who think this way. Investment banks such as Goldman Sachs and well-known billionaires like Warren Buffett, Bill Gates, and Jack Ma are all investing billions of dollars into this space.

So why is so much “smart money” flowing into renewable energy? Well, I can’t speak directly on behalf of any of the aforementioned billionaires, but I can tell you what we find extremely attractive about the space. First and foremost, a renewable energy investment has the potential to offer an investor a fantastic reward-to-risk trade-off for several reasons:

  • The industry is still very fragmented. As such, a skilled owner-operator can purchase existing assets with long-term power purchase agreements in place at about an 11%-13% non-levered yield.
  • The credit on the other end of the long-term power purchase agreement is typically a highly rated, investment grade utility company.

Secondly, renewable energy investments can be an excellent diversifier to a traditional stock-bond portfolio. Unlike stocks and bonds which are heavily exposed to macro-economic and inflationary risks, demand for energy/power is non-cyclical. Case in point, today the S&P 500 was down 3.24% while the largest and most highly traded utility ETF (XLU) posted a modest gain of 0.07%. As I previously mentioned, the utility industry is highly regulated because it acts as an oligopoly with complete pricing power…pretty much the definition of a non-cyclical, recession-resilient investment.

The risk-reward trade-off and the diversification benefits are two of the primary reasons we are so excited about investing in renewables for our clients. At the end of the day, fossil fuels are a limited resource that will eventually deplete while renewables offer an unlimited, free fuel source. Not only are renewables no longer just a niche, they are the future.

elliott_headshot_bw.jpgAuthor 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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