The risks of owning fossil fuels are rising, along with the temperature, even before carbon gets its price. However, as has been mentioned, the downside to rapid divestment from all fossil fuel assets is the likelihood of an uncontrolled financial chain reaction leading to extremely unpleasant, long term economic effects worldwide.
Nonetheless, these assets are an ideal source of funds for New Energy investments, assets that make money by generating energy from clean sources. The upside to owning New Energy companies, and projects that provide long term cash flows uncorrelated to the price of oil, is clearly far greater than whatever upside is left for fossil fuels in any low carbon scenario. Furthermore, in the New Energy world, there will never be any fuel risk.
The investment community itself is becoming increasingly aware. A recent report from HSBC to its clients explains that fossil fuels and companies are at risk of becoming ‘economically non-viable.’ Those who do not get out soon “may one day be seen to be late movers, on ‘the wrong side of history.’” The last ones out will also be on the wrong side of price. Selling, however, is the easy part. Related: Why A U.S Shale Slowdown Will Hardly Affect Oil Prices
Reallocating Fossil Fuel Assets
Even if and when investors ‘see the light,’ the hard part is knowing where to put the capital next in order generate a return on clean energy, water, and infrastructure. The New Energy complex includes leading renewable energy companies, electric transport and the development of a much smarter grid (which will include some measure of storage), where the ownership of key assets is widely distributed.
Long term income is available from renewable projects with virtually no risk, and whatever the project may be, leading EPC (engineering, procurement and construction) firms will not only benefit economically, they will be instrumental in bringing the New Energy order into being.
Efficiency measures, throughout all systems, are the low hanging fruit, regardless of the resource, the technologies and processes involved. Infrastructure projects, especially power and water related (you can let bridges fall down, or switch from coal to natural gas, but you may not run out of water), should be at the forefront of institutional investors’ thinking.
Time will tell if the next fifteen years become known as ‘the Long Infrastructure Boom,’ but the economics of PV arrays (now costing less than $2 per installed Watt in the U.S.), the low cost to operate and maintain electric vehicles (which are now as quick as a Porsche and quiet as a Rolls), the unarguable need to protect people and shorelines from rising seas, as well as the fact that there is no substitute for fresh water mean that it would probably take a world war or economic depression to stop it. Related: Could $12 Trillion Trigger A Renewables Revolution?
Historically low interest rates help too, and should be taken advantage of, as the greatest threat to renewable energy development is probably more expensive money, not cheaper oil. The combination of rooftop PV and electric vehicles (that are generally idle 95 percent of the time), or ‘PV4EV,’ is certain to have a massive and disruptive impact on the automobile industry, the oil industry and the utility industry.
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Shares of solar and ‘cleantech’ companies generally are having a banner year, but investors should be careful to separate quality from enthusiasm. Small cap companies with one product and no earnings generally bring more grief and pain than promised joy. Following the market collapse of 2008, leading clean energy companies and indices took a dreadful beating, as the chart shows. (PBW has $140 million in assets.) The S&P has recovered and reached new highs. The same cannot be said for clean energy companies. So be careful; buy high quality companies, the ones with earnings and a leading position in their markets.
Though they trade like stocks, ‘YieldCos’ are designed to provide income from solar and wind arrays. Two of the biggest names in solar, First Solar and SunPower, have announced an IPO for a jointly managed entity called 8point3 Energy Partners (8.3 being the time in minutes it takes sunlight to reach the earth). Deutsche Bank expects “YieldCos to drive solar power growth . . . especially in emerging markets like India and China, [and] play a crucial role in driving the financial growth of solar power companies.” Related: Peak Oil: Myth Or Coming Reality?
The same source reports that “SunEdison Plans $900 Million Bond Issue To Fuel Renewable Energy Ambitions.” SunEdison will develop new projects as well as acquire operating projects from other developers through its own yieldco, known as TerraForm Power. Bloomberg New Energy Finance reports: “Green bonds set to flourish in Asia as China plans to open markets.” Business Wire reports that “Morgan Stanley Extends Commitment to Sustainable Investing with Its Inaugural Green Bond.” On June 9, Morgan Stanley announced that it had closed a $500 million offering. “Since 2006, the Firm has facilitated over $61 billion of capital for clean tech and renewable energy businesses.”
Institutions and Family Offices can afford to build, own, operate and/or transfer their own large scale renewable arrays and these projects will provide cash flow for 20 years (or more) to the owners by being tied to Power Purchase Agreements with a viable utility. As for water, according to Black & Veatch, “[m]uch of the nation’s water infrastructure is approaching or has surpassed designed lifespans, particularly in Midwestern and Northeastern cities.”
Whether you own a mutual fund worth $1,000 or manage billions, the renewable tide is coming in fast; it will reach higher ground than its competitors can defend, and there is plenty of upside for prudent, high quality investments in a sphere that now has the gravitas, scale, financing, management expertise and momentum to dominate the energy landscape within a few decades, and for the next few hundred years. Even if you only have $1,000, surely it is better to buy a PV panel than to curse the oil patch.
Read Part 1 by clicking here, Part 2 by clicking here, Part 3 by clicking here and the introduction to the series by clicking here.
By Henry Hewitt for Oilprice.com
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