Imagine a world where profit and sustainability go hand in hand, where the fight against climate change becomes a gateway to untapped economic opportunities.
Welcome to the realm of renewable energy, where the fusion of business acumen and environmental consciousness holds the key to building a prosperous future. But don’t let “fusion” become “confusion.”
In this thought-provoking journey, we will navigate the complex landscape of Climate Change, showing how emotions and politics can be a catalyst powerful and profitable investments in the capitalist Renewable Energy world, but they are very different realms.
Many investors approach Renewable Energy investment with a bit of trepidation – and rightfully so given the politically charged discussions most have experienced regarding Climate Change. I am a proud board member of the Financial Policy Council, an institution that seeks to educate and influence policy as applies to business.
Our discussions and presentations, directed by experts and industry leaders are frequently tougher and blunter than you find in your average, friendly Ivy League business class. The lesson the FPC would teach here is very basic: If you can’t take the emotion out of your decisions, put politics aside and evaluate an investment project dispassionately, then you don’t belong here. Tough but true.
Separating the highly emotional tenor of Climate Change and navigating the complexities of non-business stakeholders to invest in Renewable Energy is more challenging than in most business sectors.
We must find profit while taking into account the goals and motives of all of the players, including government and non-profit groups – if we take our eye off the prize we could find ourselves in the red, with no way to climb out.
And conversely, if we ignore the huge opportunities provided by the massive movements in the non-business sector, we might find ourselves watching more savvy business people drive by in their new Bentleys, while we sit on the sidelines in our 1995 Toyota Corollas.
Climate Change as a Non-Business Issue
Climate change is an example of a “tragedy of the commons.” This game theoretic principle depicts a scenario where individuals consume a shared resource, and the more it is consumed, the greater each individual’s profits – but the aggregate consumption is damaging or destroying the resource. Addressing Climate Change as a “Commons” problem requires cooperation rather than competition. However, the term “Climate Change” carries political implications and often leads to heated debates.
Every government and countless non-profit groups are involved in this, and media outlets are overwhelmingly sympathetic. It is influenced from the top and supported at the grassroots level. But unless you live under a rock, you already know this.
The War Between Environmentalists
An interesting and important characteristic here is that the power wielded within the issue is “asymmetric.” The political nature of the issue amplifies the voices of even the smallest players to an exaggerated extent, particularly within democratic societies. For example (paraphrasing a real event), a city council member elected with a mere 42 votes (total, not margin) can obstruct a $100 million renewable energy installation that has both federal and state support, simply because it is located near his community (called “not in my back yard” syndrome or “NIMBY”).
One might assume that environmental studies would be waived for renewable energy projects aligned with climate change goals. Not so. And environmental study requirements are time consuming and expensive. Certain large solar installations in Nevada were delayed for years due to concerns about a specific land tortoise in the desert. I spent two days driving through the Pimeval desert in Nevada, I never saw one.
This NIMBY syndrome has dramatically impeded the nuclear industry. Former Secretary of Energy Spencer Abraham wrote(1) that nuclear plants are the most cost-effective solution to mitigate the carbon aspect of climate change – cleanest, easiest, with fuel for thousands of years. Because of NIMBY, we have only built one new nuclear power plant built in the United States in the past three decades.
Even in the face of shortages and an energy crisis due to the Russia-Ukraine war, Europe is shutting down nuclear reactors. In light of the issue and regarding carbon dioxide reduction, this seems illogical, but this powerful NIMBY psychology (with nuclear, it is decades of negative “branding” since the 1970s) will not be shaken easily.
Another part of the war is in the levels of subsidies and the primacy of existing utility companies. The author’s brother was a State Representative in New Hampshire, who was quite satisfied in passing a “net metering” law that allowed a homeowner’s excess solar, wind, or geothermal produced electricity to be sold back into the grid, essentially running the meter backwards.
This would have been a great boon to homeowners in the state, encouraging more renewable, but a giant pain in the rear to the utility company.
Within a couple of years of his departure from the position (unpaid, after all…), the measure was overturned.
The Impact of Climate Change as a “Brand”
From an investment standpoint, one cannot disregard the impact of Climate Change on the renewable energy industry. The pressure and awareness generated by Climate Change as a political issue have substantial effects. And there is the opportunity.
Think about “Climate Change” as a brand.
It is ubiquitous. Numerous surveys and studies have examined climate change awareness in various regions and countries. For instance, a global survey conducted by the Pew Research Center in 2020 revealed that a median of 72% of respondents across 17 advanced economies considered Climate Change a major threat to their respective countries.
Similarly, a survey conducted by the Yale Program on Climate Change Communication in 2020 indicated that 63% of respondents from 25 countries believed global warming was occurring. These countries collectively represent approximately 56% of the global population.
According to a report by the global communications group Dentsu, global advertising expenditures on sustainability and climate change-related messaging reached $3.7 billion in 2019. To put this into perspective, Coca-Cola, one of the most valuable brands in the world, spent approximately $4.24 billion in advertising in 2020(3).
The renewable energy sector received an estimated $128 billion in subsidies in 2017 alone, compared to Coca-Cola’s revenues which amounted to a paltry $36 billion that year(4). Worldwide subsidies for renewable energy have easily surpassed a trillion dollars over the decade.
The issue of Climate Change provides a brand endorsement as pervasive as Coca-Cola and, perhaps, even more effective given the deepness of its mindshare. It generates significant goodwill towards renewable projects, which, of course, come with government subsidies.
This powerful brand effect has pushed the renewable energy industries to massive heights, and caused the injection of multiple trillions of investment dollars, in addition to the subsidies mentioned above.
And more to come.
The Business of Renewable Energy
Unlike Climate Change, an issue fought by governments and non-profit environmentalists, Renewable Energy is undeniably a business. According to the Department of Energy, renewable energy currently produces about 20% of our electricity(5). The U.S. Energy Information Agency claims that about 50% of new generating capacity in 2022 was solar(6), about 22 GW (i.e., over $30 billion in installed costs).
Considering that it is growing this fast in the U.S., consider the market for the rest of the world, especially in areas that have fewer subsidies. Latin America’s electricity is 25% renewable(7), but 80% is hydropower. i.e., non-hydro-renewable is roughly a third of that in the U.S. As prices come down and subsidies become less necessary, the growth in non-hydro renewables should surge dramatically in this region.
Energy itself possesses inherent value, and any production stored or connected to a market has monetary worth. If you are considering investing in renewable energy, it is crucial to understand how the current market works and where others are making a profit.
For instance, in the solar sector, raw solar cells and panels can be obtained at low costs, ranging from a watt cost of 15 to 25 cents(8), making them remarkably affordable within the industry. In contrast, the construction of a natural gas plant can cost around $1.20 per watt(9) (excluding the gas itself).
However, the installation costs for solar, including land, environmental studies, and grid connections, can range from $1.30 to $4 per watt. Since subsidies are based on the total installation cost, there is little incentive to drive prices down. Subsidies are often the bigger part of the game in renewable energy.
In an extension of that simplified scenario, one watt of solar power generates approximately $0.11 per year at a wholesale price of 3 cents per kilowatt-hour, assuming it operates for 3,646 hours(10) annually. A specific project we are familiar with cost $1.36 per watt to install. This means (in overly simplified calculations) that an installation would require more than 12 years to break even.
However, with a 40% subsidy, the payback period becomes a more reasonable 7.5 years. Of course, the actual calculations are more complex, considering factors such as fluctuating electricity spot prices, transmission losses, the impact of cloud cover, production fluctuations, cell degradation and current interest rates. But you get the point – subsidies are a game changer.
In the renewable energy business, it is essential to become well-versed in the available subsidies, the expiration of subsidy legislation, and pending legislation that could affect investments. In the intelligence world, “plans and intentions” are a sought-after goal, while in the business realm, estimates of future government actions become a valuable advantage.
As a quick introduction, some categories of subsidies include:
Investment Tax Credit (ITC): The ITC provides a 26% tax credit for residential and commercial solar installations. However, the percentage gradually decreases over time as part of a phasedown plan.
Production Tax Credit (PTC): The PTC is a federal incentive primarily for renewable energy generation, particularly wind power. It offers a per-kilowatt-hour tax credit for electricity generated from qualified renewable energy facilities.
Federal grants and loans: The U.S. Department of Energy (DOE) and other federal agencies offer grants and loans to support research, development, and deployment of renewable energy technologies.
State-level subsidies: In addition to federal incentives, many U.S. states provide their own subsidies, grants, tax credits, and financial incentives to encourage the adoption of renewable energy. The specific programs can vary significantly from state to state.
Those familiar with the government contracting world understand that marketing departments in such contexts operate in specialized ways that may not make sense to commercially oriented businesses. The renewable energy field shares this characteristic, as marketing departments must factor in the value of subsidies for their products, and must focus on the government players and their procedures.
Nonetheless, one advantage that standard government contracting holds over the renewable energy business is that once a contract is granted, profit margins are guaranteed. In contrast, renewable energy projects require persistent effort to ensure reliable profits. In fact, many companies specialize in constructing projects and subsequently selling them off to mitigate risks, passing that risk on to a longer term investor.
Beyond energy production, various other products and services are associated with climate change. These include CO2-absorbing machines, energy credit exchanges, smart energy management and much more. Although they may not directly generate power for profitability, they benefit from the influential brand power associated with Climate Change. Do not underestimate this effect. Some of these businesses will find a home and substantial revenue. However, exploring these topics is beyond the scope of this article.
A number of companies are dedicated to renewable energy and have done well. They have managed to navigate the dangers and have “right priced” renewable projects to generate a healthy return.
Here are a few:
NextEra Energy, Inc. (NEE) is an American energy company with about 58 GW of generating capacity, revenues of over $18 billion in 2020. It has done well over the last five years (a bit sideways over the last two).
First Solar, Inc. (FSLR) is the largest American manufacturer of solar panels, and a provider of utility-scale PV power plants. They are in heavy competition with the Chinese, but given the political environment, they will likely thrive over the next several years.
Enphase Energy, Inc. (ENPH) is a $21 Billion company that develops and manufactures solar micro-inverters, battery energy storage, and EV charging stations primarily for residential customers. They are perhaps the biggest player in a wide open market.
Vestas Wind Systems A/S (VWS) is Danish manufacturer, seller, installer, and servicer of wind turbines that was founded in 1945. Their revenue was €16 Billion in 2021, and they have experienced an average 17% growth over the last five years.
If you are more adventurous and can handle more risk, watch for breakthrough battery projects and technology. For energy storage, investments that offer more compact, longer lasting, better specifications or just plain cheaper are good bets.
For example, we have seen several claims of batteries for cars that have enough energy density (i.e. light and small) to be useful, but can recharge in about the same time as a gas fillup. If true they unlock a much greater market and will “hockey stick” for a great return.
But don’t be fooled by battery charlatans – trying to charge a battery in 3 minutes transferring the equivalent energy of a tank of gas would melt 5 crowbars! (I did the math, and besides, 15 minutes is fine…).
On the other end, the utility grade battery problem is not yet solved, and the duck curve, which shows that the time of day when solar power is most abundant is not necessarily the time of greatest electricity demand, is becoming more dramatic. We believe that the market is stifled by government interference, so look for mavericks.
Take a sharp look at new generating methodologies and ask the right questions. For example, anything with large quantities of rare materials will not scale, even if they are cost effective in a demo project. Other projects might be just bad ideas or poorly implemented.
For example, the Tonopah mirror and molten salt facility has already been bankrupted and resold, having never been profitable. It was so badly designed that they had to bring in diesel generators to heat the salt at night so that it wouldn’t solidify. Another FCP lesson: Always have a hard look at the implementation team.
The FPC method is brutally honest and real world. Emotions and political beliefs must be factored in – other people’s, not yours! Leave your own emotions at the doorstep.
1. Find the Value, Find the Profit. You must take a holistic look at your potential investments and realize that subsidies can be game changers. You must consider both the concrete (e.g. actual energy produced) and abstract (e.g. community, political) benefits, the interplay is important. As you know, oftentimes, the abstract can be traded for the concrete.
2. Recognize the Small Players. Remember this is asymmetric warfare, the tiniest players can throw a wrench into your project and cost you millions. Make sure their interests are taken care of (whether you believe they are valid or not – don’t roll your eyes, real power is wielded here).
3. Beware of companies that are behind the times on subsidies. It is a dynamic environment and a shift in the timeline of a year can easily result in a 10% or more loss of subsidy benefits. Renewable companies not focused on this will be less efficient in bringing in profits.
4. Respect the Brand. It is a powerful force pushing trillions of dollars into the industry.
In conclusion, the separation of Climate Change as an issue from the business of Renewable Energy is a crucial step in doing business in the sector. While Climate Change presents challenges due to its political nature, it also acts as a powerful brand, supporting Renewable Energy industries with substantial goodwill and government subsidies. Realize that, dissect the components, assess the advantages and disadvantages and move forward dispassionately.
Original article: Decoupling Climate Change and Renewable Energy: A Business Perspective
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