A mighty wind blows

Most people are agreed – save for the vested interests – on the efficacy of promoting clean energy as an alternative solution. Factor in growing evidence the planet is undergoing profound climatic change and it would appear to
be a no brainer.

Most promising of the available technologies – in the nearer term at least – is wind power. Irrespective of technology however the key economic metric is grid parity – i.e. the point at which alternative means of generating electricity is equal in cost, or cheaper, than grid power.

As Tim Buckley, portfolio manager at Sydney-based Arkx Investment Management puts it: “Wind is probably three or four years ahead of solar and geothermal, and wave maybe five years behind solar.”

A case in point is the European Commission’s September 2010 ‘EU Energy Trends to 2030’ report. Compiled by the National Technical University of Athens, it forecasts 333GW of new electricity generating capacity to be installed in the EU between 2011 and 2020 alone, with wind accounting for 136GW, or 41 percent of all new installations. Currently, there is 80GW of wind energy capacity across the EU. The report added that it expects 64 percent of new capacity to be renewable energy, 17 percent gas, 12 percent coal, four percent nuclear and three percent oil. 
Breaking the numbers down, wind energy is forecast to account for 14 percent of EU electricity by 2020, against five percent now. Renewables as a whole will make up 36.1 percent of total electricity generation in 2030.

Industry body the EWEA (European Wind Energy Association), which is projecting 400GW of wind power capacity by 2030, has already dismissed the EU forecast of 280GW as too conservative and has taken issue in particular with the report’s claims that the increase in wind power capacity will slow from an annual average of 13.6GW in the decade up to 2020 to 5.8GW in the decade to 2030.

Irrespective of how the targets pan out the drive towards renewables is part of a grander scheme encapsulated in EU Directive 2009/28/EC. Collectively known as the 20-20-20 targets, these include a reduction in EU greenhouse gas emissions of at least 20 percent below 1990 levels, 20 percent of EU energy consumption to come from renewable resources and a 20 percent reduction in primary energy use compared with projected levels – all of these to be achieved by 2020 through energy efficiency improvements. For Tim Buckley meanwhile, Arkx Investment Management draws little distinction between the available technologies from an investment standpoint – companies targeted being ‘technology driven with proven track records demonstrating repeat sales of size’.

“We avoid investing in the multitude of ‘very exciting’ cleantech start-ups where ever-optimistic founders talk about what their companies are going to do (if only the market would give them the cash to prove it). We are looking at market opportunities that are real and current, not blue sky potential.”

The key issue with renewables as Buckley sees it is that they’re still a high cost source of energy. However, the real cost of fossil fuel-based energy will rise materially when the full cost of carbon pollution is added in, significantly narrowing the cost gap to renewables. In addition, renewables can significantly reduce a country’s energy security risks and trade imbalances from importing fossil fuels – a key motive for China, the US & Germany. Finally, the technology and scale gains are driving down the cost of renewables each year – whereas fossil fuel costs are rising as ever more expensive sources (deep sea drilling, Canadian oil tar sands) are tapped.

Noteworthy is US-listed Chinese solar wafer and module manufacturer Renesola. With a market cap of $840m, based on a stock price of $9.73, it has been the best performing (large) solar energy stock in the last year with a 73 percent return. Much of the 20 percent gain post reporting its Q2 numbers in August came on the back of a forecast 26 percent increase in cost per unit efficiency, with manufacturing capacity set to rise 50 percent in 2010 and a further 50 percent in 2011.

To demonstrate its seriousness the company, which barely existed four years ago, invested $570m in total in calendar years 2008-2009, with a further $130-140m pa set for 2010 and 2011. Total wafer manufacturing capacity is forecast at 1,800 MW p.a. by Q2 2011.

Wafer costs meanwhile have fallen from $1.10/W in Q1 2009 to $0.62 in Q1 2010 (-44 percent), and further to $0.56 in Q2 2010. Renesola forecasts wafer costs to fall to $0.54 in Q4 2010 (-26 percent) and $0.46-0.48 (-13 percent) by end 2011.

Elsewhere, First Solar US has reported a Q2 2010 module cost of $0.76/w with a 2014 target of $0.52-0.63/w.

First Solar’s global capacity will rise from 716 MW to 2.24 GW by 2012. The company’s realised per watt costs have fallen from $1.59/w in 2005 to $0.76/w in Q2 2010 (a 14 percent pa compound reduction in manufacturing costs).

“The Rensola and First Solar stories mirror those of all the major solar firms,” says Buckley, “adding massive capacity annually in anticipation of the coming solar boom with producers passing on cost savings in the form of lower prices.” Buckley adds that solar will probably not reach grid parity in Australia until 2015, despite the introduction of a carbon tax locally and rising electricity prices.

If grid parity Down Under is unlikely before 2015, in Germany it may come as early as 2013 – proof positive that wind power isn’t necessarily the only game in town. Indeed, Germany consolidated its position in H1 2010 as the world’s largest photovoltaic (PV) market – system installations there amounting to an estimated three GWp. Last year, it accounted for approximately one of every two newly installed modules worldwide, with total installations amounting to 3.8 GWp, according to Germany Trade & Invest.

However, a recently announced reduction in feed-in tariff (FiT) rates has marked what for many claim amounts to a partial retreat in government policy. Against this backdrop the Merkel government also confirmed the nation’s four nuclear operators (RWE, E.ON, EnBW and Vattenfall Europe) will be allowed to extend the lifespans of their plants by an average of 12 years. FiTs were first established in Germany 10 years ago under the 2000 RES Act and designed to run for 20 years. As of 2009 they were in operation in more than 60 jurisdictions globally. A FiT is a policy mechanism designed to encourage the adoption of renewable energy sources and to help accelerate the move toward grid parity.

Under a FiT regional or national electric grid utilities are required to buy renewable electricity (electricity generated from renewable sources, such as solar, wind, tidal and geothermal power, as well as biomass and hydropower) from all eligible participants. In the case of Germany greater emphasis is now being placed on people with rooftop systems of less than 500kWp who intend using the energy they generate.

Effective July 1st, however, FiT rates were reduced by 13 percent for rooftop installations and eliminated entirely for cropland field installations. From October 1st rates were reduced by a further three percent. Despite this, tariff rates remain relatively attractive.

In China – despite an exponential increase in wind and hydropower production – expectations are that solar and wind power will meet just two percent of the nation’s energy needs in 2020 – coal making up 58.5 percent, with oil/natural gas 26.5 percent to name two, according to Liu Zhenya, chairman and CEO of China’s largest grid operator, State Grid Corp. of China, at the World Energy Congress in Montreal in September.

Despite the numbers the replacement of fossil fuels by clean energy as a whole will reduce carbon emissions by 1.6bn tons a year. Much of the impetus for this saving is expected to come from the nation’s ‘Golden Sun’ programme. Launched in 2009, it offers a 50 percent subsidy for investment in solar power projects as well as relevant power transmission/distribution systems connecting to grid networks.

For independent photovoltaic power generating systems in remote regions with no power supply, the subsidy will rise to 70 percent. Grid companies are required to buy all surplus electricity output from solar power projects that generate primarily for the developers’ own needs, at similar rates to benchmark on-grid tariffs set for coal-fired power generators. To qualify for the subsidy, in addition to other requirements, each project must have a generating capacity of at least 300KW peak, while construction will have to be completed in one year and operations will have to last for at least 20 years.

The government plans to install more than 500 megawatts of solar power pilot projects in the next two to three years. Total generating capacity in such pilot projects in each province should, in principle, not exceed 20 megawatts.

In the US, meanwhile, the Obama-Biden New Energy for America plan envisages the creation of five million new jobs over the next 10 years by strategically investing $150bn ‘to catalyse private efforts to build a clean energy future’.The plan aims to save, within 10 years, more oil than the US currently imports from the Middle East and Venezuela combined.

Another objective is 10 percent of energy production coming from renewable sources by 2012 (25 percent by 2025), as well as implementation of an economy-wide cap and trade programme to reduce greenhouse gas emissions 80 percent by 2050. Although The Department of Energy (DOE) projects electricity demand to increase by 1.1 percent p.a. over the next few decades the Obama-Biden plan is looking to cut demand 15 percent from the DOE’s projected levels by 2020., saving consumers – it is claimed – $130bn.

A portion of this goal would be met by setting annual demand reduction targets that utilities would need to meet. The rest would come from more stringent building and appliance standards. In the investing sphere, Silicon Valley-based Firsthand Alternative Energy Fund, run by SiVest Group Inc, has already hit the ground running – its investment philosophy based on targeting companies/technologies deemed to be helping to ‘accelerate the adoption of alternative energy production and energy efficiency’.

”We take a slightly different approach to investment selection than some other alternative energy funds, driven in part by our background as technology professionals.” says company spokesman, Phil Mosakowski.

“The difference is we tend to focus our investments in companies developing, not deploying, new technology. This is, in part, based on our experience in investing in technology companies and also reflects our belief that there are often better margins in providing underlying technologies than in providing finished products or services, such as power generation.”

The fund, launched in October 2007, has targeted three major areas to date: solar photovoltaics, wind and energy efficiency. While some limited investments have been made in other areas, such as battery technologies and geothermal, the three core areas are deemed to have the most profit potential for now.

In terms of specific investments, positions have been taken in firms at all points along the solar industry supply chain, including cell and module manufacturers (JA Solar, Suntech, SolarFun), manufacturing equipment providers (GT Solar, Meyer Burger), and materials suppliers (MEMC, Praxair).

Over the 12 months through June 2010, the fund was down 6.85 percent, against a 16.73 percent decline for the WilderHill Clean Energy Index and 14.43 percent gain for the S&P 500 Index. Corresponding figures since inception were -16.79 percent; -34.66 percent and -11.96 percent. On a smaller scale, meanwhile, is the New Earth Solutions Recycling Facilities Investment Sub-Fund, managed and promoted by The Premier Group (Isle of Man) Limited. It focuses on waste management by investing directly in New Earth Solutions Group Ltd, the sustainable waste treatment and renewable energy business founded in 2002 by former landfill entrepreneur, Bill Riddle. By August 2010 its share price had increased 24.3 percent since its inception in July 2008.

Fund director David Whitaker says: “When we launched the fund we were aiming to provide investors with the opportunity to obtain long-term capital growth by investing in New Earth Solutions  – proven, effective and efficient waste management technologies.

“This remit has since been expanded to include sister company New Earth Energy, which is committed to developing and delivering innovative advanced thermal technologies to support the use of waste-derived feedstock for ‘green energy’ power plants and direct heating supply schemes for both public and private customers.”

The fund helps to finance New Earth’s roll-out of waste and waste to energy facilities across the UK and provides investors with an opportunity to participate in a market not normally available to the individual investor. On the other hand, the Osmosis Climate Solutions ETF (launched in February 2010 by London-based asset management boutique, Osmosis Investment Management) has a wider global reach.

Focusing on products and services supporting the transition to a low carbon environment, the fund currently has a geographical spread of Asia 41 percent, Europe 23 percent, North America 33 percent, Others (mainly EM) three percent.

However, June Aitken, partner at Osmosis Investment Management, is quick to point out that geographic diversity isn’t an objective of the fund. Indeed, breadth of exposure is simply being achieved as a result of the diversity of the technology, products and services the managers believe will form part of the transition to a lower emission environment.

For example, renewable energy production companies tend to be in Europe (early feed-in tariff policies) or Asia (low-cost solar products), whilst pure play smart grid infrastructure companies are often US-based. Exposure to specific companies is based on a number of filters such as market capitalisation, trading volume, and ensuring the majority of the company’s revenues are derived from the products, services and technologies used in a lower emission economy.

Irrespective of the available investment funds on offer there is little doubt that the drive towards renewables is an irreversible one. Whether the targets set by Governments globally are achieved or not is, in many ways moot, given the industrial landscape is likely to be profoundly different in 20 years than it is now.