By Edward Guinness, Guinness Alternative Energy Fund
While the outlook for alternative energy remains challenging, with government budgets still under pressure, price weakness in US natural gas and project financing still difficult, it is the potential for these challenges to be overcome or to dissipate that provides us with cause for optimism for the sector.
The area that we are most excited about for 2014 and beyond is solar. Solar costs have fallen by over 75%, spurring demand growth. Solar is now competitive without subsidies in an increasing number of countries, particularly more emerging economies with structural electricity deficits and high electricity prices from the use of diesel plants. Even in Germany and the UK a consumer can earn 10%+ returns on an installation based on the avoided cost of electricity from the grid.
The industry is also much less reliant on any one country compared to its previous over-reliance on Spain, Italy and Germany. Key countries now include China, Japan, the US, India and South Korea, and we are beginning to see strong pipelines of demand in the Middle East. This spread in countries with active solar markets means that the risk of overall demand and pricing falling as a result of subsidy changes in any one market is much lower. This has been further helped by the EU imposition of a floor for prices of Chinese modules, which has made the EU a far less competitive market from a price perspective, to the benefit of the manufacturers. A number of analysts are forecasting growth of the market to 40-50GW, and we believe these estimates are likely to be revised upwards. Solar companies are now competing against retail electricity costs for the first time; this provides extra support to solar module prices and is likely to be the catalyst for a shift in the way solar is perceived. It is no longer expensive.
For the wind industry, we see potential upside to global demand from developing markets. Europe and China do not offer major growth opportunities, although we would expect installations to continue at around current levels. With wind costs now able to deliver electricity at 5c/kWh (or less in some geographies), we see the main wind industry growth coming from developing economies, where the electricity cost is again the more important driver. We see specific opportunities in a recovery in valuations for the large cap European renewables utilities and even more potential from the smaller cap utilities who are bringing assets into production at a faster rate as a result of their stage of maturity.
As one of the only funds that is investing in alternative energy as a pureplay strategy (higher risk for higher potential returns), we are well placed to capture the returns from the growth of an industry that is only now beginning to recover from 2008.