25th June 2012 by Tim Guinness
Founder of Guinness Asset Management and MM blogger Tim Guinness gives his view on the alternative energy sector; how will the sector develop in emerging markets? Will the Rio summit change anything? And, what’s the view for investors?
Views on alternative energy tend to be polarised into extremes. People are either violently positive about alternative energy or violently against it. Their views tend to ignore many important factors in understanding the alternative energy industry and an accurate perspective can only gained by weighing up all the factors.
Similarly, the perspective of investors on the sector has oscillated wildly between unconditional enthusiasm and relentless pessimism. The reality is that there is a long term investment opportunity in the growth of the sector that will continue to have its ups and downs and that there is a wide range of investment opportunities with varying characteristics that cannot all be lumped easily into one emotional “alternative energy bucket” by investors.
I perceive that there are two big opportunities in alternative energy – investing in actual energy generating projects, and investing in listed equities.
In actual energy generating projects, most of the costs are incurred up front with predictable revenues for the next 20-30 years. They are essentially infrastructure projects and act in the same way. Investors looking to access such projects have a number of options. They can look at investing via private equity funds, EIS funds through VCTs or by making direct private investments. There are plenty of alternative energy projects that generate 10-15% cashflow per year for 20 years and these cashflows are inflation-linked and government backed.
The second area that is attractive for long term investors is listed alternative energy companies. The main areas of investment are solar, wind, geothermal, efficiency, biomass, biofuels and hydro. We find across the world that there are around 250 companies that meet our criteria. When we screen on size, this comes down a little, but we don’t feel constricted.
Among these companies there are both infrastructure companies that give some access to projects and equipment manufacturing and installation companies. Manufacturing companies are having a tough time as prices for solar and other alternative energy sources have substantially reduced but they are now trading on very low multiples and are likely to be primary beneficiaries of the continued growth of the sector. If we see a period of stability, these companies will have more upside than the infrastructure companies, but if the world collapses then it is likely to be the infrastructure companies that will fare better.
Anyone who suggests that solar is dead is completely missing the point. In volume terms solar’s growth is still strong. The price of modules has come down by 75% but that has been matched by an even higher fall in polysilicon (the main raw material) prices and dramatic improvements in processing costs that mean modules can still be produced profitably. The price of best-in-class solar is competitive in a huge range of countries today without subsidies and the market is only now beginning to realise this. It is still high priced in the US as installers learn how to make installations as efficiently as they do in Germany, but we expect that there will be an explosion in demand that will accelerate the learning curve in the US and drive the costs down dramatically.
The development of alternative energy in emerging markets
Emerging markets are playing an increasingly important role in the solar and wind industries. Solar is becoming very commoditised which means that emerging markets will form the manufacturing hub for polysilicon solar. Most of the improvements that are being made are in the manufacturing processes rather than in the product itself which is driving costs down. Costs for wind turbines are also coming down, with Asian wind turbine manufacturers installing turbines at markedly lower costs than their competitors in Europe and the US.
Removal of fossil fuel subsidies
The removal of oil subsidies would clearly be a positive for the alternative energy space, particularly if those subsidies are redirected to alternative energy projects. What would seem fair is to say that if subsidies are being removed for alternative energies, then they should also be removed for oil and gas. The current government is saying that it wants to remove the subsidies for alternative energy by 2020, and this is a laudable goal provided they create a level playing field for alternative and conventional energy technologies.
The Rio Summit
I had relatively low expectations for the Rio Summit, but this is partly for positive reasons. I believe that the world is actually doing very well without needing international co-operation. Of course, it would help if we could have international co-operation, but individual countries are making great progress on their own. China and other Asian countries are now leading the way, with many Asian countries with high energy prices and dependency on foreign fuels recognising the opportunity for progress that alternative energy represents. Latin America is pushing very hard on hydro power and biofuels without needing international consensus. The US and Europe are lowering the level of subsidy support for alternative energy but continue to have lofty long term goals for alternative energy use. And encouragingly there are signs that in many locations, alternative energy is close to being able to stand on its own two feet without subsidies.
Even if the summit did achieve some significant co-operation, it would take a long time to turn it into policy and then to make a difference, by which time the alternative energy market is likely to have evolved and grown to the point where any co-operation agreed may no longer be relevant.
Click here for Tim Guinness’s biography
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