The Dawn of the Solar Age – Part 3

PETER LYNCH

To briefly recap, in Part 1, I stated that the world is currently in the midst of an historic paradigm shift in the area of energy. The world is moving from an antiquated, inefficient centralised energy system to a renewable powered, de-centralised, flexible and resilient system.

This 21st century energy system will be far less costly, more efficient and far more resilient than the old centralised system. Other benefits from this new system will be numerous – it will enhance, rather than diminish national security, it will boost economies worldwide and increase employment dramatically.

In addition, I outlined the rationale for the shift and all the reasons (better, faster and cheaper) as to why this transition has already started and is accelerating throughout the world. At the end of Part 1 I listed five of my favorite stocks that I thought might benefit from this huge transition.

In Part 2, I focused on investment sectors that investors either should stay away from or, if comfortable with, may want to look into these areas where a profit could be made from shorting stocks in these market sectors.

In Part 3, I will continue my focus on potential investments, this time however in sectors that will benefit from this worldwide shift. While it is still just the beginning of the shift, I am quite certain that the transition will occur much faster than all the pundits are projecting.

This accelerated transition will be driven by:

1. 1. The need to move quickly to address the dangers of climate change
2. 2. Dramatically less financial risk of a renewable based energy system
3. 3. Superior financial returns and the far greater resiliency of a distributed grid

As a result of this dynamic growth numerous stocks in a number of sectors will have their growth dramatically accelerated.

This paradigm shift will lead to the greatest investment opportunity in history and many fortunes will be made, in addition to making the planet a cleaner and healthier place for our children and grandchildren.

“Alternative energy’s shift to the mainstream is largely complete and likely irreversible”. Deloitte Center for Energy Studies.

Solar Companies

Below (figure 1) is a list of solar companies and one American and one Japanese company that I would regard as leading companies in the sector. They are all “pure plays”, meaning that their primary business is in the solar electric (photovoltaic) sector. ** None of the stocks mentioned in this article should be considered as formal recommendations.

Below (figure 2) shows the returns since the end of 2013 for my top two solar companies, the leading solar ETF (TAN) and the S&P 500 Index. Solar has not done well relative to the S&P 500.

Over the past five to seven years the solar sector has been “up and down” and has dramatically out-performed and also under-performed the S&P 500, so the current under-performance is not unusual. The top two companies, in my opinion, at this time are Showa Shell, a Japanese company owned partially by Shell Oil, and First Solar the largest American solar company.

Figure 3. Renewables’ share of power generation, scale is shown in doublings.
Source: Bloomberg New Energy Finance

What is interesting is that both of these companies produce a product using a “thin film” process, very akin to a semiconductor process. The other companies utilise traditional crystalline silicon panels. Both types have their advantages and disadvantages. Crystalline currently has about 90 per cent of the world market, but thin films are starting to grow after years of development. These thin film panels have better performance in very hot areas or cloudy areas – as a result in many markets worldwide they will be the choice of developers.

As you can see in figure 3, both the solar and wind sectors are growing by leaps and bounds. Solar has had seven doubles in 15 years and now stands at 2 per cent of electricity supply in the world.

This does not sound terribly impressive, but it really depends on “how you look at it” – for example if you look at it the way the world famous futurist and genius Ray Kurzweil (below) does, it is not only impressive, it is truly staggering!

Kurzweil made a thought-provoking presentation at a recent trade show for medical device companies: MD&M, in Anaheim, California. At one point during his 45-minute talk he shifted his attention to solar.

“In 2012, solar panels were producing 0.5 per cent of the world’s energy supply. Some people dismissed it, saying, ‘It’s a nice thing to do, but at a half percent, it’s a fringe player. That’s not going to solve the problem”. Kurzweil said. “They were ignoring the exponential growth just as they ignored the exponential growth of the Internet and genome project. Half a percent is only eight doublings away from 100 per cent.

“Now it is four years later and solar has doubled twice again – now solar panels produce 2 per cent of the world’s energy, right on schedule! People dismiss it, 2 per cent is a tiny number. That ignores the exponential growth, which means it is only six doublings or [12] years from getting to 100 per cent”.

To illustrate: 2% – 4% – 8% – 16% – 32% – 64% – 128%

Two years ago Kurzweil presented this to the Prime Minister of Israel, Binyamin Netanyahu who had attended his class at the MIT Sloan School in the 1970s. Kurzweil said the Netanyahu asked him a question.

“Ray, do we have enough sunlight to do this with a doubling seven more times?” Kurzweil recalled. He said he replied, “Yes. After we double seven more times, and meeting 100 per cent of the world’s energy needs, we’ll still be using only one part in 10,000 of the sunlight that we have.”

Still sounds crazy, but I for one would never bet against a brilliant individual like Kurzweil nor would I ignore his extremely impressive prediction track record over the past 20 years. Most of these past projections came true, and were equally “crazy” and hard to fathom.

Wind Companies

Below (figure 4) are a number of wind related companies that I regard as most of the higher quality companies. There are a number of Chinese companies, but it is more difficult to get information on these companies and their prices are lower than I would be comfortable with.

My favorite companies have clearly out-performed all other wind related companies, including the Chinese ones I mentioned. They are all top quality companies and are likely to continue to participate in the current and future rapid wind industry growth.

Yield Companies

A yield company is a company that is formed to own operating assets that produce a predictable cash flow, primarily through long-term contracts. Separating volatile activities (eg research, development and construction) from stable and less volatile cash flows of operating assets can lower the cost of capital. Yield companies are expected to pay a major portion of their earnings in dividends, which may be a valuable source of funding for parent companies which own a sizeable stake.

Yield companies are commonly used in the energy industry (particularly in renewable energy) to protect investors against regulatory changes. They serve the same purpose as master limited partnerships (MLPs) and real estate investment trusts (REITs), which most utilities can’t form due to regulatory constraints. Yield companies give investors a chance to participate in renewable energy without many of the risks associated with it.

Yield comapanies can have different kinds of assets, for example solar, wind and energy efficiency. Most of the ones that were spinoffs from public companies are primarily solar, but some are mostly wind projects (PEGI) and the largest one, Hannon Armstrong (HASI), is a combination of many types of projects.

Other Sectors

There are a number of other sectors or technologies I would like to briefly mention. Most of the companies involved in these areas are large multinational companies. There are very few “pure” stock plays in these areas, but they are certainly areas that you want to be aware of and keep track of because they will be very significant high growth areas over the next 10 years.

The three areas I want to mention are:

1. 1. Storage
2. 2. Transmission
3. 3. Large scale solar thermal

1. Storage

One of the fastest growing areas over the next 10 years will be energy storage – batteries and other larger scale technologies.

The main function of storage in a distributed energy system is to help larger grid size systems “buffer” the system and help to smooth out the systems performance. This enables the system to work in a more balanced way and also avoid power outages due to disruptions or surges. The payback on these systems can also be very short.

An example of this was, what “could have been done” during the Northeast US blackout in the early 2000s. The grid collapsed blacking out much of the Northeast and the total losses were estimated in the 5 to 6 billion dollar range.

With the intelligent placement (at critical load points) of smaller solar installations and battery storage costing an estimated US$500 to US$600 million – the outage would have been averted and the grid would have been stabilized.

2. Transmission

One of the most significant developments in the area of renewable distributed energy systems is a technology called – High Density Direct Voltage (HVDC).

The electrical grid in the United States is truly an amazing technological wonder. In fact, it may well be the greatest technological marvel of the 20th century. However, it is the 21st century now and the grid in the US (and globally) needs to be totally rebuilt and upgraded.

Basically the old grid is an alternating current (AC) system and the newer HVDC cables are direct current (DV). A based HVDC system has many advantages:

1. 1. Much Cheaper
2. 2. Much more compatible with a modern fully distributed system, especially on a system with much of its power provided by renewable sources.

Cheaper

As you can see it is much cheaper than the current AC systems.

More Compatible

Because renewables are “intermittent” (i.e. solar does not work at night) it was thought that a new grid system would need significant amounts of storage in the form of batteries. However, with the advent of HVDC, power can now be transmitted over long distances (thousands of miles) with very little loss of power (an AC system can lose as much a 20 per cent in transmission).

As a result, wind farms in Hawaii, could power the East Coast of the US at night or massive, soon-to-be-built wind farms in Mongolia will be able to power Southeast Asia at night.

This opens up a whole new world with this fantastic technology allowing the acceleration of the industry, with far fewer batteries needed than was projected four to five years ago. Batteries will still be needed, but with current internet and communications technology we can accurately select the optimal locations for certain amounts of storage that will address any potential “weak” points in the overall transmission system.

All of the companies involved in this area are major ones with no pure player that I am aware of.

You will start to hear more and more about the HVDC technology and the growth of its implementation. HVDC is a key component in the current grid upgrade plans of the Chinese Government; they plan to utilise it for a new country-wide grid. To date I think (this is from memory) there were 12-13 major projects completed, another six or so under construction and many more planned. There is no doubt HVDC is coming and there is no doubt that it works and is proven.

Below is what I would call an example of being technically progressive and “thinking big”!

China has a plan to build a global renewable energy grid. Liu Zhenya is chairman of the State Grid Corporation of China (SCCG). SGCC is the world’s largest power company. It serves more than 1.1 billion Chinese consumers and operates grids in the Philippines, Brazil, Portugal, Australia and Italy. On April 8 this year, Liu told the 2016 Global Energy Interconnection conference in Beijing, “We have the capacity to enable much greater use of renewable energy by interconnecting the world’s energy grids.”

Liu has a plan. It includes massive wind farms in the Arctic and giant solar panel installations at the Equator. All of the power generated would be transmitted and shared with the people of the world via ultra-high voltage grids. The plan is technically feasible, Liu says. In fact, China is already using UHV grids to transmit electricity over vast distances.

Liu says his vision could be in place by 2050 and supply the entire world with all the clean, renewable electrical power it needs. The cost? A staggering $50 trillion dollars!

It sounds like a lot of money. However, keep in mind that world-wide grid upgrades are by necessity not optional – it has to be done regardless. But once again, the key second question that is seldom asked – what would be the cost of not doing this or the cost of doing it with 20th century technology instead of 21st century technology? I would be willing to bet that this cost (of NOT doing) would be magnitudes larger, to say nothing of the huge economic costs that we would incur by not addressing climate change as a result of continuing to use old, polluting technology.

Sounds like a crazy idea? And it would be had it been proposed by anyone other than the chairman of the world’s wealthiest power company. But the $50 billion in cash generated by State Grid last year gives the company the deep pockets and political standing to put its priorities on the international energy agenda.

3. Large Scale Solar Thermal

Large scale solar thermal is a technology that has been around since the 1980s when the first few plants were built and operated successfully in California by an Israeli company (LUZ Solar). However, back then, the plants were much more expensive and not as sophisticated. No major pure players in the area, at that time.

These plants are ideally located in “clear sky” areas where direct sun is available (no clouds), that is deserts around the world and very sunny locations such as Spain. The most interesting thing about these newer plants being built is that the thermal energy can be stored in molten salts which can extend the operating hours from only day-time sunny hours to up to 24 hours of electricity generation.

Conclusion

The Age of Solar is upon us and it is accelerating and has past the point of no return.

As a result of this, there are going to be numerous ways an investor can “place their bets”. Obviously the best candidates change over time – but right now the stocks below are my seven top picks.

Solar Companies

First Solar – symbol FSLR, trades on NASDAQ and Showa Shell Sekiyu K.K., symbol 5002-TO trades on the Tokyo Exchange. First Solar is the world’s largest solar company in the area of Photovoltaics (sunlight to electricity)

One of FSLR’s largest shareholders is General Electric (GE) which shares some important intellectual property. As the market continues to grow and accelerate world-wide it is not difficult to imagine GE coming in and buying the company.

Showa Shell has a comparable technology (different thin film) as FSLR and the market is certainly big enough for many more quality companies.

Both companies have excellent management that has been exceptional in making or exceeding their projections regarding revenues and technical progress.

Both have the strong balance sheets and a strong backlogs

Both utilise proprietary thin film technologies that perform better in cloudy or hot climates than the industry standard solar panel made of crystalline silicon. This is an advantage in many of the countries where there is substantial heat and sunlight.

Sunpower Corporation – symbol SPWR, trades on NASDAQ. Sunpower is another higher quality US solar company which has the highest efficiency panels in the world. This gives it certain advantages when it comes to limited space and lower installation costs because less panels are required.

Sunpower has very good management and a long history of innovation and strong marketing. It is well diversified in many markets around the world and is currently introducing a number of innovative products for residential markets, where its very high efficiency module has a distinct advantage.

TOTAL is the large French energy company. An oil and gas company TOTAL announced the creation of a gas, renewables and power division, which it said will help drive its ambition to become a top renewables and electricity trading player within 20 years. “The goal is to be in the top three global solar power companies expand electricity trading and energy storage and be a leader in biofuels, especially in bio jet fuels,” stated the President of TOTAL in April, which makes me think that SPWR may also be a target for acquisition by TOTAL in the future.

Yield Company

8Point3 Energy Partners – symbol CAFD, trades on NASDAQ. 8Point3 Energy Partners LP is a yield company, that is a company that is created as a public vehicle in which to place large solar projects as assets which generate cash flow. It gives investors a nice way to play the solar sector plus a competitive yield (6.02 per cent) while providing a source of financing for the yield company’s solar company partners. CAFD is in my top category. 8Point3 Energy Partners LP’s solar company partners are First Solar and Sunpower Corporation – two of the highest quality solar companies in the world, which puts CAFD in a great position with great partners. First Solar is in my top category and Sunpower is in the next category.

Wind Companies

Gamesa Corporation (GAM – Spain) and Vestas Wind (VWDRY- NASDAQ)

Gamesa (Spain) and Vestas (Denmark) are two of the largest wind companies in the world. Both are in my highest category and both have had very strong business and very large backlogs.

Both will likely participate in the worldwide boom in onshore and off shore wind parks a market which is expected to grow at an accelerating rate over the next 10 years.

Both are well positioned and have quality products with long histories in the industry and also active development programs to keep ahead of the curve.

Renewable Energy Infrastructure Investment

Hannon Armstrong Sustainable Infrastructure Capital, Inc – symbol HASI trades on NASDAQ. This company is the leader and the first to market in the sustainable investment area. It provides debt and equity financing to the energy efficiency and renewable energy markets. The company focuses its investment activities primarily on energy efficiency projects, renewable energy projects and other sustainable infrastructure projects.

The company has excellent management, a large backlog plus has a healthy dividend (6.01 per cent) for shareholders to enjoy as the company continues its growth.

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