Energy Efficiency Emerges as Strongest Cleantech Sector
My Chat with the Street's Most Powerful Investment Bankers
Let's face it...
The overall performance of renewable energy stocks has been terrible.
At the Euromoney Renewable Energy Finance Forum - Wall Street last week, I sat and listened to a group of investment bankers quantify the difficulty, and point out where the best future investments will be.
Ray Wood of Credit Suisse showed just how bad it's been for our sector over the past two years and so far in 2010:
As you can see, clean equities have lost anywhere from 40% to 72% of their value over the past 24 months.
And market performance like that jams up the entire system.
Morgan Stanley's Kevin Genieser noted the private companies looking to pay off their early investors (private equity, venture capital, etc.) with initial public offering (IPO) proceeds have been met with stiff resistance:
Recent big ticket IPOs from A123 Systems (NASDAQ: AONE), Codexis (NASDAQ: CDXS), and Jinko Solar (NYSE: JKS) have all disappointed.
And that dismal performance sends ripples all the way down the chain.
If VCs and private equity fund managers don't see a profitable exit, they aren't going to lend money in the early rounds.
Throw in the utter lack of policy guidance in the United States (lack of a national Renewable Energy Standard (RES); no price on carbon) and you get what you've got now: everyone with much-needed capital refusing to play the game either 1) because everyone that has played recently has lost; or 2) because the rules aren't clear enough.
As the rest of the world races ahead, here are what the big banks say they're doing until the U.S. gets its act together...
Forget about supply
With the massive finds of shale gas in this country, every banker on the stage said they expect nat gas to remain well below $8.00/Mcf for the foreseeable future.
Gas that cheap translates into electricity at $0.05/kWh. That makes it tough for wind and solar to compete, even with subsidies.
And again, without an RES or a price on carbon, banks are really hesitant to lend to new clean energy supply projects; there are simply too many uncertainties.
But the one sector that has a proven payoff is efficiency. It doesn't matter how cheap natural gas goes... If you consume less electricity, you save more money.
Same goes for grid investments. Reducing grid congestion and inefficiencies can be profitable no matter the going cost of electricity, and it's a fundamental pillar for the introduction of more renewable capacity in the future.
Here's a chart Parker Weil of Bank of America-Merrill Lynch shows to illustrate our grid's shortcomings:
During the session, Parker went on to say that:
Power transmissions have life spans of ~40 years that have already expired. Since the industry was deregulated, the grid new build maintenance expenditures have been reduced
The North American power grid caters to 335 million customers
The pillars of this complex network are just three independent systems (WECC, ERCOT, Eastern Interconnection)
Any disruption in the 200,000-mile-long voltage lines can escalate through the system, resulting in massive power outage
50% – 60% of the electricity is lost in transmission due to faulty lines and obsolete infrastructure
The current system does not identify exact location of power outages, so the authorities take calculated guesses
Electricity production accounts for 40% of emissions in the U.S. and is the largest contributor to pollution
There is pressure from power generated by renewable sources for which the grid has limited provisions
Given that world electricity demand has risen to 18.8 trillion kWh from 14.6 trillion kWh in 2000, and is expected to reach 35.2 trillion kWh by 2035... Bank of America believes the best investments it can make are in the area of efficiency.
It believes efficiency has the potential to reduce annual energy consumption 23% by 2020. And given all the current market variables, efficiency is the easiest to finance right now because it has the lowest up-front capital costs and the fastest payback:
This is why Bank of America — and several of the other panelists — see efficiency as the best short-term clean investment, and see investment in the sector hitting $216 billion in the next few years.
And they see a three-pronged approach to easy profits...
First, reduce demand by retrofitting homes, offices, and factories with efficient lighting, appliances, and HVAC systems.
Second, upgrade the distribution infrastructure.
Third, deploy smart meters to create a networked smart grid and advanced metering infrastructure.
I'll have more on steps two and three in coming weeks, but for now you need to focus more on the most immediate profit opportunity: reducing demand.
That's what the world's most profitable companies are doing to ensure their increased profitability. From McDonald's and Starbucks to Disney and Marriott... the goal is to reduce operating costs through efficiency.
They're optimizing their supply chains, using less cardboard and paper, doing less laundry, and — most important for us — swapping out all their old lighting systems.
Nothing saves energy — and money — like switching out the millions of lights these companies use.
Lucky for us, one company has been selected to do this for all the companies mentioned above — and many more.
It's a small engineering firm with a big lighting solution. The share price has already doubled as word gets out about its success but, as the Bank of America suggests, we're only in the early rounds of efficiency's dominance.
Call it like you see it,