Clean Tech: A Bright Future Translates into a Compelling Impact Investing Opportunity

“While long championed by environmentalists for ethical and moral reasons, and heavily supported in the past by government subsidies for policy reasons, renewable energy appears to have reached a tipping point for purely pragmatic reasons. As costs to install alternative energy generation continue to drop, adopting clean tech makes financial sense.”

The recent Climate Week in NYC provides a great backdrop for sharing our thoughts on the growing awareness of the need to decarbonize our economy, and the related forces shaping the future of clean tech. Apple CEO Tim Cook’s speech to the nearly half-million people who joined the Climate March resonated with our thoughts on the matter: namely, that there isn’t an inevitable trade-off between the economy and the environment. We would in fact suggest that the intersection of the two represents a potentially rewarding investment opportunity. To quote Mr. Cook: “If you innovate and you set the bar high, you will find a way to do both. You must do both…the long-term consequences of not addressing climate change are huge.”

In short, clean tech and renewable energy are enabling us to “do both.” While long championed by environmentalists for ethical and moral reasons, and heavily supported in the past by government subsidies for policy reasons, renewable energy appears to have reached a tipping point for purely pragmatic reasons. As costs to install alternative energy generation continue to drop, adopting clean tech makes financial sense. Just check out this graphic as an example of what is happening:

Climate Change Decision Tree
Just a few examples to illustrate the shifting dynamics:

  • The average solar photovoltaic system now costs just under $3/watt, down from $10/watt in 2001.1
  • Wind turbines have declined from approximately $1.7mn in 2008 to just over $1mn for the same model today.2
  • Increased deployment of utility-scale renewable energy infrastructure has significantly raised production levels, bringing economics of scale to the entire energy supply chain.
  • The cost of renewable energy is starting to reach parity with, or in some cases becoming cheaper than, traditional power.

In other words, renewable energy is coming to Main Street. People want it. People can afford it. And an entire industry is emerging to deliver it.

Take solar, for example. Residential solar electricity costs are falling 5% per year, while the retail price of electricity has risen 4% annually (and is predicted to continue rising at mid-single-digit rates).3 On average, residential solar will cost less than the average conventional electricity by 2015.4 Further, creative lending and ownership is making solar more accessible to residential consumers by eliminating the large up-front installation costs or, in some cases, shifting ownership away from the homeowner entirely. Which makes a ton of sense. After all, homeowners don’t own the equipment to generate the electricity they consume now. Why should they own solar panels? Through leasing arrangements, unconventional ownership structures, and innovative power purchasing agreements, residential customers can avoid the burdensome up-front costs. The combination of increased access to clean tech and lower renewable energy prices has put residential demand on steroids.

And the commercial world is right there with homeowners: the Walmarts of the world are joining the renewable energy party, and the drivers are, again, financial. Favorable installation economics are leading to increased adoption; CFOs are drooling over attractive long-term power purchase agreements to lock in their energy costs. The proliferation of third-party leasing allows corporations to avoid carrying the cost of the physical assets on their balance sheets. And we can never underestimate the green-reputation-burnishing that a few acres of solar power installation has on a company’s annual report.

Finally, the financial markets are also catalyzing the sector. As the market for “yieldcos” (a yieldco is a publicly traded company that is formed to own operating assets that produce a predictable cash flow and to protect investors against regulatory changes) grows and renewable energy securitization becomes a reality, we expect institutional-scale capital to follow. Innovative platforms like Mosaic and Solar City are connecting investors with renewable energy projects. And specialty lending firms like Pegasus and Generate are professionalizing the discipline with Wall Street rigor and capital. In short, investors are paying attention.

When we look at potential investments, we often focus on the “impact intentionality” of a business model: to what extent is impact wired into an investment’s DNA rather than being a secondary benefit? One of the things we really like about the clean tech and renewable energy sectors is that their business models are inherently based on environmental value creation. Further, their ability to produce competitive returns is attracting capital to the space and achieving scale. In our minds, this is a perfect example of what Tim Cook was saying: with innovation and market demand, there doesn’t have to be a trade-off between the economy and the environment. Clean tech is finding a way to do both. Yes, the entire industry is in transformation. And just as huge fortunes will be made, equally huge fortunes will be lost. But the future is clear (no pun intended): we are in the early innings of a transformation of our world’s energy complex, and renewable energy is going to play a central role.

And for those of us who care about the world our children will be living in, this is an incredibly exciting time to be an investor.

 

Bonus feature:

This is a link to a paper written by Bill Page, the Portfolio Manager at Essex GEOS. GEOS is a long-only public equity fund focused on clean tech and renewables. Bill’s Five Points outlines several key themes in the sector, and how these are paving the way for a robust investment environment within the industry. His paper dovetails nicely with our own thoughts on clean tech and renewables. We enjoyed reading it, and hope you will too.

 

Notes

  1. Solar Energy Industries Association, Lawrence Berkley National Laboratory.
  2. Bloomberg New Energy Finance
  3. EIA, Moody’s Investor Service, US DOE, BofA Merrill Lynch, GTM Research.
  4. EIA, Moody’s