Editor’s note: Although this abbreviated article, from investment firm EcoAlpha Asset Management, provides investment guidance, those in the wind industry will find its Power generation analysis of most interest.
What’s happening now?
In the last six months, oil prices have gone from $110 to $60 per barrel and many currencies have moved in favor of the dollar, globally. (Editor’s note: On Jan 7, Brent Crude was at $51/barrel.)
Investors have sold securities related to oil, energy, power generation and energy efficiency. It feels to us like the proverbial, “throwing out of the baby with the bathwater.” We believe this selling pressure has created significant opportunities to purchase great efficiency solutions companies at historically low prices and, where appropriate, sell short those companies that will continue to be challenged in this difficult environment.
Through our energy efficiency lens, we have identified many varied opportunities in power generation and transportation.
In our view, falling oil prices should not negatively impact renewable energy solution companies, specifically solar and wind companies. Within power generation, base load energy prices rarely define comparative price levels when evaluating against alternatives. It is generally the variable load that defines comparative price. Coal and nuclear are base load feedstocks, as variable load is typically fed by natural gas. In the U.S., oil and natural gas prices parted ways years ago. High oil prices did nothing to sustain natural gas prices and the decline in oil has not driven a decline in natural gas pricing. As such, it should have very little impact on demand for alternative energy.
With the dramatic declines in the cost of solar and wind generation, price has ceased to become the sole driver for demand. The largest power markets in the developed world-China, U.S., E.U. and Japan-each have distinct policy and market-based drivers behind the deployment of renewables. China in particular is moving to solar and wind to solve for environmental and health problems.
In the U.S., the EIA estimates that dirtier, less efficient and less stable sources have started seeing declines-nuclear and coal power are becoming less important for different concerns-nuclear regarding safety and upfront capital investment and coal regarding pollution. Coal is projected to move from 37% of electricity generated today to 32% or less by 2040, while nuclear is moving from 19% today to just 16% in 2040. The accelerating retiring of coal-fired plants is exacerbating this decline. Oil is expected to remain at 1% between now and 2040.
Meanwhile, renewable energy is expected to see the largest increase in generation, jumping from 12% today to 16%+ by 2040.
Furthermore, with regard to natural gas power generation, we believe there is also mispricing in the market for efficiency solutions companies. Combined Cycle Gas Generation is a key bridge technology in power generation to make up the gap between the necessary decline in coal-fired generation and a more renewables-centric future. Given the challenges perceived with nuclear energy, natural gas power with its lower emissions profile and relative cheap LCoE will become the workhorse technology for the medium term. We believe that demand for natural gas efficiency solutions will increase dramatically to make power generation cleaner and cheaper.
For the above reasons, we believe the 30%+ decline in solar stocks (as evidence by the TAN ETF) and the 30 to 50% decline in companies involved in natural gas efficiencies each precipitated by oil’s 50% decline is unwarranted.
The analysis continues with a discussion of transportation and investment opportunities. For the complete analysis, look for Oil’s third bear trap at:
EcoAlpha Asset Management
Filed Under: News, Policy