The early December U.N.-sponsored climate change talks in Peru may have led some of your clients to wonder about investing in renewable sources of energy. If so, they would be joining the likes of Warren Buffett, who has poured $30 billion into this business.
The relatively young renewable energy market is made up of a number of different subsectors, including solar, wind, hydropower, biofuels, geothermal and energy efficiency. Of these, the most significant are wind, solar and energy efficiency. Wind and solar have grown rapidly, seen prices drop and are in demand. However, energy efficiency may be a better bet.
Biofuels, hydro and geothermal present their own environmental problems: biofuels, or extracting energy from fermented biological matter, runs into conflicts over land use. Water is a limited resource and most of the big hydro sources are already developed. Geothermal is very expensive, location specific and can release greenhouse gases.
Over all, renewables are a tiny part of the energy market. They make up only about 5% of global energy generation and compete with cheap, seemingly endless supplies of natural gas, which burns more cleanly than oil or coal. But wind, and especially solar, have grown at a rapid pace—and prices have fallen enough to compete with fossil fuels in some states and countries.
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The growth in both renewables was driven primarily by government subsidies, but gridlock in Washington and a Republican Congress backed by fossil fuel interests are clouding the picture for these incentives.
This is leaving wind power in more of a lurch than solar, because its Production Tax Credit expired at the end of 2013. The market stalled out in that year and continues to sputter. But prices have fallen 63% in the last five years, and growth is expected to double by 2020 and again by 2030, according to the American Wind Energy Association. The biggest makers of wind turbines are GE, Siemens Wind, based in Europe, and pure play, Vestus, a Danish company.
“Wind energy is bigger than solar, but solar is growing faster,” says Elias Moosa, portfolio manager at asset company EcoAlpha. The federal subsidy for solar is set to last through 2016 and then gradually decrease. But solar may not need it as much. While still only a fraction of all energy, solar is the second most rapidly growing source of new power generation in the U.S., behind natural gas, according to the Solar Energy Industries Association.
The total global installation of solar panels has risen from 6.6 gigawatts of electricity in 2008 to 40 GW in 2013. Bloomberg New Energy Finance (BNEF) predicts growth will top 60 GW in 2016, according to Moosa. Prices have fallen by 70% since 2010, and solar is only five to six cents more expensive than coal.
Falling Prices for Solar
Prices have dropped primarily because the Chinese flooded the market with cheap solar panels, driving many U.S. companies out of business, and making equipment production a lower-margin, commodity business. This enhanced the value of developers and installers of solar farms over equipment makers, says Lee Clements, portfolio manager at Impax Asset Management. “Developers benefited from cheap panels. They are less vulnerable,” and accordingly, more expensive. “But,” he adds, “equipment can be interesting again at the right price.”