Eco Investor September 2017

Features

Cleantech Stocks Build Momentum

By Victor Bivell

The push towards renewable energy is unstoppable, but understand the challenges.

The global momentum behind renewables is unstoppable. Investors who want to look more deeply into how clean energy is growing, and growing its share of the global energy market, can find a wealth of information from some of the world's leading sources. For example, the International Renewal Energy Agency says that global renewable energy capacity more than doubled in the nine years from 2007 to 2016 and global renewable energy production rose 56 per cent in the eight years from 2007 to 2015. The biggest drivers of this growth are wind and solar.

For investors who are thinking of taking the next step and investing, it would be worthwhile to first make sure they have a sense of just how big and varied the sector is, how many ways there are to invest, which technologies and stocks offer what they are looking for, and at what point they may want to click the buy button.

For example, the renewable energy investment universe on the ASX has improved in recent years but it by no means offers all the industry sector and risk/ return options. So investors interested in the manufacture and supply of technologies such as solar panels and wind turbines will need to look at the US and European stock markets. Likewise for renewable energy listed funds and exchange traded funds.

For those who prefer to invest locally, in recent years the ASX offering has developed strongly in three areas.

Renewables as Dividend Stocks

One of these is for conservative income investors. This is through the three dual listed New Zealand utilities: Mercury NZ, Meridian Energy and Contact Energy, and Australia's Pacific Energy.

The three New Zealand utilities generate the great majority of their power from renewables. Mercury NZ's recent power generation mix has been 57 per cent hydro energy, 40 per cent geothermal energy, and 3 per cent gas. Meridian Energy's domestic power mix is 89 per cent hydro energy and 11 per cent wind energy. In addition the company has two wind farms in Australia. Contact Energy's recent mix has been 45 per cent hydro energy, 37 per cent geothermal energy, and 18 per cent gas. Its gas based generation has been much lower and can vary considerably as it is used to steady the New Zealand grid.

The three New Zealand utilities all have large capitalizations - Mercury $4.4 billion, Meridian $3.3 billion and Contact nearly $1 billion. And they are regular dividend payers. But New Zealand is a small, stable market and they lack growth opportunities.

Pacific Energy is a remote energy specialist. It builds and operates power stations for mining companies and off grid communities. The majority of its power plants are gas or hybrid gas and diesel, but it recently added solar energy and storage and hybrid solar systems to its product offering. It also has two small hydro energy power stations. The company pays regular dividends. It is smaller than the NZ utilities with a market capitalization of around $260 million, but it has growth options, including in the African mining sector.

Renewable Energy Project Developers

In my view any company that does not pay a sustainable dividend is a speculative investment. The ASX has never had a shortage of speculative stocks, and this has now expanded to include speculative solar energy project developers. This is a second area of growth on the ASX, driven by the arrival of three solar energy project developers. These are Genex Energy, Carnegie Clean Energy, and ReNu Energy.

While the installation of residential solar energy systems has been strong around Australia for several years, there is still a lack of ASX exposure to the residential installation market. But the numbers of commercial solar projects and utility scale solar farms have begun to grow, and these three companies now make it possible to invest in some of these local projects.

Genex Power is constructing a solar energy farm in northern Queensland in two stages plus an adjacent pumped hydro dam to store the energy. This is a large project. Stage one is 50 MW and stage two is 270 MW. The pumped hydro storage project will be 250 MW. These have been given Critical Infrastructure Project status by the Queensland Government. Construction on Stage One is underway and the first revenue is expected later this year.

Carnegie Clean Energy, the former Carnegie Wave Energy, continues to develop its first commercial scale wave energy farm using its world leading wave technology, but last year it acquired Energy Made Clean and expanded its product offering into remote area solar energy and storage. It also has solar project capacity through a joint venture with property developer Lendlease. The companies are developing a 10 MW solar power station at Northam, east of Perth, and this is expected to commence operation by the end of 2017. Carnegie has other projects underway and solar energy and battery based energy storage projects are now its main source of revenue.

Although ReNu Energy has an early stage bioenergy business, it recently refocused onto solar to drive short and medium term revenue growth. The company has signed two agreements to help it build a portfolio of solar projects. One was to buy a small commercial solar project on a school in the ACT, with more acquisitions possible. The second was with SCA Property Group to install, own and operate an initial 2.9 MW of solar projects on four regional shopping centres. The company is working to expand its solar portfolio into areas such as retirement village and office buildings, and it aims to become cash flow positive by next year.

An ASX wind energy option has long been available through Infigen Energy, which owns six wind farms. In April the company raised $151 million to refinance debt and fund a new project. This is the 113 MW Bodangora wind farm at Wellington in NSW, where site works have begun. Infigen is capitalized at over $700 million and has a deep development pipeline that includes both wind and solar energy projects.

Supplying the Battery Revolution

A third area where the ASX has a strong offering is in the emerging energy storage market. Suddenly, speculative battery hopefuls seem everywhere. These are mostly mining explorers that want to help supply the world with its growing future need for battery metals - lithium, cobalt, graphite and vanadium in particular.

Over the last two years this area has exploded and there are now far too many companies to mention. At my last count there were at least 22 companies with potential cobalt projects and 14 companies with actual or potential graphite projects. Lithium is similar and, having started earlier, a few companies recently become lithium producers, among them Orocobre, Galaxy Resources and Neometals. The first large scale graphite producers are not far way. Cobalt production will take a little longer.

These companies are currently for punters, but hopefully over the next few years some of them will prosper into profitable and dividend paying stocks.

This article was first published in the ASX Investor Update, August 2017.