Eco Investor May 2016

Features

Why Cleantech Stocks are Performing Again

By Victor Bivell

People may think that John D. Rockefeller became the richest man in the world by investing in oil, but he wasn't just investing in oil, he was investing in the future. At the time the world was running out of whale oil and Rockefeller saw that the future was in the new oil. The President of the Rockefeller Brothers Fund, Stephen Heintz, told this story to the DivestInvest Conference in Sydney last month and said he is convinced that if Rockefeller were alive today, "he would be doing the same thing in the clean energy economy because he knows that's the future."

Now, if investing in the future were easy we wouldn't have sayings like "Prediction is very difficult, especially if it's about the future." But the trends back Mr Heintz's view that the future belongs to clean energy. Let's look at half a dozen of these key trends.

The big news on the political trend is last December's UN Climate Change Conference in Paris. 196 countries agreed to limit their greenhouse gas emissions to keep the global temperature rise to below 2 degrees Celsius and to aim for 1.5 degrees. These included the world's biggest emitters: China, US, EU and India. Last month 175 countries signed the agreement, with more to come.

Having so many countries on board, and for the first time the big emitters, is a new level of international co-operation on climate change. This trend should give investors a new level of confidence in the direction the world is heading.

The agreement means big money will continue to flow into climate change solutions. The previous goal had been for developed countries to invest US$100 billion per year by 2020 to help poor and vulnerable countries. The Paris agreement extends this so that US$100 billion is the annual minimum target from then to 2025.

That will add to the second trend - rising investment in clean energy. Investment in renewable energies has been strong for many years and is getting stronger. The International Renewable Energy Agency (IRENA) reported that in 2015 a record US$286 billion was invested in renewables and the world's renewable power generation capacity grew by 8.3 per cent, the highest rate on record.

Solar energy capacity grew by 26 per cent, a record, and wind power capacity grew by 17 per cent, also a record. Bioenergy and geothermal energy capacity increased by 5 per cent each, and hydro power capacity increased by 3 per cent.


Global renewable energy generation capacity at the end of 2015; and growth in 2015. Source: International Renewable Energy Agency (IRENA).

The growth was helped by another trend - the continuing fall in the cost of the technologies. IRENA said that since 2010 prices for solar photovoltaic modules have fallen up to 80 per cent and prices for onshore wind turbines by up to 45 per cent.

Nor is the fast growth happening in the developed world. Renewable generation capacity grew 14.5 per cent in Central America, 12.4 per cent in Asia (which has the biggest installed capacity), 7.8 per cent in the Middle East, 6.3 per cent each in Africa and North America, 5.3 per cent in South America, and 5.2 per cent in Europe. The whole world is doing it. Even conservatively-governed Australia clocked up 8.1 per cent, mostly solar and some wind.


Source: Global Trends in Renewable Energy Investment 2016

Behind the political and investment trends are the climate trends. Concern about climate changed reached its peak in Australia during the Millennium Drought from 1995 to 2009. Public concern is again rising as new climate records are set each year. 2015 was the warmest year on record and 2014 was the second warmest. In fact 15 of the 16 warmest years have occurred since 2001. The other was in 1998. The data comes from NASA and the truth is that few if any climate skeptics have the technical ability to take on NASA, let alone the global army of climate scientists who agree with it.

And it's not just getting hotter. Other extremes like bush fires and cyclone intensity are also up. Being able to see and feel the effects of climate change, as Australians did during the Millennium Drought, is a guarantee that politicians and companies will remain under pressure to act.

And that brings us to the next set of trends - while renewable energy is on the way up, fossil fuels are on the way down. Global oversupply of oil and gas has led to low oil, gas and coal prices. Over the past five years the oil price has fallen 65 per cent, the gas price has fallen 56 per cent, and the coal price 47 per cent.

The headlines show many companies in these sectors are losing money or going out of business. These include some of the biggest, such as the world's biggest private coal miner, Peabody Energy, which last month entered Chapter 11 bankruptcy. International Banker reported that nearly 50 US coal companies have filed for bankruptcy since 2012. The Wall Street Journal reported that since mid 2014 about 60 North American oil and gas companies have filed for bankruptcy. That pain is global.

And fossil fuel investors are hurting. Over the past five years the Dow Jones U.S. Coal Index is down 93 per cent, the Dow Jones US Oil & Gas Index is down 19 per cent, and the Dow Jones Global Oil & Gas Index is down 35 per cent.

But there is more. There is another trend working against the fossil fuel companies. The divest movement that encourages investors to divest their holdings in fossil fuel stocks is continuing to grow around the world. It started in 2012 and late last year DivestInvest.org reported that over 500 institutional and other investors with over US$3.4 trillion in assets under management have now committed to divest their portfolios of fossil fuel stocks.

Many of these investors are very high profile and close to home. The Rockefeller Brothers Fund joined in 2014. In 2015 Norway's massive sovereign wealth fund, one of the world's biggest and built on oil revenue, began to divest holdings in companies where coal is more than 30 per cent of their mining activities. At around US$9 billion, it is said to be the biggest divestment from the coal industry in history.

And while it is not part of the divest movement, last month Saudi Arabia, the world's biggest oil producer, said it plans to sell oil assets to create up to a US$2 trillion fund to diversify the country's economy away from oil.

The point for renewable energy investors is how much of the money freed by divestment will go into renewables. This is a live question at present for institutional investors. Do they just spread it among the rest of the portfolio or do they allocate it to clean and other energies? As each institution makes it decision, it is likely that some of this considerable capital will go to renewables.

One final international trend is the unlikely rise of uranium as the main alternative carbon-free energy. A few years ago uranium was on the starting line and had much support, but the magnitude of Japan's Fukushima nuclear reactor disaster and the decision by Germany to phase out nuclear energy by 2022 mean the industry's prospects are mixed. While some in the industry are positive, this is not reflected in the uranium price. Data from Ux Consulting shows the spot price for uranium is around its 10 year lows.

The trends in Australia are also positive for renewables. The big development has been the replacement of Tony Abbott as prime minister by Malcolm Turnbull. The cost of the Abbott government's policies against renewables, both in terms of projects that did not proceed and in loss of market capitalization by listed cleantechs, was in the billions of dollars.

The Turnbull government has lifted industry and investor confidence. So too have the agreement on the new Renewable Energy Target, the looming shortage of large scale generation certificates, the rise of rooftop solar, growing choice in electric cars and energy storage, and the continued support for renewables by the public.

There is a long way to go to recapture the strong optimism that was around in the early days of the Rudd government. But the ACT Cleantech Index is up 11.6 per cent over the last six months and 36 per cent over the past three years. The number of cleantech and clean energy stocks on the ASX is again rising, and there are plenty of good ones for investors to research.

 

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