Investors might be kicking themselves for not buying Tesla stock when it was trading at $50 a share, but electric vehicles aren’t the only clean technology trend in town.
Renewable energy is entering a new phase that will fundamentally change energy markets, says Osterweis Capital Management. Technology is driving the change, much as it has transformed communication, e-commerce, transportation, and virtually every other industry.
“It’s lowering the cost curve in such a way that we think we’re on the cusp of mass adoption,” says Larry Cordisco , the firm’s co-chief investment officer. This sets up renewables, which include solar, wind, and other sources of clean power, for a virtuous cycle in which declining costs drive demand, which in turn leads to even greater efficiency and adoption.
Dual Drivers of Demand
Once seen as risky investments that were too dependent on federal tax credits, renewables are increasingly gaining traction among consumer and commercial customers alike.
A Pew Research Center survey earlier this year found that 77% of Americans support the development of alternative energy sources, and in a recent Deloitte study, 68% of residential consumers agreed with the statement, “I’m very concerned about climate change and my personal carbon footprint.”
While residential consumers are an important driver of demand, the big surge will likely come from commercial customers. Nearly six in 10 businesses surveyed by Deloitte said they feel increased pressure from stakeholders to disclose and address climate risk.
“ESG is a massive tailwind for renewables,” Cordisco says, referring to the growing use of environmental, social, and governance factors in the investment process.
Red, Blue, and Green
Renewable energy is expected to get a monumental boost if Joe Biden wins the U.S. presidential election in November. Biden’s massive infrastructure package includes the largest allocation to renewables in history, with the goal of achieving a carbon pollution-free power sector by 2035.
But this isn’t to say renewables will lose steam if Trump is re-elected. Multiple factors, including improved product design, innovative manufacturing techniques, and economies of scale in production, are resulting in rapid cost declines—and that trend is expected to continue regardless of what happens in November.
Until recently, wind and solar power were cost prohibitive without energy credits, Cordisco says.
The Energy Information Administration (EIA) is now projecting that the unsubsidized levelized costs of wind and solar—meaning the average cost over their lifetime—will dip to $30 to $35 per megawatt hour by 2025—or about a third of what they cost today.
“At that point renewables will be even cheaper than natural gas,” he says.
Clean Energy Ideas
Investors interested in renewable energy can look at the theme from any number of angles. Cordisco and his colleagues at Osterweis recently outlined the investment case of renewables. The paper argued for investing in NextEra Energy, a Florida-based utility that is a leader in clean energy.
“Over 40% of their earnings are derived from renewables, and that segment is growing at a much higher rate than a typical utility,” he says.
NextEra Energy’s stock valuations—recently 28 times forward earnings—look high, especially compared with other utilities, but Cordisco notes that the company is well positioned to grow its share of renewable energy, and in the process grow its earnings close to 10% annually for the foreseeable future.
Another holding, Air Products, is an industrial gas company that is aggressively pivoting toward clean hydrogen projects. In July, the company said it had signed an agreement for a world-scale carbon-free hydrogen-based ammonia production facility powered by renewable energy—and in the Kingdom of Saudi Arabia no less.
The project, which is slated to be up and running in 2025, is expected to supply 650 tons per day of carbon-free hydrogen for transportation globally and save the world three million tons per year of CO₂.
“It’s basically going to replace the equivalent of 700,000 cars of carbon emissions a year,” says Cordisco, who thinks this and similar projects could triple Air Products’ earnings within 10 years.