Last week, I was surprised to discover that Brookfield Renewable Energy Partners (NYSE:BEP, TSX:BEP-UN) is not entirely renewable.
I've owned shares of Brookfield for many years, but as a relatively safe income stock, I've parked it in the back of my portfolio to gather dust and dividends. I apply my limited time for in-depth analysis to riskier stocks where a quarter's earnings are likely to make a much bigger difference in the stock price.
I may have noticed the "Other" category in addition to BEP's wind and hydroelectric generation before last week, but I would not have paid much attention. 4% of Brookfield's power production is not going to make the other 96% of its production non-renewable, no matter how dirty it may be, at least in my own opinion.
But my opinion is not the only one that matters. I have been managing the Green Alpha Global Enhanced Equity Income Portfolio (GAGEEIP) since December with Green Alpha Advisors. Green Alpha is currently offering GAGEEIP in separately managed accounts. Like all of Green Alpha's portfolios, we're managing it to an entirely fossil free mandate.
I came across the "Other" category when I evaluated Brookfield and four other renewable electricity producers in terms of how many dollars it costs to buy a watt of renewable generation last week. Since BEP was a holding of GAGEEIP, I had to dig deeper. I found:
- Brookfield owns two co-generation natural gas facilities in New York and Ontario.
- These were acquired along with a larger purchase of hydropower assets several years ago.
- The company is not actively trying to sell them, but would if "the right offer came along."
It's Not Easy Being Fossil Free
I'm a fan of co-generation, where the waste heat from power production is also used. Despite the fact that these facilities are often powered by natural gas, I'd consider Brookfield to be green even if co-generation accounted for the entire portfolio. But no matter how green these facilities are, they're not fossil fuel free, and we had to remove Brookfield from GAGEEIP.
Brookfield is now the fourth of my favorite green income stocks that aren't in GAGEEIP. The others are Algonquin Power (TSX:AQN, AQUNF), Capstone Infrastructure (TSX:CSE, OTCPK:MCQPF), and Primary Energy Recycling (TSX:PRI, OTC:PENGF). All have some gas generation, although it's also cogeneration in the case of Capstone and Primary Energy.
So why not manage a green equity income portfolio rather than a fossil fuel free one? Marketing. Green Alpha's current mutual fund, the Shelton Green Alpha Fund (NEXTX) is one of only four broad based mutual funds which is entirely fossil free. As far as I know, there is not a single fossil free mutual fund or exchange-traded fund targeting a high level of current income. In fact, most have a distinctive growth emphasis, which is the natural consequence of investing in firms in emerging industries (renewable energy) rather than a mature one (fossil fuels.)
It's simply much easier to explain "fossil fuel free" than "hardly any fossil fuels, except co-generation." And when an individual, a pension fund or university endowment decides to heed 350.org's call to go entirely fossil fuel free but needs to maintain a high level of current income, we're to giving them somewhere to go.
UPDATE, May 17, 2014: Apparently some readers did not understand from this article that Green Alpha’s avoidance of fossil fuel companies arises from a lot more than “marketing,” as I said above. The marketing is only in the last little bit- avoiding truly green companies like Brookfield which still have a minimal exposure to fossil fuels. In their own words, here is why Green Alpha only invests in fossil-free companies for its clients:
Green Alpha’s portfolios are free of fossil fuel investments, and the reasons are economic. First, we believe fossil fuels represent the primary systemic risk to the world’s economies owing to their overall destructive and toxic nature. Notably, fossil fuels’ extraction and use are both causing and negatively impacting water and arable land scarcity, and are causing air, ground and water pollution and related health issues and ecological systems’ collapse. We believe that if you own fossil fuels, you own global warming and resource scarcity and that owning fossil fuels thus undermines fiduciary responsibility and the duty to safeguard members’ and clients’ assets. Second, fossil fuels are having an increasingly tough time competing economically, as we’ve seen, for example, with Austin, Texas’ new PPA with SunEdison to purchase solar generated electricity for 4.9 cents per kWh, versus the 7 cents per kWh Austin pays for natural gas generated electricity and the 10 cents they pay for coal power. Further, renewables, led by solar are rapidly falling in price where fossil fuels in general tend to become more expensive over time and are nearly always characterized by high price volatility. Together, the systemic risks and non-competitive cost nature of fossil fuels are making them a poor source of risk-adjusted returns. We expect this new paradigm to hold from now forward as the next economy continues to advance via capturing market share from legacy economic models.
Disclosure: Long BEP, MCQPF. PENGF, AQUNF
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It's Easy Being Green. Fossil Fuel Free Is Harder was posted on AltEnergyStocks.com.
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