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Summary

  • What would the future energy mix look like?.
  • A comparison of renewable energy costs.
  • The potential for the solar industry.

For Part II go here

The Energy Mix of the Future

In this last part, we'll think about the role of different renewable energy technologies in our future. I'll remind you that the Energy Information Association (EIA) currently has the following forecast in place:

Year

2010

2015

2020

2025

2030

2035

2040

Electricity Generation In TWh

20,240

23,309

26,632

29,807

32,959

36,153

39,034

A TWh, or a terawatt hour, is one billion KWh, or kilowatt hours. An average American home consumes ~10,837 KWh per year.

I view the EIA estimate as conservative. I believe many who are pursuing the difficult task of forecasting the future are not accounting for computing energy consumption. With digital data continuing to grow at 40%/year, the amount of energy required to store that data (mostly in enormous data centers) is starting to mount.

For now, I'll still relay the EIA forecast, to be extra conservative. That said, I can see the computing factor accelerating our global energy generation capacity build-out.

Technological Barriers

As the governments of the world encourage a renewable energy-rich mix, we need to understand the current technological barriers of the different technologies:

  1. Hydropower - requires a suitable available water body.
  2. Geothermal - requires a unique geographic location.
  3. Tidal Power - requires a seashore.
  4. Wind - requires an open field.
  5. Solar - requires sunlight.

If we had no other economic factors to take into account, what technology would we choose to deploy more of?

Hydropower is limited to specific waterways, so many places/countries lack suitable locations for that option. Some countries do show great potential for hydropower. Tidal power can only fit countries that have long seashores. Wind and solar can be deployed wherever there's enough wind and enough solar irradiation.

Thus, developers of renewable energy projects could find suitable locations to develop solar projects or wind projects much more easily than finding a suitable location for a geothermal project, for example.

Economical Barrier

The following table compares the levelized cost of electricity (LCOE) of different renewable technologies. Of course, a technology that can generate electricity at lower cost is preferable. That means that a government does not need to put forth a "fat" (or any) subsidy.

More than that, a lower LCOE means higher IRRs for the project owner at a given electricity rate. The LCOE calculations are not always the most accurate. There are several examples of solar projects around the world (that were connected to the grid in 2013) that are reporting a cost per KWh of about six cents, which is remarkable.

Source: REN21 annual report, June 2014

The costs of many technologies are posing a threat to coal burners around the world. We can see that the cost of hydropower is the lowest, coming down to two cents per KWh, which is a lot lower than coal's LCOE. But again, we lack enough water bodies in the right places to widely deploy hydropower beyond a certain point.

Solar and wind LCOE comes down to $0.04-$0.09. As I said, real-life projects developed by solar module manufacturers reach a much lower LCOE, as low as $0.06. We have plenty of wind and sunshine resources, so wind and solar definitely make sense. Ocean power is both very costly to build and needs a valuable resource: seashore.

Our Future Mix

Summing up the above, we can infer that the technologies that have the best potential to comprise a large share of our electricity mix are hydropower, solar and wind. Let's now compare that to real-world data:

Source: REN21 annual report, June 2014

Our previous observations fit like a glove, when we see solar scorching the charts with a 55% growth rate in 2008-2013. Growth declined to 39% in 2013. The wind capacity growth was at 12.4% in 2013, demonstrating it is more mature (319 GW of wind capacity vs. 139 GW of solar).

Geothermal and hydropower growth rates are very low, at ~4% per year. By this trend, solar and wind will become more and more important in the renewable energy mix, given the lucrative profitability they offer developers, the relative global support in comparison with other renewables, and the fact they are easier and faster to deploy. Further, a large (50 MW) solar project can take only a few months to set up.

Building a Model

As I focus on solar investing, I would offer my newest model for the global solar industry. The starting point of this model is the assumption solar can generate 15% of global electricity generation by 2040. In my view, the world could support a lot more solar, especially when economical options start to hit the marketplace. Companies like Ambri are on track to offer a groundbreaking $100/KWh battery by 2015.

Assumptions:

  1. Solar will provide about 15% of global power generation by 2040.
  2. Every 25 years of operation, a solar project requires a 25% increase in panels to keep the same output.

Let's do the math:

Let me explain. First of all, let's convert the year-end installed capacity figures for 2039 from GW to TWh. To do so, I'll multiply it by 365 days in a year and 4 sunlight hours each day (the 4 hours/day figure is factoring all efficiency-related issues). We get at least 6,402.1 TWh generated from solar in 2040.

IEA forecasted 39,000 TWh of generation in 2040. So 6,402.1/39,000 = 16.4%. Slightly above my 15%-16% share assumption.

The reason you see annual shipment growth rising again in 2033 is because projects installed in 2008 are performing at 80% output due to degradation, and are being upgraded. You can see that if solar power is to supply 16.4% of the world's electricity in 2040, installations will grow from year to year, from their 48 GW level today, to 101 GW in 2019, to 352 GW in 2040.

Solar Industry Implications

The solar industry has a few other dynamics at work while annual shipments grow:

  1. Profitability: Many companies are turning up profits, which in some cases, approach a 10% net margin. Given the very large revenue base, every small % change results in significant bottom line growth.
  2. Consolidation: As consolidation continues to occur, the big players are starting to increase their market shares. If you look at the computer memory industry, it once included hundreds of companies, but now it is, in fact, a duopoly. The current market shares of the industry leaders are around 5%. Consolidation substantially complements organic market growth.
  3. Downstream Business: As more and more companies are building their downstream business of developing solar projects and then selling them, or operating the project and selling the electricity, they enjoy a recurring revenue stream, which further helps bottom line growth.
  4. Given all those factors in play, in the next few years, if you pick the right solar companies, you'll see growth that far exceeds that of the market on the upper and bottom lines.

Conclusion

To conclude this series, I think that watching the developing story of renewable energy has enabled us to identify one of the top forces playing in that story, solar energy. Over the next 25 years, annual shipments will double, double again, and almost double one more time.

The special dynamics acting in the solar market enable different companies, the better-managed ones, to reach high growth rates in the top and the bottom line.

Given today's valuations of these companies, a terrific investment opportunity can be seen arising into the next few years, at least.

Join me as we go on and pick the winners of the solar industry.

Source: An Inquiry Into The Wealth Of Renewable Energy: Part III