The Green Premium Could Be Shrinking

| About: PowerShares WilderHill (PBW)

Summary

The top four coal stocks have dropped over 90 percent since the beginning of 2011.

A Gallup poll shows that the youngest demographics support an environmental conscience over economic growth.

Lazard's levelized cost analysis suggests that some alternative energies are competitive, but there are other nonmonetary costs to consider in the green premium.

With oil and gas production at its highest levels in years, no one would guess that its demise is not too far off. The debate over what the future of energy generation will look like continues to heat up as economic viability clashes with climate change politics. Since the beginning of the 2000's, energy companies have had to keep their ears to the ground as they prepare for the stampede of alternate power sources. Support for initiatives like the United Nations Framework Convention on Climate Change and the United States' own Global Climate Change Initiative have forced the market for cleaner sources wide open. The sleek, green feel of solar and wind power has already topped the dirty, industrial reputation of fossil fuel sources. As the markets for green energy quickly improve, the shrinking of the "green premium" will become more and more tolerable to a population with an intensifying concern for the environment.

What is the "green premium?" In short, the green premium is the extra costs associated with the implementation, operation, and use of renewable energy sources. Most of these costs are monetary which is why individuals and families have been reluctant to take on the burden. Other costs may be the extra time needed to install a certain technology, the lack of availability, the extra space that is needed, and extra maintenance costs. The "green premium" continues to weigh on demand for renewable energy as it still only accounts for 13.5 percent of net U.S. electricity generation. Although, the National Renewable Energy Laboratory reports that new renewable energy capacity is on the rise while coal is no longer the most popular method of electricity generation. Thus, the green premium is either becoming smaller or consumers and producers are more willing to take on the extra costs. The analysis provides evidence for both trends.

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With the rise of environmental policy and support for the cause of fighting climate change came the popularity of clean energy sources that could dramatically reduce carbon emissions. The last two decades of technological proliferation have allowed the advancement of the wind, solar, and many other electricity generation methods. Coal companies have been under pressure, both financially and environmentally, to leave coal for cleaner energy sources or be labeled as economically obsolete and dangerous to the environment. The NREL report points out that demand for coal energy is slowly fading. U.S. electricity generation from coal has dropped from 49.7 percent in 2004 to 38.5 percent in 2014, a descent that has surrendered the top spot to natural gas. In the investment arena, the end of coal is near if not already here. The chart above shows the apocalyptic fall of the four biggest coal producers in the United States. Despite a combined output of 49.2 percent of the country's coal, the four firms' shares have crashed an average of 97.95 percent from 2011 to today. The low costs of producing and using coal are quickly being overwhelmed by what may be called the "black premium" of environmental unsustainability. Investors and company leadership should have seen the writing on the wall by now. A Gallup poll measuring American's prioritization of economic and environmental issues reported that 50 percent of respondents prioritized environmental issues versus 41 percent who chose economic growth. The results of the survey, conducted in 2014, show that the willingness to take on the green premium is growing. For the young- (18-29) and middle- (30-49) aged demographics, the largest group of consumers over the next two decades, environmental support was even stronger with 60 percent and 52 percent choosing the environment respectively. These generations are showing that they will be inclined to spend the extra dollar for green energy while ignoring the sources deemed "dirty" by their peers.

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From Lazard

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Over the past ten years, the cost effectiveness of alternative energy technology has been increasing in pursuit of the cheaper conventional methods. As people have continually become more tolerant of the green premium, the actuals costs associated with it have dropped simultaneously. Lazard Asset Management provides excellent insight on the size of the green premium with data measuring the levelized cost of energy. With a comparison of alternative and conventional sources using a dollar to megawatt an hour unit, the trends start to reveal themselves. An assessment of the three rising renewable sources with the highest electric generation, wind, solar, and biomass energy, becomes possible.

Wind

Wind energy accounted for 4.4 percent of total U.S. electricity generation in 2014. The second largest renewable energy source (behind hydroelectricity) is famous for its large windmill hooked up to generators harnessing the limitless kinetic energy of the wind. As one of the oldest and most researched alternative methods, the costs of wind energy are surprisingly low compared to its peers. Lazard estimates a price range of $32 to $77 per MWh, the cheapest of the sources researched. It's lower bound beats all conventional forms of electricity generation, including coal and natural gas burning. The scalability of wind turbines allows for cheap per unit energy generation, especially in the appropriate climate. With subsidies factored in, the pricing is reduced to $14 to $63 per MWh. The bargain looks real and the trend of cost efficiency looks even more promising. Since 2009, Lazard's levelized cost estimates for wind energy have decreased 61 percent. But before dismissing the green premium concept in the wind energy market, consider non-monetary costs.

When looking beyond the capital-intensive construction of wind turbines (accounting for 78.1 percent of the cost), the energy it provides is actually quite cheap. Well, not exactly. The differences in geography and climate of the United States cause costs to differ across regions. For example, the flat, windy Midwest region has an estimated low of $32 per MWh, but the hotter Southeast region has an estimated low of $59 which is higher than the low for natural gas combined cycle generation. However, that's only a regional green premium that could easily be sidestepped by the implementation of the appropriate alternative at a more efficient cost. The true green premium for wind energy is space. The United States is still expanding in population and consumption. Therefore, the nation is going to have to sustain the houses, food, and cars of larger generations. Constructing large fields of wind turbines constricts the construction of more buildings and the planting of more farmland. The solution may already exist in offshore wind turbines, but the estimated cost for that technology is over twice the highest onshore wind estimate ($152 per MWh).

Solar

The next renewable source accounts for about 0.8 percent of total electricity generation. Solar panels are a clean energy source embraced by individual residences with the funds to pay for the capital costs of installation and upkeep. Often a small metallic patch of these photovoltaic cells can be seen perched on the roof of the individual hoping to finally break from the local energy company contract. Unfortunately, the dream of residential energy independence is buried under large costs and scalability problems. Lazard's estimated range for these structures starts at $184 and runs to $300 MWh topping the costs of every conventional source except one. Rooftop panels for commercial and industrial purposes are cheaper with a range of $109 to $193 per MWh as well as community panels at $78 to $136 per MWh. The serious discussion begins when considering the utility scale or large fields of panels powering a particular location. This large-scale operation would cost $58 to $70 per MWh for crystalline cells or $50 to $60 per MWh for thin film cells. These estimates are more precise but not as cheap as wind energy source, but still just as viable as conventional methods. With subsidies, the low costs are reduced into the $40's.

Once again, the data fails to produce an observable monetary green premium, but that doesn't mean one doesn't exist. In fact, the externalities are quite similar to those of wind energy. Certain geographical regions are exposed to a varying amount of sunlight, thus, increasing the amount of panels needed in shady regions. Lazard estimates the biggest gap between Southwest lows of $53 to Northeast lows of $82 per MWh. Thus, it might not be worth the cost of taking up the extra space to gain the necessary capacity when other energy generation methods are preferable. That points to another green premium, one that's already been mentioned, space. Creating enough power for entire cities would necessitate the construction of giant fields of solar panels that occupy precious life as the country continues to grow. Although, this component of the green premium will continue to shrink as residential rooftop panels become economical. With solar panels, time also becomes an issue as the photovoltaic cells and technology used to enhance its efficiency will need constant maintenance and repairs as it can be relatively sensitive. This could create extra variable operating costs that haven't been factored into the comparison. Solar technology will be best implemented when it becomes sensible for individual households to take on the burden of the time and space costs, spreading out the overall effect that large-scale solar implementation will have.

Biomass

The last method to analyzed is responsible for 1.6 percent of electricity generation in 2014 and has important implications for the both automobiles and homes. Biomass sources use organic material as a burning fuel in place of the typical combustion of fossil fuels. The biomass inputs vary from animal and human waste to corn and other foods with the necessary chemical make-up for combustion. Estimates from Lazard put costs for biomass electricity generation at $82 to $110 per MWh just cheaper than the conventional nuclear energy source. Although, subsidies keeps it competitive reducing the range to $63 and $95 per MWh. Unlike the wind and solar energy where the fuel is free and limited, costs for biomass fuel sources factor into over 25 percent of the total costs while capital costs exceed both solar and wind implementation expenses.

Biomass technology is the newest of the three alternative sources mentioned here. The research and development occur mostly on the chemical level with combustion techniques being perfected for efficiency. The green premium here is most obviously monetary as the costs continue to keep large-scale biomass capacity off the market for the time being. Other than its inability to be competitive, biomass methods have other positive externalities. Waste sources can eventually be used as a fuel which helps clean up the excess of disposed materials in the long run. The space premium is not applicable here, and the time premium is only evident in the time necessary for research and development to optimize the technologies. Streamlining biomass combustion methods into automobiles may be the next step after its large-scale implementation for electricity generation. Keep one eye on biomass developments as it enters the future with potential to revolutionize the energy industry.

This article has only looked at the three most popular rising alternative energy resources and the green premiums associated with it. Energy firms going forward will be feverishly looking for new green technologies, like fusion, that will satisfy the growing demand for environmentally friendly technology. The incentives are certainly clear as higher price toleration would boost revenue and income with the innovation of new. efficient technology. Behind those innovations come a whole new world of investment opportunities to capitalize on the markets boosted by the green premium.

Before ending, it might be worth mentioning some of the assumptions made in Lazard's levelized cost data. In particular, their assumption of $3.50 per MMbtu for the price of natural gas seemed a little high to me. The shale plays in the Marcellus and Utica regions have been pumping a record amount of natural gas despite hundreds of rigs going offline at the end of last year and the beginning of 2016. The high underground storage numbers might keep prices below the assumed price for much longer than expected. In addition to that, natural gas is just now emerging as the leading source of the United States electricity generation. Further advances in its combustion efficiency could cause the green premium to increase.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.