Lest anyone has forgotten, human-contributed global warming “got us here”. This reality and its destructive consequences have been demonstrated by a wide array of longitudinal studies conducted by thousands of scientists working almost everywhere. Moreover, people around the world embrace the Paris Climate Agreement. Support comes from public and private sector leaders through organizations such as the World Economic Forum. It also comes from everyday citizens as documented, for example, in the US by the research of Yale and George Mason University.
The effect is that the migration from dirty to clean energy is well underway and accelerating. We know this from the conversion of coal-fired power plants to natural gas, from the rising sales of hybrid and all-electric vehicles, from the presence of more wind and solar farms, from the race to come up with new and improved batteries, and from invention in such areas as tidal turbines and hydrogen fuel cells. And, many believe that the trend to reduce carbon emissions will continue. We see it in the projections of government organizations such as the International Energy Agency, and in other forecasts including by Fred Lambert at Electrek who predicts that the lines for new BEV and ICE sales will cross in 20 years or so.
When I step back from all this, I see a transformation that resembles "The Industrial Revolution" and "The Information Revolution". If, indeed, we are witnessing the makings of "The Renewable Revolution”, it will lead to major dislocations but equally significant investment opportunities.
So, what are those investment opportunities? In the past, I have written about them in the context of a segmentation model I have offered of the clean energy industry. Those articles decomposed the business into six parts, including:
Although this paradigm is still useful, for today’s purposes, let’s take a different cut and discuss the kinds of companies that are likely to lead the renewable revolution. I tipped my hand two articles ago when I asked rhetorically whether Siemens (OTCPK:SIEGY) might emerge as the renewable energy integrator. I believe the odds favor companies like Siemens which can deliver large quantities of renewable power that can be “stored” in industrial batteries or drawn immediately into the grid for redistribution by utility companies to end-users.
These renewable integrators will increasingly be called upon to fashion turnkey solutions for businesses, cities, regions, states, provinces, and countries. Siemens brings to the party substantial electrical expertise. To it, they have added a controlling interest in Gamesa (OTCPK:GCTAY) and together they have overtaken Vestas (OTCPK:VWDRY) as the #1 wind manufacturer globally. (Vestas seems to be adrift strategically and should consider aligning with a strong renewable energy integrator.)
Although Siemens backed away from solar a few years ago, we're seeing signs that they are reconsidering the business. Specifically, the company is working with Solarkiosk (private) on microgrids in Africa, and on a “SunFlex” energy storage platform that are developing and marketing via their Fluence Energy joint venture with AES (AES). It would be nice to now see Siemens take a bigger step forward perhaps with a controlling interest in First Solar (FSLR). The company has good product, but absent a strong alliance with an integrator, I don’t see them “making it” on their own.
But things need not end with Siemens. ABB (ABB) and Orsted (OTCPK:DNNGY), formerly Dong Energy, are also working together – including now on the world’s largest offshore wind project – and I could envision that the former, or the two together, could also emerge as a dominant renewable integrator.
The same may be true of Total (TOT) that owns a controlling interest in SunPower (SPWR). With the support of France – and, specifically, the country’s “PlaceAuSoleil” initiative – and continuing inroads in Japan, Total could emerge as a renewable energy integrator. They certainly have the capital to do so but are, of course, missing a key element that being competitive advantage in batteries and grids. The could fill that gap through an acquisition such of another French company, Schneider Electric (OTCPK:SBGSY).
Most of the remaining players in fossil fuel and renewable energy are playing no-win or zero-sum games. Coal use has peaked and is heading down as it is being substituted by natural gas. The big natgas drillers/frackers – BP (BP), Shell (RDS.A) (RDS.B), and Total – will capture that market share only to turn around and lose it to renewable energy sourced from the sun and wind. At the same time, existing, expanding, and acquired “filling station” networks will come to represent important distribution points for a variety of fuels including gasoline/petrol, diesel, electricity, and perhaps even hydrogen. But, here again, there will be little more than substitution occurring.
The same is true for automobile, bus, truck, trains, ship, and perhaps even airplane manufacturers. The best ones will rise to the clean energy challenge and will gain market share in the process. The industry overall, however, will see no net increase in sales as the result of the renewable revolution. Indeed, to the extent that the overall global warming movement results in people driving less, or car sharing, personal vehicle sales may ebb. Picking winners in the space will become increasingly problematic.
And, speaking of BEV winners, it’s too early to declare that Tesla (TSLA) will be one of them. Serious issues abound – financial stresses, loss of talent, and questionable product quality. Tesla is driving toward an economic cliff – income, EBITDA, cash flow, working capital, and leverage. Whether or not they go off it, the best that investors can hope for is, let's just say, "material" dilution. My money is on Toyota (TM). Do a side-by-side comparison of the two companies' financial ratios and you will see exactly what I mean.
And, with respect to whom you plug in to recharge your BEV, we all know that utility companies are increasingly taking in juice from a wider variety of fossil fuel and renewable sources. For sure, they will supply more electricity as end-user demand for dirty energy declines. The utility sector might interest me if only it weren’t so regulated and subject to financial challenges driven by the sheer size of the capital requirements coupled with the need to build extra capacity to accommodate short-term spikes in demand. Companies such as AES have more flexibility in this regard insofar as they can monetize minority shareholdings in regional utilities they have served. The recent sale of their 17% stake in Brazilian utility, Eletropaulo, is a case in point.
So just as the industrial and information revolutions substituted machine power for human labor, so too the renewable revolution will substitute one form of energy for another. This means, of course, that the investment opportunity is in the transformation itself. And, this in turn means that "the action" will be with those in the center of that process with the ability to deliver end-to-end solutions. Therefore, in addition to identifying integrators, investors should work to spot companies that they in turn may acquire to succeed in the renewable revolution.
Relating back to an article I wrote a year ago, I believe a global oligopoly is beginning to form around renewable energy and, if so, investors will want to own a piece of it. Revolutions like this don’t come along very often.
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Disclosure: I am/we are long SIEGY, AES, ABB, TOT, FSLR, BP, RDS.B, TM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Always do your own due diligence in consultation with a licensed and competent financial adviser who understands your unique needs and puts your interests ahead of their own. Remember, there are added considerations in owning foreign securities including those associated with ADR sponsorship, buying and selling the pinks, foreign withholding taxes on dividends, and fees. (All my proceeds from contributing to SA go to charity.)