Trend #1: Investment in Renewable Energy 2015

Old critiques, die hard. For the longest time, renewable energy (RE) has been viewed as too expensive and un-scalable, as a luxury energy source, that will not be deployed in developing countries. As a matter of fact, how many times did you hear the criticism, that by diverting investment away from so-called “cheap” fossil fuel energy, we would be depriving developing countries of their right to develop?

The numbers quantifying investments in RE are in! It should be no surprise that RE investment is increasing significantly and the developing world, especially China, is leading the way.

The findings of the United Nations Environment Programme (UNEP) Global Trends in Renewable Energy Investments 2016 confirmed that RE set new records in 2015 for dollar investments, the amount of new capacity added and the relative importance of developing countries in the context of that growth.

Record-breaking uptrend in Renewable Energy Investments

Global investment in RE rose 5% to $285.9 billion from 2014 to 2015, breaking the previous record of $278.5 billion reached in 2011 (FYI that’s double the dollar allocations to new coal and gas generation, which was an estimated $130 billion in 2015) when the famous ‘green stimulus’ programs in German and Italian were in full throttle. The figure below shows that the 2015 investment increased sixfold since 2004 and that investment in RE has not been below $230b since 2010.

GLOBAL NEW INVESTMENT IN RE BY ASSET CLASS, 2004-2015, $BN

global-investment-in-re-asset-class-2004-2015-b
Source: UNEP, Bloomberg New Energy Finance

*Asset finance volume adjusts for re-invested equity. Total values include estimates for undisclosed deals.

Over the course of the 12 years shown in the chart, the cumulative RE investment has reached $2.3 trillion.

Moreover, in 2015 some 134GW of RE excluding large hydro were commissioned, equivalent to some 53.6% of all power generation capacity completed in that year – and this is worth mentioning because it is the first time it has represented a majority. Of the renewables total, wind accounted for 62GW installed, and solar photovoltaics 56GW, highest ever figure and sharply up from their 2014 additions of 49GW and 45GW respectively.

Developing Countries Leading the Way

The investment which led to record-breaking levels came from China, which lifted its investment by 17% to $102.9 billion, about 36% of the global total. In the Middle East and Africa, investment was up a total of 58% at $12.5 billion, helped by project development in especially in South Africa and Morocco; and in India, up 22% at $10.2 billion.

More significantly, 2015 was the first year in which investment in RE (excluding large hydro) was higher in developing economies than in developed countries. The figure below shows that the developing world invested $156 billion last year, some 19% up on 2014 and a remarkable 17 times the equivalent figure for 2004, of $9 billion.

INVESTMENT IN RE: DEVELOPED/ DEVELOPING COUNTRIES, 2004-2015, $BN

global-new-investment-in-re-developed-vs-developing
source: UNEP, Bloomberg

The key contributors to this shift from developed to developing are the big three: China, India, and Brazil, who saw an investment rise of 16% to $120.2 billion

A large part of the record-breaking investment in developing countries took place in China. Indeed China has been the single biggest reason for the strong increasing trend for the developing world as a whole since 2004. In spite of low market fundamentals and much talk of decreased investment in RE, China has been a key contributor to these figures. China invested $102.9 billion in 2015, up 17%, representing well over a third of the global total.

Likewise, India enjoyed a second successive year of increasing investment, breaching the $10 billion for the first time since 2011.

Other developing countries, excluding the big three, lifted their investment by 30% last year to an all-time high of $36 billion, some 12x their 2004 investment, the biggest players are:

  • South Africa also deserves an honorable mention as it’s RE investment is up 329% at $4.5 billion significantly ramping up their solar PV, in the context of their auction program. In June last year, the government in Pretoria launched a tender for an additional 1.8GW for its renewables program. One of the signal deals later in the year was the financing in September of the 100MW Redstone solar thermal project for an estimated $756m, helped by loans from the World Bank’s International Finance Corporation and Overseas Private Investment Corporation of the US;
  • Mexico saw a 105% increase at $4 billion, aided by investment from the development bank Nafin for 9 wind projects. Moreover, Mexico is emerging as an important location for bond issues to back renewable energy projects. In November last year, National Financiera issued $500 million worth of five-year bonds to contribute towards the development of nine wind farms with a total capacity of 1.6GW;
  • Chile saw an increase of 151% higher at $3.4 billion, thanks to a sizable uptrend in solar project financings;
  • Morocco, Turkey, and Uruguay also saw investment increases in excess of the $1 billion milestone in 2015.

Developed world downward trend (mostly)

In the developed world, however, we are witnessing a downward trend quite consistently, since 2011, when it peaked at $191 billion, some 47% higher than the 2015 outturn. Developed countries invested $130 billion in 2015, down 8% and their lowest figure since 2009. This decline is due to two major factors:

  1. because of the US, where firstly; there was a rush of investment in 2011 as projects and companies tried to catch the Treasury grant and Federal Loan Guarantee programmes before they expired and secondly, the US Supreme Court’s decision in February 2016 to allow all legal objections to the Environmental Protection Agency’s Clean Power Plan to be heard before it can be implemented may be deterring investment in 2016.
  2. but much more to do with Europe, where allocations fell by 60% between 2011 and 2015. That big drop was caused by a mix of factors including retroactive cuts in support for existing projects in Spain, Romania and several other countries, an economic downturn in southern Europe that made electricity bills more of a political hot potato, the cut of government subsidies aimed at incentivizing RE in Germany and Italy, and the big fall in the cost of PV panels over recent years.Italy, in particular, saw renewable energy investment of just under $1 billion, down 21% on 2014 and far below the peak of $31.7 billion seen during the PV boom of 2011.

Retroactive cuts to feed-in tariffs really weaken support for solar energy investments. Spain, scene of particularly painful retroactive revenue cuts imposed by the government during the 2011-14 period, and the end of all support for new projects, saw investments of just $573 million in 2014. This was slightly up on the previous year but miles below the $23.6 billion peak of 2008.

But it’s not all bad in Europe, especially since the UK has not seen a significant slowdown in RE investments in recent years, and is actually pushing in the opposite direction. Moreover, in spite of the fact that offshore wind in the North Sea has seen massive investments amounting to $17b, Europe’s aggregate RE investment is still in decline.

The Siemens-Gamesa Merger

Following several rounds of consolidations by their competitors in the energy sector including General Electric’s purchase of Alstom’s energy business and a merger between Germany’s Nordex and Spanish rival Acciona Wind Power, Siemens and Gamesa have announced their merger.

Siemens and Spain’s Gamesa agreed last week to merge to create the world’s biggest manufacturer of wind farms, with the German company paying 1 billion euros ($1.13 billion) for a majority stake in the combined business. The combined group’s order portfolio would be worth some 20b euros. The merged business will have 21,000 employees, an installed power base of 69 gigawatts.

Before the merger

Before their merger, Siemens had an 8% share of the global wind turbine market, according to data from FTI Consulting, which made it the second-biggest manufacturer after Denmark’s Vestas, which had a share of nearly 12%.

But Gamesa’s relatively small 4.5% market share put it steadily behind other large players, such as China’s Goldwind, which has been growing internationally into fast-growing renewable energy markets in Latin America, as well as the parts of the US and Europe.

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Wind Turbine Manufacturers by Market Share 2015,
www.statista.com 

The Siemens-Gamesa merger

The Siemens-Gamesa merger would create a new global market leader in wind energy by capacity, surpassing China’s Goldwind, Denmark’s Vestas and General Electric, according to FTI Consulting.

The merger is broadly considered a win-win in that this move would bring together Siemens’ strength in offshore wind power in mature markets and Gamesa’s leading role in emerging markets.

Each has their own competitive advantage

More specifically, Siemens operates in the mature North American and European markets and whereas Gamesa’s turf are the fast-growing markets such as India, Mexico, and Brazil. 

Moreover, Siemens’s wind division, which had almost €6 billion in revenue in 2015, manufactures and installs wind turbines for on- and offshore farms. But the business has been largely focused on the offshore market—where it has a large order backlog for turbines—while fumbling on onshore growth opportunities. Gamesa is also a major player across South America, where it expanded when the Spanish government cut subsidies to clean energy producers in 2013 as well as China and India, where it is the number one foreign producer.

Siemens is known to all of us as a quality engineering company (whose other products include trains, medical body scanners, and technical instruments), but it has struggled to make its wind turbine business profitable. After the merger, it will take a 59 % stake in the company but it will not have a majority on the board but will have five out of the 13 board members in the new group.

Their deal states that in return for Siemens becoming majority shareholder, Siemens will pay Gamesa’s shareholders, which include Spanish utility firm Iberdrola, 1b euros in cash in the form of an extraordinary dividend.

The businesses will be combined within Gamesa which will retain its Madrid headquarters. The Spanish group is creating new shares to be offered to Siemens.

Gamesa has further affirmed that the merged business will be operational by March- April 2017  and will be worth 230m euros of earnings before interest and taxes (EBIT) within four years due to the cost and savings strategy that is being implemented. The idea is that getting bigger would also help to lower costs, one of the industry’s key targets in its race for more efficient turbines, which in turn will make it more competitive. 

And then there’s Dong

It’s hard to find a comparable energy company to Dong, the world’s largest developer and operator of offshore wind farms and European poster child for the transition from fossil fuels to green energy. Dong Energy is looking to sell a stake of approx. 17% which could value the company at €16bn.

Winds of Change: Move from black to green

Over decade ago, Dong Energy was one of Europe’s most coal-intensive utilities, providing thermal    electricity to its customers.It was also very active in offshore oil and gas exploration and extraction in Norway and Scotland.

In recent years,  the company embarked on an energy transition strategy and began selling off coal-fired assets and a part of its oil and gas business. For the past few years, their vision has been to reduce their energy generation from coal and transition to wind energy, becoming world’s biggest offshore wind company and are aiming to double their installed capacity from 3.0 gigawatts in 2016 to 6.5 gigawatts by 2020, equivalent to the annual electricity consumption of 16m people.

Dong CAPEX
Dong Investor Presentation, March 2016

 

According to their March 2016 Investor Presentation, towards 2020, they expect to allocate 80% of their capital investment to wind, 10-15% to biomass conversation and investments into the power grid. Finally, an ever shrinking 5-10% is targeted towards oil and gas.

Chief Executive Officer Henrik Poulsen, had this to say regarding their transition, “Fundamentally it is a strong portfolio. However, we see simply better risk-return opportunities in the renewables business, and therefore we are managing the oil and gas business for cash and reallocating that cash back into renewables.”

However, there is no denying that Denmark today is still reliant on oil, coal and gas. Make no mistake, was it not for the North Sea oil fields, the Danish success story might have looked very different. Since the 1990s, the oil and gas driven from the seabed north of Denmark have made the Danes quasi-self-sufficient with oil and gas, while simultaneously boosting the Danish economy. But the Danish energy story is changing, the investment strategy clearly trends towards RE and away from fossil fuels.

Coming Soon: June 9th, 2016 Dong Energy IPO

On Thursday, 9th June, Dong will look to sell a stake of as much as 17.4% in an IPO that may value the company as high as 106.5 billion kroner (€16 billion) for 200 to 255 kroner (€26-34) per share, thus making this the largest IPO this year.  Previously, Dong tried and stopped three past attempts to list from 2006 to 2008 due to market turmoil and other difficulties, but this time, they are marching ahead.

However, what’s special about Dong is that unlike any other large energy company, 75 % of its capital is already employed in wind power generation. While Dong has a small but active oil and gas business, it’s clear this is trending toward being a triviality in the overall core business mix.

Traditionally, investors interesting in exposure to RE through large companies typically have to invest in a traditional energy company whose diversification into clean energy is still small relative to their conventional power assets, but Dong has practically already transitioned. Moreover, the high quality domestic Danish power distribution network provides the stable revenue returns which are very reassuring to their investors. This signals that they can support investment in its core wind business.

Owners of Dong Energy
Owners of Dong in %, Bloomberg

 

The Danish government now holds 59% of Dong and plans to maintain a holding of 51% after the IPO. Goldman Sachs with an 18% stake underscored its commitment to being a long-term partner in the future of the company.

Here are the take home messages that I think are valuable to keep in mind in the wake of their IPO:

1. Dong has access to very low-cost capital, especially in a macro backdrop where policy makers are incentivizing clean energy

2. Dong needs capital investment to ensure healthy returns to their shareholders

3. Dong’s objective, via this IPO is to share out the capital expenses through its partners

4. Dong’s distribution, generation and storage assets, can provide their grid resiliency in the cases of intermittency.

Renewable Energy and The Rise of the New Commodities

It’s no news to anyone that the commodities market has been a graveyard for investors in the last couple of years, with low prices and little sign of any positive catalysts. The global economic slowdown has affected goods such as steel, aluminium, copper and other commodities.

The 15-year commodity super cycle peaked circa 2008 and has experienced a trend of falling prices and stagnant/falling demand since. With lower market fundamentals and in China, commodities took another hit as demand fell off a cliff, with the expectation being that many commodities won’t recover for years as the world adjusts to a new structure, without heavy reliance on Chinese demand.

Demand for commodities is declining in part due to the deployment of renewable energies (RE). However, not all commodities are in a rut, some are actually benefiting from the rollout of RE as there are a few rising stars, that are making the world a *slightly greener* place.

The gold medal goes to:

Silver

solar-k8YG--621x414@LiveMint

Silver is an extremely important mental for industrial fabrication, as it accounts for about 56% of world silver demand relative to gold, which only accounts for 8%. This is largely because silver is a crucial component of cell phones, monitors and tablets, plasma TVs, cables, precision instruments, and many other tech products.

Silver has become one of the best-performing commodities this year, fuelled by an increase in interest from hedge funds and Chinese traders after it fell to an uncommonly large discount to gold.

This is partly due to a significant increase in installations and investment in solar panels, which uses silver for its electrical conductivity. According to the Silver Institute, 70 million ounces of silver are projected for use in solar panels by 2016.  A very thin “paste” made from silver is applied to the front and back end of crystalline-silicon solar cells using highly efficient ink-jet technology (like the one in your printer), spraying silver nanometric conductive inks on solar cells, cutting solar cell energy costs even further.

Moreover, with the solar industry just accounting for 6% of overall physical silver demand, global solar capacity is growing at an average rate of 53% a year in the last decade, underscoring future growth potential, according to London-based Capital Economics’s Simona Gambarini. 

In any case, it is important to bear in mind that the price of gold and silver will continue to be impacted by changes to monetary policy. Since they have quite stable supply and demand, these commodities are more of a “pure play” on inflation than traditional industrial metals, energy, or agricultural commodities. They may also be influenced by technical factors and the economics of exchange-traded fund (ETF) buying and selling, which could introduce volatility to these markets in the future. 

Secondly:

Lithium a.k.a “White Gold” or “the new Gasoline”

Lithium is a soft, highly reactive metal which is quickly becoming an interesting alternative commodity investment. With uses ranging from heat-resistant glass and ceramics, alloys used in aircraft, and lubricating greases. Lithium is the key ingredient in many rechargeable batteries, plug-in cars and electric vehicles like the Nissan Leaf, Tesla, and hybrids. About 30% of lithium supplies are used in these rechargeable batteries.

Analysts say demand will increase in the next 5 to 10 years as battery costs fall and electric vehicles and storage for grid power gain popularity. Today, the main lithium-ion battery makers are Samsung and LG of South Korea, Panasonic and Sony of Japan, and ATL of Hong Kong and BYD of China, whose government is scaling up the promotion of lithium-ion batteries and electric vehicles, with the biggest emphasis on city buses. Sales of “new energy” vehicles in China almost tripled in the first ten months of 2015 compared with the same period in 2014, to 171,000 (still it’s less than 1% of total vehicle sales).

Global Lithium Market Outlook @ Goldman Sachs HCID Conference, 3/16
Global Lithium Market Outlook @ Goldman Sachs HCID Conference, 3/16

Prices for lithium in China have risen 60% from about $7,000 a ton to over $20,000 recently, according to research by consultants CRU, while industry website Asian Metal says lithium carbonate, the compound used in batteries, has jumped by 76% in the past 12 months.

Still, it is not a relatively big business: lithium accounts for only about 5% of the materials in some car batteries, and for less than 10% of their cost. Worldwide sales of lithium salts are only about $1 billion a year. But it is a vital component of batteries that power everything from cars to smartphones, laptops and power tools. With demand for such high-density energy storage set to surge as vehicles become greener and electricity becomes cleaner.

Tesla, US electric car maker, will need to capture much of this growth as it will need 24,000 tonnes annually of lithium hydroxide, according to Benchmark Mineral Intelligence, out of a market last year of 50,000 tonnes. Moreover,  this year Tesla will begin production at its “Gigafactory” in Nevada, which it hopes will supply lithium-ion batteries for 500,000 cars a year within five years. J.B. Straubel, Tesla’s chief technical officer, says the firm wants to secure supplies of many battery materials, not just lithium.

Either way, larger automakers also have a growing demand for lithium. In a recent shift, Toyota has begun offering lithium-ion batteries in lieu of heavier less efficient nickel-metal hydride ones in its Prius hybrid.

Limited supply is another appealing factor that makes this metal a lucrative investment. 80% of the world’s lithium that is in Argentina, Chile and Bolivia (in the USA, Nevada is the only state that produces lithium), where the lithium is extracted from brine pools and refined.

Lithium is, for now, a tiny component of batteries, but  has the potential to shape the future of energy.

SunEdison went bust, it’s a big deal.

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SunEdison stock price Bloomberg

SunEdison, the largest renewable-energy firm in the world went bust last week with $16.1 billion of debt, making it the biggest U.S. bankruptcy in more than a year. In a nutshell, they were victims of their own success, as they grew too fast and burned way too much borrowed money in the process.

Their bankruptcy says more about reckless investor strategy than about the solar industry as a whole.

Bad Strategy: Too much focus on Growth

In 2014, SunEdison created two subsidiaries, called “yieldcos”, to manage the projects that it built assets for. They are called TerraForm Power and TerraForm Global, both separate and publicly traded. The purpose of these “yieldcos”  was to purchase energy projects from SunEdison and other developers at lower capital costs and attract (read: lure) investors who expected reliable dividends based on long-term power contracts.

Unsurprisingly, not all of its their investments proved successful, which is the name of the game in the project development world, but SunEdison’s win to loss ratio was evidently lopsided. It ended up with a lot of money tied it up in projects at various stages of completion, which it needed to sell to realise the gains and pay back creditors.

In order to make sure that the yieldcos had projects to develop, SunEdison had to grow, quick. That took a lot of (borrowed) money.

Circling the Drain

Things turned sour in July 2015, after it announced that it would try to acquire Vivint, a residential solar roof-top company, at a 52% premium (!). That deal for residential assets deemed inferior to the commercial assets SunEdison usually bought (read: utility-scale projects) hinted to investors that SunEdison may not have as much liquidity as they thought. And investor appetite for the yieldco abruptly ended.

SunEdison vs. Creditors

Things are also ugly between SunEdisons first- and second-lien lenders who are fighting over who will give them the money they need to get out of the bankruptcy.

  • If the first-lien lenders win: they will fire sell all of SunEdison’s projects, which would be disastrous for the solar market because there would be many solar projects on the market, resulting in lower prices for these projects.
  • If the second-lien lenders win: they will attempt to get more value out of these projects, the first-lien lenders, which is better for the solar market.  There is a lot of value in the project pipeline, which ultimately comprises cash-generating assets not tied to the continued existence of SunEdison, and it would be a shame if they were sold below value. But this will take time since investors will take time to do the due diligence to value these projects before buying them.

This does not bode well

SunEdison started off as having an investment portfolio of utility scale projects backed by governments, to investing in residential solar roof-top backed by private investors, therefore substantially increasing risk. Their free cash flow was negative and their net debt skyrocketed and eventually led to the bankruptcy. But SunEdison is not unique in that regard. Solarcity, SunPower and First Solar have managed a develop-and-sell business profitably over the past three years and are engaging in similar growth strategies all in plain view.