An Inquiry Into The Wealth Of Renewable Energy 

By Jonathon Fishman, Seeking Alpha 

 

Part I 

This series of articles aims to examine the state of global renewable energy markets, 
focusing on solar power. I believe that in the future, solar energy will provide us with at 
least 30% of our energy needs. 

 

"Solar power could provide a third of the global final energy demand after 2060, while 
CO2 emissions would be reduced to very low levels." 

- The International Energy Association (IEA) (2011) 

I plan to go through the different moving parts on this and, of course, how we can 
capitalize on this trend. As with any investment, getting the story is the first step, so I 
will focus on solar investing, as getting the story is understanding the role of solar in 
our future. 

I hope that Adam Smith will forgive me for shamelessly altering his title of his 
famous An Inquiry into the Nature and Causes of the Wealth of Nations. As Smith's 
ideas seemed light years away from materializing in the late 18th century, I believe 
that, with careful analysis, we can understand where and when the renewable energy 
sector is going and how to intelligently capitalize on it. 

An Intro: Global Power Markets 

To begin our inquiry, let's zoom out a second and look at the world from the outside. 


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enlarge) 


Here's a picture of everybody that ever lived and died. For those of you who have 
trouble imagining change, the existence of such a photograph was a matter for science 
fiction books 100 years ago. 

We are one energy-thirsty species. Just in the past 20 years, our energy consumption 
has grown almost 40%, from 102,569 TWh (1 terawatt-hour = 1 billion kilowatt-hours) 
in 1990 to 153,546 TWh in 2010, of which 20,240 TWh was electricity generation. 

That 20,240 TWh is a lot. But comparing it to the IEA forecast of 39,034 TWh in 2040 
shows the true nature of our electricity demand. A big part of that forecast is the 
electrification of the world. As of 2011, 1.25 billion people don't have access to 
electricity, and about a quarter of them are in India. 

 


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Twenty-six years from now, we will need twice as much electricity as we use today. 
Before we start thinking about the future, let's analyze the current mix of energy 
production in the world. 

(click to 
enlarge) 


Source: REN21 annual report, June 2014 

It's easy to see that our world still heavily depends on fossil fuels, with a 78.2% share. 
We are nowhere near creating a fully renewable energy ecosystem: Renewable energy 
generation met only 1.1% of our energy needs in 2011. Let's zoom in to just electricity 
generation: 

(click to 
enlarge) 



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Source: REN21 annual report, June 2014 

The world still generates most of its electricity from coal. The second-most used 
resource for electricity generation is natural gas, followed by nuclear, hydropower, and 
non-hydro renewables (with only a 5.8% share of electricity generation in 2013). 

What Renewables Are There? 

Hydro Power 

Hydro power is the most used renewable energy in the world. A capacity of some 1,000 
GW has been installed, which is responsible for an impressive 16.4% of global 
consumption. Current capacity grows slowly, at about 3%-4% a year, mainly due to the 
extremely capital-intensive nature of hydro power. 

(click to 
enlarge) 


Source: REN21 annual report, June 2014 

China leads the way in hydro power development as part of its dire pursuit for a cleaner 
energy-generation mix. About 75% of all hydro power projects commissioned in 2013 
were located in China. 

Ocean Energy 

Ocean energy is a small contributor to our energy mix, with only 530 MW of capacity 
installed around the world. Most ocean energy projects operate on tidal power, taking 
advantage of the tidal range. The following representation shows how it works: 


http://static.cdn-seekingalpha.com/uploads/2014/7/1/saupload_tidal1_thumb1.png 


Solar Power 

As of the end of 2013, a solar capacity of 139 GW was installed around the world. 
Drastic changes to the economics of solar power in the past decade have made it one 
of the most cost-competitive renewable energy sources we have. 


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Source: REN21 annual report, June 2014 


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(click to 
enlarge) 


Source: REN21 annual report, June 2014 

In my view, this is maybe the most important chart out there. The above charts 
demonstrate why solar power is going to be the most important player in the evolution 
of our energy and electricity mix. After extreme cost reductions and corresponding 
price reductions, for the first time, we managed to install more solar capacity for less 
money. 

CSP Solar 

Concentrated solar power is using a set of mirrors to concentrate sunlight onto solar 
panels. Although promising, the CSP industry usually struggles to compete with its 
older brother, the PV industry, in terms of cost. Overall, global CSP capacity remains 
relatively small, and is disproportionally concentrated in Spain. 


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(click to 
enlarge) 


Source: REN21 annual report, June 2014 

Solar Thermal 

Here, in my home country of Israel, it's normal to see solar water heaters on top of 
almost every building, as legislation was enacted many years ago making it mandatory 
to install solar thermal water heaters on top of each building. 

 

These are not solar panels, and they are fairly cheap to make and install using no 
state-of-the-art technology. However, although they are very simple to make, these 
"toys" are responsible for making more efficient one of the most energy-consuming 
applications in the modern home, water heating. 

Wind 


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Wind power generation has steadily grown since 2000. Wind is a great resource for 
renewable energy, and approximately 318 GW of wind capacity are installed around 
the world. Wind projects cause some concern for some people, as they often raise the 
NIMBY (not in my back yard) problem. 

In short, the NIMBY problem boils down to the fact that we all want the clean energy 
that comes out of wind turbines, but we don't want that turbine to be built in our back 
yard. Wind turbines make noise, impact wildlife, and usually give rise to civil discomfort 
in the place of installation. Even offshore wind projects have some negative impacts on 
marine wildlife. 

As the installed wind capacity continues to increase, the above issues are more of a 
concern. The industry is actively solving these problems, but some concerns for future 
installation growth remain. 

(click to 
enlarge) 


Source: REN21 annual report, June 2014 


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Source: REN21 annual report, June 2014 

The True Cost of Using Fossil Fuel 

As of 2010, fossil fuel-generated electricity represented almost 62% of total generation. 
Our reliance on fossil fuel is disastrous and severely impacts all of us. Understanding 
the following is vital to understanding why the world's governments are pursuing a 
more renewable-rich energy mix. 

Fossil fuels are a very efficient source of energy. It took the Earth hundreds of millions 
of years to form coal, natural gas, and oil. Before we were technologically advanced to 
the level we are at today, these fossil fuels helped us to evolve our civilization to its 
current amazing state. 

In our race to progress, we were unable to fully understand the true externalities (the 
added costs of using fossil fuels) that fossil fuels create. A great study by Harvard's 
Paul Epstein sums up the externalities of coal in the U.S. They range from fatalities 
caused by coal transport, climate damage from CO 2 emissions, and mental illness 
from mercury emissions, to excess cardiovascular disease, air pollution, methane 
emissions, and more. 

All of the above add up to $345-$523 billion worth of externalities. Who pays that? The 
coal miners? The utilities who burn them? Nope. That tremendous cost falls on every 
American citizen. 

If the different entities up and down the coal value chain would have been taxed for that 
cost and every part of the value chain would have rolled the cost down to the 
consumer, electricity prices in the U.S. would have skyrocketed three- or four-fold. 

Looking at the situation from that angle, it's clear that renewables offer a much cheaper 
method of producing electricity. 

Every government in the world knows this, and the issue is more noticeable in some 
countries than in others. For example, in China, which is a massive consumer of coal 
due to its rapid economic growth - along with a corresponding rising demand for 
electricity - people can't even leave their houses in certain cities due to pollution. Many 


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Chinese who live in these cities get sick and have to wear surgical masks just to 
breathe normally. 

 

"Chinese scientists have warned that the country's toxic air pollution is so bad that it resembles a nuclear winter". - The Guardian, 2.25.14. 

Given this fact, as our electricity demand should double by 2040, it's clear why 
governments want to add renewables to the mix and are seeking to soften the impact 
of using fossil fuels. Other reasons that countries pursue a renewable-rich mix include: 

. A finite resource : We have 39 more years of oil, 160 more years of natural gas, 
and about 400 more years of coal. That might sound a lot to you, but from the 
perspective of our species' history, that's a mere blink of the eye. 
. Energy dependence: As we deplete our stockpiles of oil, natural gas, and coal, 
many countries will have serious problems getting those resources. Being an 
energy-independent country is almost invaluable. 


The Global Consensus 

In the past decade, substantial progress has been made toward adopting renewable 
energy targets in order to solve the above-mentioned problems. 


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enlarge) 


Source: REN21 annual report, June 2014 

Today, 144 countries (~76% of all countries) have defined renewable energy targets. 
This is a tremendous improvement from 2004, when only 48 countries had such 
policies in place. The growth came mostly from low- to mid-income countries, as you 
can see in the following chart. 


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enlarge) 


Source: REN21 annual report, June 2014 

With 76% of world's countries now on board with growing the amount of renewable 
energy in their energy-generation mixes, the policies that allow renewable energy 
companies to develop projects - and to finance them - are in place in large portions of 
the world. 

That being said, there is still a lot of room for improvement in the policy landscape, but 
the main thing we can infer is that 76% of governments, including the strongest ones, 
are backing the growth of renewables. 

To Be Continued 

In this part, we went through the different kinds of renewable energy, the current profile 
of our energy consumption, and the reasons why countries around the world are 
striving to increase the amounts of renewable energy they generate. 

In the next parts, we will examine the investments in different types of renewable 
energy, the places of different technologies in our future energy mix, current grid 
integration issues, and the profitability and growth potential of renewable energy 
technologies. 

 


 

Part II 

In this part, we will go over investment flows in different renewable technologies, think 
about the future role of renewable energy, and discuss the case of Germany. 


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Investment Flows 

Examining the investment environment of renewable technologies over the past 10 
years reveals a true growth story, from $40B in global investments back in 2004 to 
$214B in 2014. That is an 18.5% CAGR. The following chart reveals another story, that 
of Germany. 

(click to 
enlarge) 


Source: REN21 annual report, June 2014 

Over the past three years, global investments in renewable energy went down from a 
peak of $279B in 2011 to 2013's level of $214B. There are many reasons for that, but 
the main ones, in my view, are: 

1. Europe's attempt at repositioning its renewable energy market, happening mainly 
in Germany. 
2. Reduced costs, mainly of solar modules, enabled the world to build more projects 
for less investment costs. 


Let's further understand where investment in renewables comes from. 


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enlarge) 


Source: REN21 annual report, June 2014 


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(click to 
enlarge) 


Source: REN21 annual report, June 2014 

Except for Europe, we can see most of the world is growing its investments in 
renewables, although in a bulky manner. In 2013, China invested more than all of 
Europe for the first time, which demonstrates the ongoing growth of China vs. the 
world. Of course, the reduced cost of investing in solar distorts the real picture, given 
that 53% of all investments in renewable energy went into solar. 


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enlarge) 


Source: REN21 annual report, June 2014 

It's fairly easy to see that the majority of new investment is going into solar and wind, 
which offer the best economics to deploy as of now. 

Let's go back a second to a chart I attached in the last article. 

(click to 
enlarge) 


Source: REN21 annual report, June 2014 

As I said, the reduced cost of solar just explains one part of the story; the other part is that of Europe and Germany. 


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Germany: The Chicken and the Egg 

I like to think of Germany's solar story as that of the chicken and the egg. Which came 
first? It might be an interesting debate for game theory professors. I claim that 
Germany sacrificed its own power market for the world, without ever intending to do so. 

"Energiwende" is the German phrase for "energy transition." In 2010, Germany had 
outlined its Energiwende targets, including: up to 90% reduction in greenhouse gases 
emissions and achieving 60% share of renewable energy in the energy mix, all by 
2050. 

 

From 2006, when Europe reached the level of 1 GW of annual solar installations for the 
first time, that figured quickly ramped up as more European countries joined Germany 
in its pursuit of renewable energy. In 2010, 2011, and 2012, Germany installed about 7 
GW of solar, annually. 

When Germany and Europe started ramping up the installations of solar, the Chinese 
industry was nearly nonexistent. To provide developers with incentives to develop solar 
projects and other renewable projects, a very fat rate, unimaginable these days, was 
offered for electricity generated from these projects. 

These "fat" rates, in many cases locked for 20 years, enabled developers to achieve 
lucrative IRRs on their projects. It also burdened utilities to a great degree, as they 
were forced to purchase that electricity from those developers, which in some cases, 
were residential PV system owners. 

The drastic rise in European demand for solar did not go unnoticed by the Chinese 
solar industry, which quickly ramped up its production capacity. It was that production 


capacity that enabled them to reach the economy-of-scale they enjoy today and reduce 
costs by a staggering rate. Prices plunged as supply grew well beyond demand, and 
the market forces did what they do best. 

In the meantime, Germany's utilities were losing a lot of money by purchasing 
electricity from developers at prices that reached $0.43/KWh in some cases and selling 
it to their customers at market prices of lower than $0.10/KWh. Costs began to mount 
and quickly forced the Germans to cut subsidies. More than that, given the debt crisis 
situation in Europe, Germany started to think about fixing the situation by charging a 
renewable tax from electricity consumers. 

Recently, that tax was announced to be close to 6.42 eurocents per KWh in 2014, 
which is a huge fee. That tax issue further escalates as we speak. Many politicians 
jumped onto the wagon and suggested to include different added components to the 
suggested tax as a support for energy-intensive industries, as a compensation to 
utilities for falling electricity prices and more. 

Germany's renewable energy race was the trigger that enabled the cost of solar 
modules to plummet; now, it has to face its past, when it offered very high subsidies 
without thinking ahead. If the subsidies were laid out today, given the much better cost 
of solar, Germany's problem would have never developed. But if it had waited, very 
cheap solar modules would not be available, as the solar industrywouldn't have an 
incentive to grow capacity. Hence, the chicken and the egg problem. 

After the expansion of the Chinese solar industry and the plummeting prices of solar, 
project developers could achieve lucrative IRRs (7%-10%) even with very little or no 
subsidies in many electricity markets around the world. Pursuing a renewable-rich 
energy mix using no subsidies (or very low ones) is the driving force behind 
governments around the world setting aggressive solar installations targets. 

The Grid-Connection Issue 

Until economical energy storage is available, solar power can be used only during 
times of sunlight. The current role of solar energy in a country's electricity mix is that of 
reducing the amount of fossil fuel-based base load power plants. 

There are two main kinds of power plant: base load power plants and peaking power 
plants. The firstkind is meant to generate a constant level of power throughout the year. 
These plants generate the base load amount of power demanded by the consumers; 
they do not fluctuate in output over time to a great degree. 

Peaking power plants are meant to generate the electricity demanded by consumers 
during peak hours of the day, when we use a lot of electricity. The causes for peak 
demand include air conditioning, TVs, computers, water heating, and more. These 
plants utilize a responsive capable technology, such as natural gas turbines, that can 
be ramped on and off fairly quick. 

Let's take a look at a German intra-day power consumption chart: 


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In this chart, I used a yellow marker to mark the base load power needed by Germany 
on that particular day. You can see it's about 33 GW. Now, let's focus on conventional 
power plants: 


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I hope you'll excuse me for my drawings. This time, the yellow marker shows the 
minimal power generation needed from conventional power plants, which you can see 
is about 18 GW at 3:00 PM. The red markings show the maximum generation Germany 
needed from conventional power plants that day, which is about 33 GW at 10:00 PM. 

Let's analyze the situation. In Germany, according to the above chart (which represents 
the summer), there is a need for 18 GW of base load conventional power plants and 15 
GW of peaking power plants, which start to ramp up at 3:00 PM. 

If no solar and wind were used, given that about 5 GW constantly comes from 
hydropower, the conventional power plants would have needed to supply a base load 
of 25 GW at 3:00 AM. Then, at 12:00 PM, conventional would have needed to supply 
an additional 15 GW of peaking power plants. 

The meaning for utilities is that they had to retire about 7 GW of conventional base load 
power plants. If more solar will be adopted (as is expected), it will push the minimal 
generation needed by conventionals at noon even lower, thus decreasing the base 
load (meaning more base load power plants will be retired), and increase the amount of 
peaking power plants needed (to ramp back to the 33 GW mark at 10:00 PM). 


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This conventional power plant transition to fit into a renewable-rich energy mix carries a 
cost on utilities, as they need to handle the extra "smart-grid" work and operate more 
and more gas turbine-based peaking power plants and fewer base load plants (which 
are cheaper to operate). 

It's easy to see it would be logical for a government to compensate these utilities for 
the added cost of transition and share the cost by taxing the solar power plants a small 
KWh-based charge. Given the current roadmap of solar cost and price, that would still 
allow developers to achieve those lucrative IRRs. 

It's also easy to see there is a limit to how much solar can be integrated in a grid (as a 
certain amount will exceed the country's peak demand and completely eliminate base 
load power plants). But don't get nervous; the limit is more than 20-30 times the current 
global mix (0.7%) on a global scale, without energy storage. 

That day in Germany, the country had 20.9% of its electricity generated by solar. 

(click to 
enlarge) 


This will push solar installations to decades of growth, even if it is able to supply just 
10% of global electricity demand by 2040 (up from 0.7% today and a conservative 
estimate, in my view). Even without storage, getting to that 10% solar share is very 
feasible. 

To Be Continued 

In this article, we went through the global investment profile and saw the trends in 
investments that illustrate the change from Europe to Asia. 

We went through the "chicken and the egg" story with Europe and Germany, which had 
an extremely important role in enabling the feasibility of solar installations around the 


world, but are paying a high price, as they used huge subsidies to accomplish that 
goal. 

Finally, we talked about the grid integration issue and saw that we are nowhere near to 
fully taking advantage of solar power on a global scale, even without storage. Of 
course, storage makes the potential of renewable energy to supply close to a 100% of 
electricity generation. 

In the next part, we will focus on why solar power is the key player inside the 
renewable energy story, the growth rate the solar market can reach in the next few 
decades, and the profitability and growth of the industry going forward. 

 


 

Part III 

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. 


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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 


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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: 


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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. 

 

 

Disclosure: The author has no positions in any stocks mentioned, and no plans to 
initiate any positions within the next 72 hours. The author wrote this article themselves, 
and it expresses their own opinions. The author is not receiving compensation for it. 
The author has no business relationship with any company whose stock is mentioned 
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