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Vertical Farming – Controlled Environment Ag Market Brief – Future Bright

Vertical Farming – Controlled Environment Ag Market Brief – Future Bright

Market Brief – Vertical Farming – Future Bright LLC

Vertical Farming is a technique in Controlled Environment Agriculture utilizing LED lighting and control systems to grow plants with consistent quality, year-round. Interest and investment in Vertical Farming is still in its early stages, and, combined with other CEA techniques, offers a differentiated growth area for investors that is ripe for innovation.

Investment in agricultural technology is growing and reached $4.5B in 2015. Still, Upstream Production Infrastructure, like Vertical Farming, Control Systems and Greenhouse Growing, remains a small part of overall investment for US markets. Indoor agriculture attracted $77M of the reported total in in 2015 (AgFunder). This total grew to ~$250M in 2016, 222% growth and we estimate will exceed $450M in 2017. Globally, this number is likely to be around 5-10X through 2018, with higher end estimates including medicinal crops. The focus of this brief is food.

Vertical Farming is increasingly being seen as part of the puzzle in creating a sustainable global agricultural system, as seen in the needs and opportunity graphic below.

Building a Sustainable Agriculture System (Opportunity / Needs Assessment)

Early Growth: There are a number of secular drivers fueling growth in Vertical Farming. These factors include improved economics, rising demand for local foods, and an increased focus on water and weather-efficient growing in order to improve food security in the face of climate change.

Vertical Farming is reaching economic parity in many markets due to falling costs of technology, the rising cost of water, improved growing expertise and demand for clean, local foods that are non-GMO and produced without pesticides. It is estimated there are 20+ commercial developments underway in the US with dozens more in planning. 2014 represented an acceleration of investor interest with the notable investment of ~$30M by Goldman Sachs and Prudential into Aerofarms, a company that has garnered over $107M in investment as of 2017. Aerofarms is working to develop a 70,000-ft2 facility in New Jersey. Aerofarms, like many of its US counterparts, claims they are building the largest and most productive vertical farm in the world. In our view, the largest and most productive vertical farms operate in Japan, a country with a long history of addressing its resource scarce position through technology. Japan has over 150+ commercial scale vertical farms, many of which have proven profitability while employing leading water, energy and labor efficiency (New Bean Capital, Future Bright). Still, Aerofarms signaled a number of initial and follow-on investments in Vertical Farming projects and companies, including more US investment in Greenhouse growing as well.

Market Signals – San Francisco-based Plenty announced a $200M funding, the largest ever for indoor Ag, led by Softbank’s Vision Fund and venture arms supported by Jeff Bezos and Google. We expect this deal to catalyze further interest and bet placing by investors around the world. 2018 could be US Vertical Farming’s first billion dollar year. 

The Science & Tech: Vertical Farming technology is evolving rapidly to meet the needs of a number of market models. While Plant Science relatively well known for standard, quick harvest cycle, leafy greens, the key for vertical farmers is to tune their system to deliver the proper things (PAR or light from LED’s, Nutrients and ambient conditions: Temp, Rel. Humidity) at the proper time. Any investible model should have this process down pat for its’ core varietals. The controlled environment is allowing growers to experiment with things like simulated sunrise/set, strobe lighting, water stress, utilizing ultraviolet and green PAR spectrum and much more. Databases of plant science variables and growing techniques are growing across the industry. Eventually, the industry needs to evolve to grow more robust, value-added varietals from a whole-diet nutritional or nutraceutical angle. Additionally we see systems integration and vertical integration (from energy to seeds to feeds) as all part of the opportunity arc as Vertical Farming evolves.

BREAKOUT BOX – Where Does It Go? Future Bright LLC is focused on a future with healthy food systems. We share the vision of a Berlin think tank that articulates a viable economic global demand for 3000 ‘Whole Diet’ Integrated Agriculture Facilities that have 37 stories, including 5 sub-levels for aquaculture. These farms would each produce 3,500 tons of fruits and vegetables and 1400 tons of tilapia fillets, and cost $200M to construct pointing to an industry need for $600B+ in infrastructure investment. Add services and value-added product and the market for CEA tops $1T, assuming no serious environmental disruption.

Apples to Oranges? What makes one Vertical Farm different from another, or from an investors perspective, a better investment? There are really three aspects to compare: Technology, Strategy and Experience. On the technology front, models should be examined for how efficient they are in terms of water, energy, space and carbon per pound of food produced. There are small efficiencies to be gained from optimizing building envelope, chassis design, HVAC and LED’s and these must be examined fully. The second aspect of the technology is the quality of product that it produces – are the plants nutrient dense and how to they compare to conventional and organic product alike. The dialogue is evolving in this space and is at the heart of the debate between soil-based organic growers and vertical farmers.

Second is strategy and we’ve seen a number of market models from direct distribution to long-term contracts (volume and/or price) with distributors or retailers. The distribution model has a big impact on profitability with higher profit strategies presenting investors with taking the risk of merchant pricing.

If the Climate Change Thesis is correct, taking merchant risk with highly predictable, weather-agnostic food production isn’t a misplaced long-term bet. If the Vertical Farm is relying on premium pricing (up to organic levels) then we’d like to see a plan geared around bringing that price down over the course of three years to de-risk the model. If the Vertical Farm is focused on a few products, is there a plan to expand into higher value varietals or partner with a value-added producer? We also include data and control systems under the strategy umbrella although it overlaps with technology. Are control systems being built in-house, developed in partnership or simply outsourced? Co-development in partnership may be the most ideal given the specialization effect and the ability to raise investment into each entity separately. There’s also the question of database design. How robust are the data sets, do they extend beyond baseline varietals and into the opaque world of distributor and market pricing. Do they integrate with weather; soil and climate data to predict which varietals will be most valuable for the next cycle.

Finally, there is experience. We’ll note a number of the notable raises into the Vertical Farming space involve companies which have not yet gone to market. They’ve raised millions but haven’t sold a vegetable or proven they can manage the perishable product supply chain. This presents a challenge, as the food business is ultimately a problem solving exercise built around sales and marketing. By contrast, there are many Vertical Farming companies with years of growing and selling experience, or those developing production assets alongside a retailer, taking the sales challenge out of the equation. From an investment perspective, we prefer putting our money with the later. While no two vertical farms are exactly alike from an investment perspective, they all share a similarity in that they address certain environmental and social challenges.

Environmental Challenge: Vertical Farming is arriving not to soon to address some critical environmental challenges. Numerous causes of disruption to the food supply, like drought conditions, excessive heat, hot wind and dwindling fresh water reserves point to challenges for conventional agriculture. Excessive heat is already leading to significant crop failure, as reported in 2016 by one of the largest South American agriculture companies, AdecoAgro. Soil Health is rapidly deteriorating, with the UN FAO recently stating that the world, on average, has only 60 years of farming left (UN, Scientific American). There is a critical need to implement a hedge against the risks posed to the food system by scarcity and climate volatility. That hedge is Controlled Environment Agriculture, including Vertical Farming, Integrated Aquaculture and other CEA techniques.

A Solution to Urban Decay: While many Vertical Farming models are re-utilizing urban brownfields, and the public money that comes with this strategy, others are building from the foundation up. Regardless of the strategy around the structure, Vertical Farming can bring much needed employment to urban areas that have seen an exodus of jobs for decades or more. The counterpoint to watch is whether automation threatens the bulk of these new roles in VF2.0 or whether these jobs can offer meaningful opportunities for both economic and skills advancement. What the Vertical Farms can solve for is food access into heretofore deserts for fresh food. The lack of quality nutrients is a contributor to many of society’s downstream costs like crime, low education rates and health costs, and many Vertical Farming companies have a stated goal of improved access. But supply, access and affordability is only one aspect of the challenge. Fixing the food deserts, and the long-tailed problems that come with them, is equally a challenge of education and convenience. Vertical Farms, and other CEA techniques, are uniquely positioned to solve this problem because they can be located within the food desert communities, source employment from them, and double as centers of education and community gathering.

A Solution for the Developing World: While the high energy footprint doesn’t make Vertical Farming an obvious choice for bringing sustainable food and purpose to the developing world, we feel that view could change over time given the abundance of renewable energy sources found in many parts of the developing world. Pairing Vertical Farming with a large geothermal or solar plus storage arrays does two things. First, it completes the technology leapfrog for developing communities from both a food and a energy perspective. It also creates the investment scale that could attract development organizations like OPIC and IFC that require large investment sizes to justify participation. Still, Future Bright LLC sees a better fit for another Controlled Environment Technique, Integrated Aquaculture and Hydroponics or IAH. This technology delivers whole-diet, and much needed protein, in the most efficient manner possible. Compared to Vertical Farming, IAH uses 1/3 of the energy to grow ~2 times the food. As we describe in the ‘breakout box’, we see the two technologies combining and are actively encouraging that within our stakeholder groups.

Economics: We propose that Vertical Farming model can achieve mid-to-upper single digit unlevered returns in certain markets through using traditional distribution channels. Returns can be enhanced in a number of ways by solving for direct distribution, accessing strategic channels, like restaurants or D-T-C portals, and through varietal diversification and value-added partnerships. Also, a number of innovative financial structures and project leverage can push returns into low-to-mid double digits, or higher. Certain niche models, in niche markets, can boost returns further but questions arise over scale and sustainability of pricing as the industry matures. Vertical Farming is in the early stages of a secular growth story because it is reaching economic parity in markets around the world, but also because it is a solution-based investment in terms of climate and social restoration.

 

Solutions-Based: Controlled Environment Agriculture solutions, like Vertical Farming, are economically viable today and will be more so in the future. CEA is a solution for delivering reliable, consistent quality, and food security, in the face of a predictable increase in Climate Volatility. Vertical Farms do not use soil and utilize between 90-99% less water than conventional systems. They can grow year-round in any weather. They shorten food transportation miles, reduce pollution and food waste, and can deliver food that is of superior nutrient quality compared to conventional food. They don’t require the use of pesticides or herbicides for growing and when paired with renewable energy, CEA presents the most powerful economic opportunity for society’s global pivot towards sustainability.

On The Follow: For a deeper dive of the technology, practitioner or investment landscape in Vertical Farming, Aquaculture, Renewables, Energy Efficiency, ESG/SRI platform development and more, please contact Future Bright LLC.

About Future Bright

Future Bright is a think tank and consulting company in the fields of sustainability and sustainable investing. Future Bright focuses on a diverse cross-section of themes including renewable energy, energy efficiency as an asset class, sustainable agriculture, equity strategies and green consumer trends. Future Bright has worked with project developers, fund managers and asset managers in developing frameworks, definitions, structures and investment products.

Future Bright offers executive management, project management, team construction, product development, modeling, sourcing, communication and investing services.

Disclaimer: This brief is for informational purposes only and was prepared by Future Bright for publishing and distribution attributable to Future Bright LLC. This is not an offer of investment of any kind. The information on sustainable investment opportunities can serve the basis of discussion with potential sponsors or project work that Future Bright can assist with.

Intellectual Property: Models and Concepts not explicitly otherwise stated are the intellectual property of Future Bright LLC and are not to be used or reproduced without attribution without written permission and/or compensation for services at market rates.

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Don’t Give Up

Don’t Give Up

Don’t give up. Not now. We’re too close.

I know a lot of people are frustrated and disillusioned with the state of politics and world affairs. I share those frustrations. But never before have the problems, and the solutions, been brought into to light in such a transparent and accountable manner. This, unfortunately, is the painful part about getting to the truth.

There is only one way to resolve that pain. We know the truth and now it is time for action.

Climate Volatility is a mathematical fact that requires our action. High waste streams and heat-trapping emissions are and will continue to alter the way we live for generations to come. There will be migrations and challenges to the food system but there is an action plan. We must go all-in on renewable energy, mandate ultra-efficient new building and build a sustainable agricultural system around soil-based organic farming, greenhouses and vertical farms.

Progress is being made. Over a trillion dollars has gone into renewable energy in the past three years and that pace is accelerating. In 2015, Solar energy installations in the US passed natural gas for the first time ever. This is in the face of direct and indirect opposition from a multitude of sources and not just the usual suspects (Warren’s Buffett’s utility interests in NV were protected by retroactive legislation against solar; Bill Gates continues to push a ‘more research is needed’ party line). We don’t need more research – We need implementation and a level playing field. But even without it, deployment is happening and it’s happening with a subsidy program that pales in comparison to fossil fuels. Clean energy is winning because its smarter, safer and cheaper and it will continue to make gains but more support is needed. There’s much more work to do and already the job growth in clean energy is outpacing other industry at record rates.

Bridge

The organic food movement has been growing rapidly for years and your choices have and will continue to reshape supermarket shelves and other delivery mechanisms. Co-ops and local foods movements’ are thriving and we are seeing the first hundreds of millions in investment go into Vertical Farming. Future Bright’s research points to a $600B opportunity in infrastructure alone for Vertical Farming.

Transforming our food and energy systems to be clean and resilient in the face of climate volatility is a priority but we have other pressing challenges and we are making progress.

Inequality is a mathematical fact that requires our action. Like you, I want to live in a world where people can work hard and do well. Right now, we have great challenges to that progress due to technological trends and structural impediments. If we don’t address these and provide a system for folks to work hard and do well, the money the ultra-wealthy have won’t mean much. We can keep pushing for an equitable and accountable tax system. It should be proportional or flat and smart people shouldn’t require personalized loopholes. This dialogue is making progress. We can’t call the market free if it’s not, if we are no longer the land of opportunity, then we must acknowledge that and act to change it.

There are other ways we can address the risk of inequality. One way is to support companies who are mandated to promote healthy social and environmental systems.

Good Companies are being born everyday. B-corporations are companies who promote healthy social and environmental systems. Co-ops and small business are, by definition, focused on people. Local businesses, as opposed to franchises, keep dollars in the communities where they are spent. Sustainability geared companies are easy to start because the problems and solutions are again so transparent and actionable.

I’ve started four efforts I’d love you to know about:

Future Bright LLC – a think tank and advisory that supports sustainable consumer products companies and investment strategies

Perpetual Sustainability – large-scale sustainable infrastructure

Future Bright Foundation – a non-profit effort – details coming soon, and

Sonic Bomb – a creative company that produces music and media in support of sustainability and positivity. I couldn’t be more excited for what we will release this summer!

Will all these work? Maybe, maybe not but I can tell you that each effort is designed around a different strategy to help restore social and economic systems and as risk mitigation for climate volatility. So should they? I would hope they should. I’d love your support and would love to support your efforts in our common goal. That’s right – we’re in this thing together, whether we like it or not. Get fired up, it’s the time of legend.

Crowdfunders and other circumventional finance pathways are flocking to good ideas and this brings me to my next point. The ‘No’s’ are becoming a smaller and lonelier crowd and technology will continue to build around these impediments.

Wallace

We can circumvent the corruption. Have you heard of Aspiration, the investment company that pays deposit interest 10X what your bank does and promotes sustainable investing. They’ve formed a partnership with Sierra Club and they let you ‘pay what’s fair’ for their services. How about Greenbacker, a renewable energy investment fund with a relatively low minimum investment threshold. Did I mention Thrive markets or hundreds of organic and superfoods companies you can support directly. Gather By is one I am connected to, that supports pollinator and earth restoration and here is the kicker, the product tastes great and is good for you.

Do you see your investment portfolio taking shape? Reach out…

Let me list a few other great ideas. Industrial hemp can clean up our soil and create a domestic manufacturing industry resulting in jobs and economic growth. Electrification of everything from vehicles to lawnmowers is a boon to innovators everywhere. These trends all point to enormous opportunities for liquid investors as well.

All these great and necessary shifts are happening now to take us to the sustainability platform, the new economy, one that works. Don’t think governments and large corporations aren’t noticing this. While many may be trying to hold sustainable change back…

Politicians, at all levels, are picking up the platform. It would be hard for anyone to say that Bernie Sanders platform isn’t popular and infectious. Popular is a hard quality to dispel but the ideas listed above are just what’s being carried out today by good men and women around the world. Bernie says it best, ‘It’s not about him or any one person, its about us and our children.’ The children believe in and support our efforts, and I’ve received more than enough personal confirmation of that to know it’s true.

They are watching. They are hoping.

There’s only one choice and it will be hard but it’s the one we’ve got.

The sustainability platform is the only platform that supports all people and the planet and allows for wealth creation.

This is an epic time to be alive. The thought revolution is now the action oriented sustainability evolution. There are now millions of young Bernie Sanders’, Elon Musks’ and Dalai Lamas’ planning, preaching, peace-ing and producing around the world. The pollination of the future happens now. Support it. Be it. 

To quote one more from Carl Sagan: “Don’t sit this one out. Do something. By chance of fate, you are alive at an absolutely critical moment in the history of the planet.”

Sagan

5 Numbers on Water

5 Numbers on Water

5 numbers about a given topic in hopes of stimulating a math based discussion of sustainability and sustainable investing.

This post will attempt to follow a form that does one or all of the following:

  • Illuminates a problem in the context of environmental or social systems
  • Illustrates where industry may have to shift behavior due to the problem
  • Ties the problem to the economic system
  • Highlights potential investment solutions

Today’s 5 focuses on water scarcity and degradation touching on both freshwater and saltwater systems and making the link to economic and social systems through food.

5Water

Disclosure: Future Bright is a think tank and advisory in sustainability and investing. Future Bright has worked with renewable energy developers, energy efficiency funds, assets managers and vertical farm engineers on progressing solutions towards sustainability. This note is not an offer of services or investment of any kind. This is a blog post for informational purposes only. Those interested in consulting services, design work or industry analysis should contact Future Bright directly. (www.futurebrightblog.com)

Five Thankful Eyes “I’s”

Five Thankful Eyes “I’s”

Here are 5 “I’s” to be thankful for in our global pivot towards sustainability. Let’s keep in mind the goals here; that is, the efficient and restorative use of resources for a healthy, prosperous and profitable future. When we invest in sustainability today, we improve our communities and our environment so that future generations can live together and enjoy the planet as we have. If we invest locally, in food and energy independence, we improve our own security and that of our families.

There’s been tremendous momentum for the clean energy revolution in 2015. The clean food movement is gathering steam and knowledge of the economic benefits of localization are growing.  Here’s 5 “I’s” we can be thankful for:

Innovation: Even with research budgets flagging in many areas of the world, the private and public sector continue to innovate with new technology to solve the resource problem. As global recognition grows that the resource problem is one of math and not ideology, we can hope that momentum should increase. Here are a few notable 2015 innovation trends you can discuss around your community:

  • Microturbines: In February 2015, two private companies LucidPipe, the manufacturer, and Harbourton Alternative, the investor, teamed up with the City of Portland, OR to install a 200kw microturbine system in the city’s water pipes.While not disrupting the functioning of the pipes, the microturbines use the energy of the flow to create electricity. For the gearheads: the 200kw system expects to generate 1,100 MWh’s of electricity per year, enough for 150 homes, which implies a ~63% capacity factor for the technology (equivalent to some natural gas plants). The $2M in energy sales over the 20 year PPA life implies a kWh price of around $0.10. Microturbines and other technologies that capture wasted energy are going to be big business. Here’s another such innovation just waiting to be unlocked.
  • HumanPower: Here’s your future business. With proven technology, you retrofit the flywheel in rowing machines, treadmills and elliptical bikes to capture the wasted energy created when someone works out. The energy charges a battery, which the gym uses in conjunction with a smart meter when electricity rates are high. Bring in a specialty finance company, also you, to finance the savings and share your portion with investors. On to your global roll out but you won’t be the only one promoting financial and technological innovation to save resources – the big fish are getting involved too…
  • Bill Gates is expected to announce a multi-billion dollar clean technology innovation fund at the start of this year’s climate summit (COP21)  in Paris. Announced in the NYT this week, the fund will fuel needed innovation in new clean technologies that streamline and improve efficiency in energy systems. Kudos to Bill and other well resourced folks for doing what needs doing and while innovation is necessary, what we need more than ever is the all-in implementation of proven technology…

Implementation: There’s a whole slew of investor ready technologies just waiting for implementation in our energy systems. Three in particular, whose prices have fallen between 60-90% in a few short years are Solar PV, Wind and LED lighting. These technologies enable clean power generation and the implementation of energy efficiency retrofits at a profit for investors.

While investment growth has been brisk, with over a trillion dollars financing clean energy projects in the last few years globally, we’re still missing the mark for wide scale adoption for a few main reasons.

First, politicians have yet to get on board, come to consensus and steer the ship towards a clean energy solutions. The evidence they need, jobs, a reduction in pollution and a boost to the domestic economy is readily apparent and documented. Hopefully, COP21, continued activism from voters and transparency on funding sources can help us re-establish the right course and construct of our political systems. We need guidance at the local level, in zoning laws, at the national level, in right sizing a 5-to-1 subsidy advantage in favor of incumbent industries, and at the global level in the form of cooperation.

Second, Financial institutions are dragging their feet. While there have been a number of newsworthy commitments by banks to invest in clean energy and many of them have funded portfolios of projects, we’ve yet to see the wide scale pivot to build pathways to dedicated investment. 401K and other employ plans should all have a placeholder to participate in investments in clean energy across the capital stack that rival credit alternatives. Progress is being made at the corporate level but product groups are moving more slowly. You’re hear a lot of talk about investment opportunities in emerging markets, clean energy and water conservation but finding places to put your money is another story all together.

Part of the problem is the financial regulations prohibiting banks from investing balance sheet capital. While prudent in many cases, I view this as a large impediment to galvanizing investment into sustainable infrastructure. The net effect is that product innovation is low and lead times are exorbitantly long. It’s much easier for the banks to process innovate and ignore content all together.

An associated problem is the challenge of capital formation. Beyond the retail, private wealth and institutional landscape, the bulk of capital is tied up in the opaque world of private equity and venture capital. While there are offerings for clean energy and other sustainable investments they are difficult to track much less access for everyday investors and savers.

While the Impact investment arena is growing at a healthy clip, still more investment and financial innovation is needed to unlock a smooth pathway for capital formation and make these efforts more than just symbolic.

Recent regulatory changes on crowd equity funding and notable investment efforts from the likes of Howard Buffett’s i(x) are bright spots from opposing poles. While crowd equity funding is sure to evolve, the $1M annual limit is likely to limit any truly transformational results from this avenue alone.

Against a backdrop of structural headwinds but with economic tailwinds, the clean energy transformation has performed admirably. In the US, clean power made up 60% of new generation in 2015 and many areas of the globe are crafting plans or have significant investment already underway.

FB1

Incubation: Young minds are reading. Today’s generation is coming up well-versed on high waste streams, climate risk and scarcity. Thanks to the internet and some progressive journalism from the majors (9 people own 1600 major news outlets) young people cannot only learn but use there voices to ask their teachers, parents and friends why we aren’t acting more decisively. Circumventional finance platforms like Mosaic, AgFunder and others are a direct result of these shifting winds but there net effect is still small next to the juggernauts of capital controls. Will the old guard shift beyond symbolism and listen to the voice of the new generation? Will politics recognize the majority call to action? One thing remains sure – the good ideas are incubation in the minds of the young and evidenced across the entrepreneurial landscape of the internet economy.

While the young give us hope; old ideas are rooted in the pivot to clean energy and sustainability as well. The insulation comes in the form of savings and security…

Insulation: Energy Efficiency is a creeping up as possibly the best risk-adjusted return option available today. When we lower operating costs, we insulate our business or our family from shocks to the economic system, like lost jobs or customers and general financial cycles. That’s exactly what early investors in energy efficiency are realizing, stability of returns reaching into the double digits for all stakeholders in many cases.

Doubly, both Efficiency and Renewable Energy offer security benefits at the national, state and local level. A distributed renewable grid system is a more difficult target for a terrorist attack, responds better in an environmental disaster and has none of the associated costs of fuel volatility of non-renewables. Energy Independence and thus security through renewables and efficiency should be hailed as the most American thing we can do. The companies that made fortunes on the last regime and fossil fuels should help us pivot (they have the capital), retrain their workers (it’s the right thing to do, again American) and continue to make fortunes. I can live with that and I’m pretty sure our children can but the move must be more than symbolic. It must be unconditional and tectonic not incremental, just like the banks. Then we can thank them for it instead of scratching our heads and wondering why we are liquidating the planet for a few more good decades. This brings us to inspiration – for our problems are many and without hope – it’s hard to be thankful for anything.

Inspiration: We can draw our inspiration from many places. Together, we’ve accomplished many great things and it hasn’t been easy. To all people fighting for a future that is profitable today and prosperous tomorrow, together we gather strength from each success. From the young around us, still rightfully enchanted by our beautiful world, to the artists, poets, journalists, pioneers, politicians, investors and ordinary citizens using their voices and positions to promote sustainability, our ability to sustain ourselves, we can say thanks.

I say thank you.

More people join everyday and slowly the impediments recede, the logic of pushing against becomes harder to defend. Mostly, we might draw our inspiration a beautiful day or a rising sun, which powers all life and can deliver 20,000 times the electricity we are using today.

Sunrise

Return to FUTURE BRIGHT

Future Bright

Future Bright

Future Bright’s focus has been on evolving pathways for institutional investment into sustainable infrastructure, equity and credit strategies.

By focusing the farthest upstream on the supply of food and energy these solution areas unlock shared savings for higher value added economic growth downstream.

For investors, the concept can be described as localizing our food and energy dividend using proven technology that reduces supply chain risk.

The three pillars of food and energy localization are energy efficiency, renewable energy and controlled environment agriculture a.k.a. Vertical Farming. For Infrastructure, the investments must satisfy three conditions.

Infrastructure Focus

  • Growth Markets with compelling economics
  • Markets where structure and financial innovation can unlock value
  • Investment that offer co-benefits / risk mitigation of social and environmental issues

Energy Efficiency assets are created when third party finance funds invest in energy efficiency retrofits for commercial, residential or industrial hosts. The retrofits can include LED lighting, insulation, HVAC and smart grid technologies The fund vets energy services companies and approves projects within the pipeline that meet criterion for credit quality, project scope and investment viability. The market size for C&I retrofits in the US alone is estimated to be around $300B, capable of unlocking shared savings of over $1T. Energy Efficiency Assets solve a market inefficiency and deliver returns in the form of highly predictable shared savings with upside optionality to investors. Returns attributable to investors can range from high single digits to the 30%+ on individual projects. As the market evolves, securitization, strategic buyers, improving technology and policy mandates will drive growth and sustain returns.

Additional co-benefits include keeping retrofits off-balance sheet, improved Quality of Life improvement for building occupants, cost predictability in capital budgeting, a reduction in carbon footprint and unlocked downstream savings to spend on higher value economic growth.

See Future Bright, ‘The Sleeping Giant’ for more on Energy Efficiency as an asset class.

Renewable Energy projects represent one of the fastest areas of growth for infrastructure worldwide. The deployment of proven technology in wind and solar PV is creating an investable asset class in the form of project equity, tax equity and project finance debt that can deliver attractive returns to investors. Additionally, the elimination of an operational supply chain and close to zero marginal cost of productivity are core de-risking features for renewable energy investors. Revenue is predictable and visible often for decades into the future. Renewable Energy project returns vary by class, location, size and other factors but generally can range from high single digits to mid-20’s unlevered with aggregate portfolios targeting returns in the low teens. Annual investment is averaging around $300B.

Additional benefits include a reduction in the carbon footprint, predictability in energy costs, job growth, energy security and access.

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Solar and Wind made up >60% of US installed capacity in the first 9 months of 2015. Oil, Hydro and other sources were zero or sub-1%.

Controlled Environment Agriculture (CEA) or Vertical Farming is a growth area targeting rising demand for clean, local and secure food supply. 15 commercial scale farms are in operation in the US with dozens more expected to come online in the near future. Falling technology costs, improved growing methodology and the need for resource efficient solutions in agriculture is driving growth and economics for CEA. An economic baseline has been reached for about a dozen varietals of leafy greens with value added potential in nutriceutical and consumer packaged goods (CPG’s) markets. The market for local fruits and vegetable was $7B in 2014. To reduce the carbon footprint of grid tied CEA, both renewables and efficiency can be applied.

Benefits include food security, health benefits, consistency, urban renewal, reduces water and transportation costs.

CEA1

Join the Future Bright distribution list or reach out for more on the CEA space.

Turning now to equity and credit themes, the focus becomes a factorized approach to both positive and negative drivers with respect to sustainable business models. Increasingly, investors are recognizing sustainability or ESG factors as being important to current bottom lines and future viability. Future Bright expects a long-term tailwind to shape both equity and credit market valuations guided by these and other factors:

Sustainability Factors

  • Energy / Revenue: Businesses can achieve a strategic advantage when they lower their cost per unit of energy required for one dollar of revenue. With renewable energy integration, many corporates are recognizing this benefit (see, Solar Power Growth Story).
  • Water / Revenue: Water supplies are increasingly at risk and strained throughout the globe presenting a particular risk to social and environmental system. High water user and businesses predicated on high water use are at risk. Efficiency technologies and business that create revenue with lower water intensity are set to benefit.
  • Useful Life / Replacement Cycle: With resources running out, businesses need to pay close attention to the replacement cycle for natural capital stocks their operations depend on. Sustainable fibers can right-size the useful life mismatch for industries in paper, plastics and other durable goods.
  • GHG Footprint / Revenue: It is recognized that increasing the intensity of carbon, a heat trapping gas, in the atmosphere increases the volatility of weather including rainfall and raises the probability of drought conditions and powerful storms. These factors affect economic activity directly. The global community is moving to address this risk to economic, social and environmental systems. Businesses that get ahead of the carbon curve will experience less disruption. Solution providers will benefit.
  • Future Waste Liability: Companies with high waste stream and large extraction footprints should be moving to address scarcity and detrimental waste impacts. Awareness is growing as to the health impacts and costs of toxins in food and energy systems.
  • Physical Supply Chain: Globalization only works when environmental and social systems are unaccounted for. However, these systems are required for healthy economic systems. Localization feeds vibrant economies while reducing transportation, health care and storage costs. Long supply chain credit is at risk.
  • Subsidy Risk: Subsidies exist in nearly every major industry. In mature industries they are embedded downstream with consumers, in developing industries they are embedded upstream with project developers.Carbon
  • Political Transparency: Sustainability is becoming a political issue as facts about health costs, climate change and public governance become more transparent. There is no reason to expect this trend to reverse given increasing access to information. Political systems can take decades to reshape but the early stages of recognizing the private sectors impact on social and environmental capital is taking shape. Businesses that recognize scarcity and waste streams, as a mathematical driver and risk factor should benefit. Politicians that do the same will be increasingly supported. It’s time to remove ideology from progress towards prosperity, by focusing on the math; we can.

 

Future Bright is looking for its next assignment. Does your organization want to explore these mega-trends in detail, build models, meet practitioners, make investments, design product and forge private-public partnerships? Let’s collaborate. ken@futurebrightllc.com

Disclosure: Future Bright is a think tank and advisory in sustainability and investing. Future Bright has worked with renewable energy developers, energy efficiency funds, assets managers and vertical farms on progressing solutions towards sustainability. This note is not an offer of services or investment of any kind. This is a blog post for informational purposes only. Those interested in consulting services, design work or industry analysis should contact Future Bright directly. (www.futurebrightblog.com)

 

The Sleeping Giant: Energy Efficiency Asset Class

The Sleeping Giant: Energy Efficiency Asset Class

The Takeaway: We’ve been sleeping on a pile of cash. The opportunity in Energy Efficiency is being driven by improving technology, supportive policy and adapting financial innovation. Innovations in the renewables industry will speed the creation of an energy efficiency asset class. Energy Efficiency as an asset class represents an attractive uncorrelated alternative to hybrid fixed income instruments. The opportunity represents another trillion-dollar sustainability option. It’s time to wake the Sleeping Giant.

EE1

The giant is snoring loudly—he’s waking his neighbors—there’s dollars to be made. In July 2014, HSBC estimated the investment opportunity in energy efficiency could be worth up to $365B globally. The opportunity in the US alone could be around $200B (HSBC, Deutsche Bank). The bulk of that opportunity lies in retrofits to existing commercial, industrial and residential buildings.

Risk-Reward: From an investment lens, capturing waste and turning it into dollars through energy efficiency shared savings should be quite attractive. After all, no one is competing for these wasted dollars; they simply evaporate from the bottom line. Investment vehicles to access these captive returns are gaining recognition because they pool a portfolio of shared savings retrofits and give investors access to potentially uncorrelated returns. Depending on investment structure, energy efficiency can be seen as a hedge against a slowing economy for both businesses and investors and as a potential credit enhancement for the business and or tenet (through lower operational costs).

Still, complexities in the marketplace have made waking the giant more difficult. Stakeholder misalignment and opacity in commercial credit standards have hindered strategic origination and investor comfort. Some of these impediments seem to be lifting as adaptive policy, awareness and the search for diversified yield drive interest.

The value of retrofits is determined by the payback period for retrofitting with new technology and financial structure. The payback period is determined by the cost of new technology and energy prices. As the cost of technology falls or energy prices rise the value of retrofits increases. Further, retrofits often hold more value for businesses where facilities are operating for 8-16 hours per day.

At the technological core are light-emitting diodes or LED’s. Lighting efficiency is measured in lumens per watt or the amount of energy required to produce light. The more lumens, the brighter the light. The graphs from the US Energy Information Agency show us that LED’s are ~6X more powerful than incandescent bulbs and can last 30X as long.EE3EE2

The cost of LED lighting has fallen more than 80% since 2010 making payback periods often less than a year. Let’s illustrate with a simple example.

Building A has 100 60W incandescent lights (IC) and is exploring the value of an energy efficiency upgrade to LED’s. Lights currently run 16 hours per day and energy costs are $0.15/kwh.

EE4

For our example, we assume that LED equivalents are four times more expensive than IC comparable. Channel checks show competition and gains in efficiency that are above and beyond the analysis above.

EE5

Further gains in technological efficiency are expected while cost declines are predicted as well. The EIA forecasts lumens per watt to reach 150 by 2020 with a concurrent cost differential to be around 2. Regardless, the current environment appears to afford enough excess return (do we call it uncorrelated alpha?) to satisfy all required stakeholders at the tea party.

This trend bodes well for businesses geared to LED’s like vertical farming. Contact Future Bright to learn about transforming trends in sustainable agriculture.

LED are one facet of the energy efficiency equation. Gain and intelligence in smart grid technology can optimize and building energy usage further. Green boilers, grey water systems and improved insulation add to the bottom line and one cannot overlook the omnipresent chatter on the benefits of batteries and battery price parity (See Future Bright’s upcoming article, ‘Closing the Loop’ on batteries).

It is clear from the above example for LED’s that a compelling opportunity exists in energy efficiency retrofits but how do we unlock these saving. There are many challenges to scaling the market including matching the capital expenditure cycle for businesses, stakeholder misalignment and origination and scaling issues. We now address a few of the policy and financial engineering innovations addressing these impediments.

Financial Innovation / Supportive Policy:

PACE or Property Assessed Clean Energy is a means of financing retrofits through an increase in property tax liens. PACE is an innovation born of California that is now spreading nationally and from the residential market into the commercial market. PACE is attractive to financiers due to the lien status and value of residuals available in securitization. PACE programs continue to work through hurdles of aligning interests with the mortgage industry and bridge loan requirements but interest and investor appetite appears to be scaling.

Energy Services Agreements (ESA) fund off-balance sheet retrofits in exchange for shared savings. The shared savings are split between investors, investment managers and energy service companies in an innovation to overcome capital expenditure hurdles and bring new investors to the segment. ESA’s may prove attractive as they allows hosts to realize operational cost savings immediately with no capital expenditure. ESA’s are also less sensitive to regulatory or incentive structure although certain models could benefit from tailwinds in these areas. Challenges that exist in benchmarking and portfolio construction can be addressed with strategic origination channels, technology and insurance. ESA typical resemble the power purchase agreement (PPA) an innovation used to unlock financial interest in the solar market. In the case of ESA, contracts are for savings units as opposed to produced energy.

EE Loan: Traditional secured loans may provide more comfort for investors targeting and stable bond like return. Energy Efficiency loans can take many forms with some allocating a mix of shared savings in addition to a fixed rate of return. Collateral can be extended beyond the retrofit equipment in some cases.

Policy Support is driven by the will to invest in a low carbon economy. Efficiency fits into the equation of economic value add through localization. The dual mandates of mitigation of climate risk and more economic resilience through reduced operational cost volatility should keep policy support accommodating.

There are numerous other iterations in the marketplace vying for access to captive returns from energy efficiency retrofits. As the market scales and securitizations increase, more investors are sure to be attracted to the risk-reward characteristics and expectations for continued improvements in technology.

Investments: In terms of investing in energy efficiency—there are many potential articulations from securitized bonds, to equity, to PE-style investment vehicles. One company worth mentioning is Hannon Armstong (HASI). HASI is organized as a sustainable REIT and invests in renewable energy and energy efficiency projects typically in the form of loans. The stock is up 39% year to date and sports a 5.46% dividend yield so investors may want to consider relative performance.

From a platform perspective, large investors and institutions should take a close look at building capacity in the energy efficiency asset class. Some are taking note, as evidenced by GE’s announcement this week of the formation of Current, a wholly owned subsidiary to capture momentum in new energy trends including energy efficiency. GE is reported to have committed $1B in balance sheet to the problem. Now let’s see if they can solve the strategic origination problem.

One thing is for sure. The Giant is no longer sleeping deep. He’s yawning and beginning to stretch. Soon he will carry those who took notice of the opportunity.

Disclosure: Future Bright is a think tank and advisory in sustainability and investing. Future Bright has worked with renewable energy developers, energy efficiency funds, assets managers and vertical farms on progressing solutions towards sustainability. This note is not an offer of services or investment of any kind. This is a blog post for informational purposes only. Those interested in consulting services, design work or industry analysis should contact Future Bright directly. (www.futurebrightblog.com)

Incubation – The Vibrant Loop

Incubation – The Vibrant Loop

This week a town called Columbia, MD, designed by James W. Rouse, became the 4th American city to join the 100% renewable energy crowd. The others; Burlington, VT, Aspen, CO and Greensburg, KS, make up an elite crowd recognizing the benefits of clean, local energy production. Long before renewable energy made prudent economic sense, as it does today, Columbia MD has been innovating as a sustainable community. In fact, Columbia’s design was premised on sustainability.

For his part, Rouse was a pioneer other city planners and investors would do well to study. In his design, Rouse interspersed concentric socioeconomic bands around a village center each with its own natural features and public amenities. The integrated design sought to lower social, religious and economic barriers.

Rouse believed that diverse co-habitation of social and economic spheres led to resilience, understanding and intelligent solutions to common societal problems.

Columbia inked its participation in the 100% renewables crowd through a combination of a 25MW solar array and the purchase of wind energy credits.

Columbia is close to Future Bright’s heart because Future Bright was incubated there. Growing up around diversity proved to be foundational. Future Bright has extrapolated the idea of Columbia’s integrated design into the think tank concept, the Vibrant Loop. A few notes about the Vibrant Loop follow:

The Vibrant Loop is based on biodiversity, social diversity and food and energy independence. Promotion of a Natural Economic system is paramount for the continued success of society.

The Loop’s design affords free range livestock grazing and natural fiber farms, fueling revolutionary manufacturing. A vehicle-less core sports forestland, biomes and vertical farms.

5F

Localization supports a high level of employment while import-export optimization targets lowering health care (clean food and energy systems) and other social costs (high employment/education reduces crime, drugs, etc,.). In a sense, the community design becomes and education system.

Zoning laws promote efficient building and an allocation of shared savings vs. a benchmark as a long term incentive. Stabilizing cash flows for service sector employment minimizes local boom-bust.

Technology is used to provide transparency on goal, public sector spending, manage traffic and more. Transparency and accountability reduce the potential for corruption.

In order to build the Vibrant Loop, we need investors and we need the technology sector. Congratulation Columbia and the other 100% renewable energy cities, you’ve made us proud but there is more to do. The majority of American’s would like to join you but in order to do so we need easy economic choices to do so. We need policies and politicians that understand sustainability and the risk of not investing. Awareness is growing but we need your voice to do more. We can do it.  May we do it together.

Goldman: Solar = Yes / Coal = No

Goldman: Solar = Yes / Coal = No

If you saw Future Bright’s post earlier today on Goldman’s Coal divestment, you understand the second part of the title.

As for the first, Goldman and Sunedison (SUNE) today announced a joint $1B investment vehicle warehouse to construct and purchase operating renewable energy assets. Goldman’s investment vehicle West Street Infrastructure Partners III (WSIP) will invest $300M of equity while Bank of America, Deutsche Bank and Morgan Stanley will offer up $700M in debt commitments.

The investment warehouse is expandable up to $2B if certain conditions are met. It is the second such investment warehouse established between Sunedison and various partners to develop the company’s sizable project pipeline.

Sunedison’s equity has been under pressure lately, falling roughly 40% since announcing earnings earlier this month, amidst concerns of the impact of falling oil and gas prices on solar and wind development and the company’s ambitious growth strategy, including the acquisition of Vivant Solar (VSLR).

With the Goldman warehouse, the company should be able to meet its growth plans through 2016.

In terms of positive catalysts for solar and wind development, there are a number to point to:

  • The Clean Power Plan calls for a drastic reduction in the carbon footprint of the United States energy infrastructure. Solar and Wind will benefit from state plans to meet this goal. See Future Bright’s blog post – ‘Clean Power Plan in 5 Pictures’
  • A $140B pledge by blue chip corporations including Goldman, Apple, Berkshire Hathaway and others points to continued private investment in renewables.
  • The cost to install Solar and Wind energy assets continues to fall while the efficiency of the technology continues to rise. For more on the Solar Power Growth Story, click HERE.

Equity markets, built on perception and the valuation yardstick a la jour will most likely continue to remain volatile. Still, given the catalysts and momentum for real asset growth in renewables, beaten down equities of solar and wind developers might warrant closer inspection.

Given growth prospects and misunderstanding of what might possibly the most elegant of asset classes from a long-term revenue stability, secular momentum and security standpoint, Future Bright prefers real asset ownership. Connect to learn more.

Roadside Array

Disclaimer: Future Bright is a think tank and advisory in sustainability and investment themes. Future Bright has worked with renewable energy developers, energy efficiency funds, assets managers and vertical farms on progressing solutions towards sustainability. This note is not an offer of services or investment of any kind. This is a blog post for informational purposes only. Those interested in consulting services, design work or industry analysis should contact Future Bright directly. (www.futurebrightblog.com)

Goldman sells $600M Coal investment for <$10M

Goldman sells $600M Coal investment for <$10M

For many, the etchings on the mine wall are clear; coal is in terminal secular decline. The message is clear – one option remains to divest from coal assets and that is to walk away.

Effectively, that’s what Goldman has signaled in August when the firm ended its 5-year investment into Colombian coal mines. The company announced it would sell assets, originally purchased for roughly $600M, for less than $10M to private US coal company Murray Energy. After four years of operation, Goldman estimates it lost $200M on the deal.

Murray, for its part, is attempting to diversify assets outside of the US to ‘ensure survival’ as coal has come ‘under attack’ in the US. It won’t be so easy.

The global economy is pivoting away from coal given the availability of cleaner, cheaper alternatives and potential future waste liabilities. Coal assets have largely become unsalable (see Future Bright’s thesis on Future Waste Liabilities for corporate valuation). The market has revealed this to be true as over the past few years, coal equity valuation has plummeted. Unable to sell equity or assets, the bankruptcies have begun.

Coal_Stocks

– In earlier August, Alpha Natural Resources filed for the industries biggest bankruptcy yet.

– Many other coal companies have filed for bankruptcy over the past two years including, Walter Energy, James River Coal and Patriot Coal. Two others, Arch Coal (ACI) and Peabody Energy (BTU) could potentially be next.

Why Coal won’t be coming back

1.) Future Waste Liabilities: A cornerstone of the Future Bright investment thesis is the looming recognition of Future Waste Liabilities (FWL’s). FWL’s will be tied to global greenhouse gas (GHG) emissions, fabricated and synthesized products with toxic qualities, water, air and other forms of pollution that affect real estate value, human health and bio diverse ecosystems.

  • In 2014, the state of North Carolina sued Duke Energy over and accident that spilled 39,000 tons of coal ash into the Dan River. It is estimate that clean up could cost the company over $10B. Duke’s market cap at the time of this writing was $52B
  • Estimates of the economic value add of coal are 1/2 that of the externalized costs of environmental destruction and health costs.
  • It is estimated that 500k to 1.6M people lose their lives annually to air pollution in coal-heavy China.

2.) Cheaper: The Coal industry first had to battle off the natural gas boom, an industry that will prove to carry its own sizable future waste liabilities. Now, Coal is losing an outright battle of economic parity to renewable energy sources, which have installation/technology costs which have mirrored the steep decline in the price of coal itself (~80% over 4 years). Contrary to coal how, renewables have no fuel costs or near zero marginal cost of production.

Lcoe

Graph displays sample LCOE (Levelized Cost of Energy) for 2014 utility scale projects (NREL).

3.) Cleaner: Renewables and Natural gas are winning in price and, in the case of renewables in particular, cleanliness. Renewable often have zero operational supply chain and little to no GHG (Global Greenhouse Gas) emissions. As the global economy races to de-carbonize to improve air and water quality and combat climate change, Coal’s kissing cousins of oil and gas will be forced into transformation or face a similar fate.

2012Emission_bySector

THINK TANK: Will Oil and Gas companies see the ghost of Christmas future in the mirror and pivot before their own equity implosion begins. Key inflection points like battery pricing could signal the tipping point when joined to conditions like rising vehicle efficiency, millennial trends and liability from spills and earthquakes.

Stay tuned to Future Bright for more on this subject and others related to the trillion dollar sustainability option.

Sources: EIA, Bloomberg, Future Bright, NREL

Disclaimer: Future Bright is a think tank and advisory in sustainability and investment themes. Future Bright has worked with renewable energy developers, energy efficiency funds, assets managers and vertical farms on progressing solutions towards sustainability. This note is not an offer of services or investment of any kind. This is a blog post for informational purposes only. Those interested in consulting services, design work or industry analysis should contact Future Bright directly. (www.futurebrightblog.com)

The Solar Power Growth Story

The Solar Power Growth Story

The tailwinds supporting the secular shift from non-renewable to renewable energy are strong and growing. Solar PV is experiencing tremendous growth from a low installed base while gains in technological efficiency, favorable policy and financial innovation are all increasing prospects and visibility for investors. Global recognition of the economics for a solution with zero marginal cost of production and low potential future waste liabilities are cementing solar at the core of the massive replacement cycle for energy systems.

The energy created by the sun that reaches the earth per year is equal to approximately 20,000 times the total demand by society. Photovoltaic (PV) cells are comprised of abundant materials and are designed with no moving parts’ they capture the sun’s energy and convert it into electricity. This electricity is exchanged for hard currency. There is minimal security, transport, environmental or storage hurdles. This is the solar power growth story.

Growth: The Solar PV industry has experienced a 23.2% compound annual growth in the past decade to 2014.

Total installed solar PV capacity increased 32% in 2014 to a cumulative 180 Gigawatts or between 1-2% of global electricity demand. 1 Gigawatt (GW) of solar PV is enough to power roughly 200,000 homes.

By comparison, global wind capacity stood at around 369 GW at the end of 2014.

Growth typically follows productivity gains. The pair of graphs below contrast the productivity gains (CAPEX efficiency) in solar vs. declining productivity in the Oil & Gas industry. In a confirmation of Future Bright’s thesis, investors have been rewarded for investing in industries with rising CAPEX productivity. In the case of solar, industry is building more capacity, with less dollars, using less land.

SolarCapex

OilCapex

The productivity of CAPEX is driven by a familiar story: Moore’s Law for the scaling of semiconductor technology.

Technology: The cost to install Solar PV has fallen dramatically over the last five years. The Photovoltaic cell, the core component of a solar power plant based on semiconductor technology, has fallen in cost by roughly 80% (right graph) while total installed cost have fallen by roughly half. With power prices stable or rising, these efficiency gains have led to improving economics for investors and implementers of renewable energy like solar PV.

A sample of projects from 2014 by the National Renewable Energy Laboratory (NREL) shows for utility scale projects, renewables like solar PV and wind have largely satisfied the cheapest to deliver condition for utility adoption.

LCOE

As Solar PV costs fall, global grid parity is on the horizon. Grid Parity occurs when a capacity source reaches or falls below the cost to generate electricity on the grid. In 2014, Solar PV had achieved grid parity in over a dozen US states and in over 100 countries. Deutsche Bank recently predicted 80% of the global market will reach grid parity by 2017 (Bloomberg, Cleantechica).

What happens when an energy technology with zero marginal cost of production reaches grid parity with fuel-based substitutes? We now stand at that intersection.

PV costs have continued to fall in 2015. Reported prices in both developed and developing markets have dropped an additional 10-20% in the past six months (Cowen). Germany, one of the worlds more mature markets for Solar PV and not a low-labor cost market, installs rooftop systems at around $1.2/W, which is around ½ the cost in the US market indicating further potential for CAPEX efficiency in growth markets like the US.

Policy: Policy support for renewables has been generally favorable around the globe. Job growth and the will to mitigate climate change risks are two main reasons for this support. Policy support can take many forms some of which include: Renewable Portfolio Standards (RPS), Feed-in Tariffs (FiT), Renewable Energy Credits (REC/SREC) or Tax Credits (including Carbon Taxes).

Renewable Portfolio Standards are state or federal level guidance for the percentage of the capacity mix that utilities must provide from renewables. For example, California just raised its renewable RPS to 50% and other states such as Massachusetts, Vermont, New Jersey and New York have progressive goals for RPS. To see your markets RPS, click here: RPS by State.

RPS are often paired with Feed-in Tariff or Renewable Energy Credits to create the proper market based mechanisms and incentives for growth. In SREC markets, renewable energy developers receive their negotiated offtake price (often a long-term contract discussed below) plus the value of the SREC at the time energy is produced. Forward markets exist for SREC’s with institutional participation allowing developers to hedge and increase bankability of projects. Feed-In Tariffs are mandated prices between developers and utilities for approved projects. Tariff rates typically ‘step-down’ overtime as capacity is added to meet goals.

FiT’s and RPS are also used at the country level across the globe. Some examples include:

  • Japan’s FiT system for solar implemented after the Fukashima disaster has resulted in 69GW of approved projects in less than 2 years
  • India has a seven-year goal of over 100GW of solar PV. Instrumental private capital partners like SunEdison are arriving to make the grid of the future a reality in India.
  • China’s recent accord with the US on carbon emissions anchors the countries’ position as a leader in investment into renewables and manufacturing. China could invest up to $2T over then next 15 years in renewables under the parameters of the Nov 14’ accord (WEO, Bloomberg).

Tax Credits have been instrumental in kick starting growth for market like the United States. The 30% Investment Tax Credit (ITC) will step-down, unless extended, to 10% at the end of 2016 and is expected to drive growth in the 2015-2016 development cycle.

THINK TANK: Future Bright predicts the 30% ITC for solar could be extended.

While there remains regressive policy in particular states and/or countries, it should be no doubt that governments’ the world over see their job security more than ever tied to their ability to steer the economic ship towards a low carbon future. Future Bright expects low-carbon strategy and climate change to be an inseparable part of elections and the democratic processes globally going forward.

Case in point – the Obama administrations final draft of the Clean Power Plan (CPP) directly addresses limits on carbon emission by imposing state-level standards and implementation guidelines. The CPP plan calls for emission reductions of 32% by 2030 vs. 2005 guidelines on a national basis and will be responsible for driving large investments in renewables and efficiency.

With or without policy support, overall growth prospects for renewables remain attractive, especially for developing markets:

  • According to the International Energy Agency, non-OECD countries will require $10 Trillion in investments into power generation and transmission. For non-OECD countries, sustainable development like renewables offer a cost advantage over substitutes

Improving economics and growth eventually attract expertise and innovation in financial engineering. We are seeing the early stages of a tremendous growth in financial innovation for renewable right now.

Financial Innovation: Solar Power has been made bankable by a financial innovation known as the Power Purchase Agreement (PPA). The PPA is a long-term offtake contract for all or a portion of the power produced by a solar plant which typical ranges from 10-25 years. PPA’s are signed with utilities, commercial or residential buyers and often carry escalators of between 1% and 5%. The escalators, the low and falling cost of solar and the ability to generate onsite energy with no transmission costs often generates contracted PPA’s below market prices for electricity. This shared savings approach used in solar represents the key driver of growth in renewables and other areas of sustainable investment.

Other financial innovations have arrived to scale the development of new solar capacity. Recognizing the value in stable cash flows for assets with inelastic demand, financial innovators have delivered the Yield Company. The Yield Company is a dividend oriented growth company spun out from a sponsor that bundled and acquires renewable energy assets to distribute cash flows to shareholders. Both public and private yield companies exist as a source of long-term value creation for owners given the growth prospects for renewables. Yield companies are analogous to the MLP boom fueled by the US shale gas expansion. In 2014, Yield Companies had a combined market capitalization of around $30B vs. $500B for MLP’s. The Yield Company is expected to lower the cost of development capital over time and fuel long-term growth in renewable capacity.

Impact: In addition to the economic value, renewables offer investors and communities other significant social and environmental dividends. These include:

  • Jobs: There are now over 7 million clean energy jobs worldwide. In the United States, Solar energy jobs grew at a 21.8% rate in 2014 vs. overall job growth of 1.3% (Energy.gov, The Energy Collective)
  • Reduced Water Use: To see the future of scarcity challenges, look west. Solar and Wind offer conservation benefits over substitute like hydraulic fracturing or nuclear in that they use little to no water in operation. Look for more about water on this blog. Its maybe the biggest blindside risk out there.
  • Security: whether it is from natural disaster or terrorist attack, renewables offer more resilience over the conventional grid. During hurricane Sandy, the 32MW Long Island’s Solar Farm endured minimal damage and was available for operation almost immediately. There were no reports of significant damage to solar and wind farms after the storm. If you doubt the threat of attacks to our energy infrastructure, google ‘The Metcalf Incident’ where you will read about the nearly successful assault in 2013 on a major PG&E sub-station responsible for providing power to Silicon Valley.
  • GHG Reductions: Renewable energy assets generate electricity with no global greenhouse gas by-product. The lack of pollution and the will to mitigate climate change through potential carbon taxes provides further upside potential to renewable energy asset owners.

 

Bottom Line: The economics make sense. Accelerating gains in technological efficiency, policy tailwinds and financial innovation are combining with positive impact qualities to make the Solar Power Growth Story unstoppable.

DEMAND: Corporate and Country Level Adoption is Strong

Many blue chip companies already have made significant investments in solar

Solar Makes Sense

Long-term asset owner will continue to be drawn by the zero operational supply chain and low potential future waste liabilities; qualities which should enhance value in times of economic stress. Individual investors and institutions have multiple ways to invest from liquid equities to fixed income securities to direct long-term investments and alternative fund structures. Renewable Energy asset ownership is ideal for institutions such as pension funds seeking to address potential asset liability mismatches.

 

Additional Sources

  • Database of State Incentives for Renewables and Efficiency, www.Dsire.org
  • National Renewable Energy Laboratory, NREL, www.nrel.gov
  • United Nations Environement Programme, http://www.unep.org/climatechange/mitigation/
  • S. Energy Information Administration, EIA, www.eia.gov
  • International Energy Agency, IEA, iea.org
  • Cleanedge
  • Cowen & Co
  • Bloomberg

Disclosure: Future Bright is a think tank and advisory in sustainability and investing. Future Bright has worked with renewable energy developers, energy efficiency funds, assets managers and vertical farms on progressing solutions towards sustainability. This note is not an offer of services or investment of any kind. This is a blog post for informational purposes only. Those interested in consulting services, design work or industry analysis should contact Future Bright directly. (www.futurebrightblog.com)