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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.

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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.

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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

Models for Localization

Models for Localization

Down the road from where I sit writing this post, a prudent example of localization and education is taking root at Samuel Staples Elementary School in Easton CT. This month, the town activated a ground mounted solar array capable of providing one half of the schools electricity needs. The project was financed entirely by the CT Green Bank and is phase one of a plan to make Samuel Staples the first fully solar powered school in Connecticut.

The story illustrates many fine points in the story for sustainability.

For one, the Easton school’s renewable energy aspirations are more of a next step than a first one.

The school already recognized the educational benefits of displaying food systems front and center in the eyes of young minds. For years, the school has leased school grounds to farmers for a wide variety of crops. This is an early imprint for young minds on where food comes from and possibly how it should be grown. Food that comes from the community travels less and is often organic lending itself to high nutritional density, health benefits and a reduction in spending on imported food.

With renewable energy, Samuel Staples is taking the next logical step to localizing its energy dividend as well. The school receives a lower energy bill, higher energy security and can point to the installation as a foundation of the local economy.

How the project was financed is another illustrative point for our evolution towards sustainability.

The Connecticut Green Bank, like its New York counterpart, represents the next step in circumventional finance in a sound strategy of localization. The Green Bank model is designed to stimulate private capital into infrastructure investments in clean energy and technology. I’d like to see that mandate expanded to food systems as both food and energy systems are the foundation of stable economies and societies. Regardless, the green bank model is proving to be successful in its early stages in forging private-public partnerships and in going it alone for smaller project like the Samuel Staples ground array.

The Green Bank model targets market rate investment returns to maintain capital preservation and re-invest returns. The school and town building model is a prudent one because the Green Bank, in theory, knows a lot about its counterparty and each participant has a vested interest in the others success.

Green Banks’ are tasked with investing in technology and infrastructure that is proven and typical enjoys a long life of paying dividends to all stakeholders. In the case of Easton’s solar array, the asset should offer energy savings and returns to investors for 25 years or more. Also, those returns are highly predicable and not subject to economic volatility outside of the town’s border.

Shouldn’t we be doing this at all our schools and on every town building? If we can invest public money at a market rate of return; if the investments create jobs and contribute to establishment of a low-carbon asset base; the answer becomes obvious rather quickly. Even ignoring environmental and health benefits completely; the economic arguments to localize our food and energy dividends stand on their own.

Returning to the education benefit. Isn’t this the type of thing we should be teaching our children? I imagine a young child looking to his father and pointing to the fields of food and the solar panels powering the school, “What’s that Daddy?” He asks.

The dad smiles and replies, “That’s the economy son and it’s our future.”

For more on the CT Green Bank – click here

Future Bright: The CT Green Bank should raise a dedicated fund and allow savers and private investors to participate in renewable energy build out for all schools in Connecticut. Later iterations of this series vehicle could include vertical farming infrastructure, design and local textile manufacturing and more.

SSE

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 farmers 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)

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.

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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.

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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.

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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.

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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.

Solar in 5 Pictures

Solar in 5 Pictures

1.) Solar Penetration is low making large market share gains possible. That’s been exactly what’s happening in terms of new capacity. Solar and Wind accounted for 74% of new capacity in the 1st half of 2015 (Cleantechnica)

PowerMix

2.) Solar has steadily exhibited rising efficiency with falling costs (CAPEX efficiency) while end consumer power prices have risen. A sampling of project shows total installed costs fell by more than half from 2011-2014.

Avg_Cost

3.) Overall Demand for electricity is expected to rise dramatically. Much of this demand will come from non-OECD countries where renewables are the cheapest form of new capacity.

Elec_Demand

4.) Countries are responding to multiple signals. Cheapest to deliver, low security costs, public demand, pollution mitigation and climate change are all factors driving an influx of solar PV to the grid around the world.

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The top countries investing in renewables have announced between $30-60B in utility scale Solar PV projects through the first half of 2015 (Cowen). But public sector investment dollars aren’t the only ones betting on renewables,

5.) Corporate Demand is Increasing too

Corp_adoption

Given the relative balance sheet conditions between governments, consumers and businesses, the corporate pivot towards renewables is significant and necessary.

Many of these company’s are adding to their renewable portfolio and making that pledge publicly and in partnership with the White House.

A $140B pledge to invest in climate change mitigation between 13 blue chip companies and the White House was announced at the end of July. Those companies included: Bank of America, Goldman Sachs, Microsoft, Google, Apple and Berkshire Hathaway among others.

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)

 

Clean Power Plan in 5 Pictures

Clean Power Plan in 5 Pictures

Future Bright’s summary of the US administrations Cleans Power Plan (CPP) and implications for investors.

The White House released its final proposal on the Clean Power Plan on Monday August 3rd.

Bottom Line: Emissions of carbon dioxide (CO2) from power plants are to be reduced 32% below 2005 levels by 2030. State plans must finalize and agree their implementation plans with the federal government by 2018 with the compliance period beginning in 2022. If states do not submit a plan they will be assigned the Federal Implementation Plan (FIP).

Here’s how the plan breaks down in five pictures.

Building Blocks in the final plan were altered to exclude energy efficiency from the FIP given questions around the reach beyond the corporate borders of utilities of the EPA’s authority. Still, Efficiency is available as a cornerstone of state plans and could be seen an attractive option for investors (See Efficiency www.futurebrightblog.com )

CPP1

Through its three remaining building block, coal plant efficiencies, renewables and natural gas, the EPA devised guidelines for plant level emission reduction.

 

Setting Standards

The EPA took a average of 2012 emission by power plant type across three main regions (East, West, Texas ERCOT) and then choose the region with the least penal forecast emission cuts; Eastern Interconnect. With the Eastern Interconnect as a model, EPA applied their three building blocks to determine what cost-effective plant level reductions could be.

CPP2

The results (above) were then applied to all plants by state to come up with state level reduction targets.

How each state is affected depends obviously on the current capacity mix generation. States with a higher dependence on coal power and in particular homes to inefficient plants or lacking in a renewable footprint will require more investment and retrofitting.

The Top 25 states in terms of % reduction are:

CPP3

South Dakota will have to establish a plan to reduce CO2 emissions from power plants by 48%, Montana by 47% and so on.

The Bottom 25 look like this:

CPP4 Some states without high CO2 generating capacity or already with significant renewables infrastructure have less work to do. Connecticut must reduce CO2 emissions by 7%, Maine 11% and Vermont is so far below the baseline – their work is already done.

Future Bright notes that Vermont’s renewables integration has been driven by a Feed-In Tariff system modeled after Germany (the world leader in Solar Power as a % of demand). More can be learned about the Vermont Plan at VTSPEED.

Opportunities for Investors abound. Whether states view the CCP as a challenge or an opportunity, investors looking to capitalize on the trend towards renewables and efficiency should first understand how those investments stack up vs. substitutes. Grid parity is a concept utilities use when deciding to invest in new capacity. In the case of mandated investments for CPP compliance, it is important to understand that many forms of renewable energy have or will soon reach grid parity. In the graph below, Future Bright displays, as one roadmarker, a grid parity forecast for Solar PV for 2019. A positive number indicates a net savings (positive NPV) from adding solar to the grid for a particular state.

CPP5

Takeaways: Solar is at or near economic parity with substitutes in nearly all US states which should lower risk for private capital looking to fund the replacement cycle mandated by CPP. Additional features of solar asset ownership, like zero marginal cost of production (a security feature and economic volatility dampener), are discussed HERE.

Utility disruption could be a prevalent theme as the push toward clean power meets with resistance in some areas and is welcomed in others.

Wind power is below grid parity in most regions with there is resource availability (OK, TX, ID). The benefits of adding wind power can be seen in the case of states like Idaho, who will now have low hurdles for CPP compliance and could find robust opportunities in exporting existing excess capacity as other states seek compliance.

Sources

Environmental Protection Agency www.epa.gov

Energy Information Agency www.eia.gov

Future Bright www.futurebrightblog.com

Utility Dive www.utilitydive.com

Disclaimer: 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)

 

Imagine

Imagine

Think – Act – Profit

Future Bright

Imagine a world of rising prosperity and growing natural beauty. Imagine a world of lasting wealth paying economic, social and cultural dividends now and the future. This is the Future Bright world.

Future Bright started as a think tank centering on just such a world. Can we get there and if we can, will we?

We can. By adopting new paradigms for Equity – Efficiency – Infrastructure – we can deliver profits today and prosperity tomorrow. These paradigms are based on proven technology, in production and growing that relies on Natural Economic Closed Loop Accounting – a fancy word for Nature’s technology adhering to Resource Math.

My exploration started in renewable energy and the development of commercial solar projects in the northeast. I have studied solar power indepth and can say without a doubt – the growth is going to accelerate and the transition is here to stay. This statement is predicated on four main drivers: resource scarcity, high waste streams, changing demographic and a rising middle class.

The first two factors, scarcity and waste, and their impact on our life support systems are setting the stage for superior economics for those who bring balanced solutions like renewable energy online.

The communities that thrive in the future will be built on collaboration and transparency. I see these enclaves starting now. When they are offered the Vibrant Loop of food and energy independence – they will choose a positive future that will pay dividends for all stakeholders.

Renewable Energy, Energy Efficiency, Vertical Farming

What do these investments have in common?

  • Profits: They all exhibit higher returns for comparable risk with comparable duration investments.
  • Stability: Their revenue drivers represent relatively inelastic demand units that whose traditional extraction, production and supply chains are set to experience growing price inflation and volatility. Future Bright Investment have lower corresponding volatility, long term price stability and lower correlation.
  • Social Responsibility: They all pay community dividends in the form of jobs, real estate appreciation, lower long run health problems and lower pollution.