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Climate Volatility: A Predictable Increase in Forward Economic Volatility that can be Hedged.

Climate Volatility: A Predictable Increase in Forward Economic Volatility that can be Hedged.

Climate Volatility represents a predictable increase in forward economic volatility that can be hedged. We have a short window to act by pivoting social systems towards sustainability and implementing the Climate Volatility Hedge.

Climate Volatility is driven primarily by scarcity and high waste streams, in particular of greenhouse gas emissions of carbon dioxide and methane. (CV Factors). The impact of CV Factors is evident today and a dramatic increase in negative impacts is locked in’. Concentrated and decisive action taken today can avoid the most catastrophic impacts in the future.

A collision of CV Factors with social systems risk factors due to rising inequality in developed markets and a rising middle class in developing markets sets the stage for the increase in forward economic volatility.

It is important to understand that our problems are founded in mathematics and not ideology. So, too, are the solutions.

The Climate Volatility Hedge must be approached three ways:

  1. Infrastructure: Localized indoor agriculture, domestic industry built on renewable (and biodegradable) fibers and renewable energy provides community security, jobs and affordable access at a profit. Sustainable asset ownership acts as a hedge, with predictable bond-like cash flows plus upside optionality. Demand is rising for the production of these assets, and, is inelastic in the case of food and energy.
  2. Liquid Markets: Business models built on extraction of non-renewable natural capital, with long supply chains and high environmental externalities are at risk. Derivatives markets are under pricing this, with many companies in conventional food and energy businesses trading at implied volatility less than the S&P 500. A relative value hedge is the starting point with selective shorting of at-risk industries locked into subprime carbon/scarcity strategies.
  3. Stable Society: Clean food and energy assets, that are in part community owned, is an imperative to social restoration. Our current model incentives the erosion of the labor base without asking the question, “What then?”. We are at a critical point where automation, microchips and private capital investment strategies are eliminating labor capacity faster than society can adapt, re-train and re-tool. Sustainable Infrastructure and localization strategies are a key hedge against societal breakdown.

The concept of volatility is important in that it is a concept well understood by risk managers and investors. Volatility is the standard deviation or amount of predicted change over a given time period vs. some qualified expectation. In sustainability, climate volatility is dictated both by scarcity and high waste streams, and carbon waste in particular.

By predictable, the thesis also points to a mispricing. Although the impact of scarcity and high waste streams are inevitable, with impacts occurring earlier than expected, they are not being priced in by capital markets and investment flows. The predictable effects of climate volatility are not being communicated effectively by governments, businesses or educational institutions. This aberration will create the largest ‘unseen’ bump in forward economic volatility. It also tells us that an arbitrage exists.

Arbitrage conditions allow us to hedge Climate Volatility for a lower cost than we will pay in the future.

New Equilibrium: Understanding the Critical Need

In order to execute the hedge at the scale required, we must raise awareness and come to consensus on the root causes, impediments and solutions to our climate challenges.

One way to raise awareness is to continue to promote data driven arguments supporting the climate volatility thesis.

Data from NASA shows us that we have exited the old equilibrium with climate and are searching for a new one. Graphs from NASA inserted below depict; 1.) Carbon emissions as a % of atmosphere have risen beyond their long-term range,

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2.) In the short-term, CO2 emissions has steadily increased,

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and 3.) Average Temperatures are rising.

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Higher temperatures have predictable results including the melting of polar ice, rising sea levels, storm and drought intensification, extended periods of excessive heat, ocean acidification and more.

The downstream effects of these first order effects are clear and include; crop failures, mass die-off of livestock and ocean life, population displacement through forced migration, social conflict due to food and water scarcity and more.

In the simplest sense, we point to the science of Climate Volatility as the relative displacement of water and heat between soil, air and ocean and the impact of this displacement on forms of life. To understand the interaction of heat-trapping gases, like Carbon, and cooling gases like Oxygen, click HERE.

Many of the economic and social challenges of Climate Volatility are evident today but will increase dramatically in the future.

Impacts of Climate Volatility

We list below a few of the 14+ Climate Volatility impact areas raised by reports from the Intergovernmental Panel on Climate Change (IPCC) along with examples of impacts occurring today:

  • Food Production and Security: Just this year, a major South American Agriculture company, Adecoagro, reported a 30% loss in yield of corn and soy due to excessive heat. Across the globe conventional crops are pushing there temperature maximums with potentially disastrous results.
  • Vulnerable Societies: It is now widely understood that the Syrian conflict was sparked and intensified by a record drought that forced millions of refugees into urban areas after livestock die off and crop failures. Syria may be the extreme but these events are playing out across the world in Africa, China and parts of South America. Most models expect drought conditions in California to persevere for the foreseeable future and to be joined by record drought conditions in the dust bowl region. The northeast US too, has been in drought for much of 2016.
  • Extreme Weather: No storm is normal anymore. We are seeing epic rainfalls that often fall at rates of 1-3 inches per hour. Recent examples include;
    •  Dec 2015: A 1-in-a-1000 year rain floods parts of South Carolina dropping up to 2 feet of rain on places like Charleston in a single day.
    • Mar 2016: Record rainfalls in Louisiana trigger massive flooding with up to 26 inches of rain falling in a four day period.
    • May 2016: almost 9 inches of rain fall in two hours in Austin Texas.
    • July 2016: up to 10 inches of rain pummels parts of the Midwest bringing tornadoes and destruction from flooding.
    • Aug 2016: In Ellicott City, MD, a 1-in-a-1000 year storm drops 6.5 inches of rain in about 3 hours.

A small sample shows 5 1-in-a-1000 year events in an 8-month period. There are many more such events to pull from in that same period. The Volatility estimate is wrong.


  • Human Health: In 2016, an unprecedented heat wave met with intense drought in India to decimate livestock and crops, melt roads and cause human casualties.

Citibank estimates climate change inaction would cost $44 trillion globally by 2040. We think this is conservative – Climate change inaction could make money obsolete


The costs of Climate Volatility will be considerable and even more so if the dialogue remains muted and held back in places. What may be most alarming is collectively we a pursuing a broken food and energy strategy that exacerbates the risk.

A RISKY FOOD AND ENERGY STRATEGY

We currently have a risky food and energy strategy in that these systems are:

  • Concentrated: Our food and energy comes from large, centralized facilities that focus on intensification (doing one thing at scale). Long supply chains add to social costs and increase risks of systematic breakdown.
    • Energy: Another sniper attack against a major electrical sub-station, similar to the Metcalf Incident, was reported in 2016. The Metcalf incident could have knocked out power to parts of Silicon Valley for a period of months.
    • Food: Drought in places like California, responsible in 2014 for 32% of domestic fresh fruit and vegetable product, causes price spikes and shortages.
  • Productivity Challenged: In the conventional system, costs are rising with less and less output. It’s a classic industrial death spiral that has been distorted by structural impediments in the form of laws, investment structures and culture that favors the conventional model.
  • Carbon Intensive: Conventional Agriculture, Transportation and Electricity are the three main sources of Greenhouse Gas emissions, including CO2 and Methane

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  • Embedded with Systematic Risk: One needs to look no farther than the implosion of coal equity and near total closure of capital markets to new development to understand the risks embedded in trillions of dollars of Fossil Fuel market cap. UK bank head Mark Carney and former US Treasury Secretary Hank Paulson have been vocal in their warnings about subprime carbon. In short, there could be up to $28 Trillion of subprime carbon assets, unburnable and held on the books of oil and gas companies today.

Citibank goes one step farther, reporting that the total size of the carbon bubble could be upwards of $100 Trillion.

Our only hope is avoiding catastrophe is making peace with the facts, upping the dialogue and taking immediate and decisive action. Financial Engineering can help.

Financial Engineering A Climate Solution

Trillions of dollars in the investment community are tracking and following indicators known as factors to make trading decision. More than 1/2 of these decisions are fully automated. Factors dictate everything from short-term decision making on through to managing portfolio risk over long horizons. What if the factors understood Climate Volatility?

One way to educate the factors is by using well-understood concepts, like volatility and arbitrage to show the optimal portfolio includes the Climate Volatility hedge.

Put-Call Parity is a well known relationship that has guided the growth and evolution of the derivatives industry. Put-Call Parity describes a relationship between the cash market (today) and the forward market (the future). It’s derivation also includes valuation of individual options (to account for opportunities or risks that exist based on future conditions).

Below we insert a simple idea that Put-Call Parity, arbitrage concepts and other derivatives math can be used, in part, to begin to financially engineer a solution to Climate Volatility. We note the simplification of what’s presented here provides a basis for a discussion in this vein. Future Bright has also designed frameworks for valuation using Real Options and CAPM Extension methods.

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The left side of the equation represents the ability to invest in the CV Hedge today and the option that this investment becomes more valuable in the future. The right side represents current valuations for conventional industry, which we are told takes into account all available information. We argue that all available information and, in particular, information on climate risk is not being accounted for. The longer it takes to account for this risk, the more exponential the impact will be. This is known as gap risk.

If you were building a society today to compete globally, would you add more of the left side of the equation or the right? This thought analysis lies squarely in the pathway to paradigm shift. Would you build with clean, resilient assets that provide security and jobs to support society or would you build centralized production dependent on scarce resources and subject to price volatility, that contributes to economic instability and higher health costs? With no embedded interests, you would likely choose the former. It’s less risky.

The Coal industry is a good example where the transfer of assets has become prohibitive, effectively reducing equity value to zero. Other factors, outside of the market for company assets, can affect the valuation in today’s market. A key variable to watch is market demand failure for conventional goods. For example, food produced using pesticides is under increasing global scrutiny from consumers of all types. Whole countries are banning the use of certain pesticides and extending these bans to genetically modified crops (GMO’s). Consumer segments than can, are choosing away in increasing numbers. In fact, access and affordability are key impediments that keep more consumers from pivoting away faster from products they deem harmful to themselves and the planet.

The Climate Volatility Hedge delivers profits today and solves the problem of access and affordability.

The Climate Volatility Hedge

Controlled Environmental Agriculture: With crops failing and livestock dying due to excessive heat, an essential part of the CV hedge consists of a massive effort to build localized controlled environment agriculture. Future Bright estimates this opportunity, which includes Aquaculture, Greenhouse Hydroponics and Vertical Farming, exceeds $1 trillion in infrastructure alone, and is capable of both environmental and social restoration. Controlled Environment Agriculture can produce millions of jobs, provide food security, meet increasing demand for clean, healthy, local and organic product and, maybe most importantly, reduce the water demand of agriculture. Controlled Environment Agriculture uses up to 99% less water than conventional and is profitable at market prices around the world. Controlled Environment Agriculture provides stable cash flows and profitability today with embedded upside due to climate volatility, potential supply chain disruption and food and water shortages. We depict this potential in the graph below.

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Renewable Energy: Renewable Energy provides predictable cash flow with upside optionality. When the centralized grid model is disrupted due to storms or attack, renewable energy assets increase in value. When we realize the impact of water intensive energy strategies, long supply lines and high waste streams, renewable energy assets increase in value. The Renewable Energy revolution is already underway, with prices falling below conventional sources across the world and over $1 trillion in investment in the past 3 years, but a greater acceleration is needed. We need a ten-fold investment for both developing and developed markets. The technology is viable, we only need the political and corporate will to build an energy infrastructure that creates a viable path for survival.

Renewable Fibers: Everything made with fossil fuel based polymers and long replacement cycle resources like trees, can be made with hemp, bamboo and other renewable fibers. With afforestation of paramount importance to hedging climate volatility, breaking down structural impediments to renewable fiber farming and domestic manufacturing should be viewed as a tremendous opportunity. Both bamboo and hemp have yearly harvests (vs. decades for trees), sequester more carbon and emit more oxygen than trees.

Waste Reduction: The Consumer Leverage Point is of utmost importance here but so is the response of corporations in delivering viable consumer solutions. There are easy choices like using reusable bags and Klean Kanteens, supporting CSA’s and patronizing businesses committed to waste reduction. Harder it seems, is to get automobile companies to deliver electric vehicles that consumers want, banks to fund community microgrids and sustainable agriculture, investors to do the same, governments to support transition and re-training of fossil fuel workers, education systems to reach consensus and teach preparedness, markets to mobilize and penalize high waste activity in favor of clean and sustainable.

Liquid Markets & Financial Structures: We continue to see innovation in circumventional finance to give consumers the ability to support sustainability with their savings. Major impediments remains with large institutions making slow progress in the creation of investment vehicles and pathways for deployment. Crowd Equity is making progress but a $1M limit is too low to affect real change. Consumers and Investors should demand transparency and move their money to institutions capable of meeting the critical need. It is far easier to raise investment for abstract consumer technology than it is for food security. That’s backwards and must change for our survival.

Moonshot towards Deployment: We need a WWII scale mobilization from society and business to deploy renewable energy, storage and controlled environment solutions. Elon Musk tells us in Leonardo DiCaprio’s excellent documentary, ‘Before the Flood’, it would take 100 Tesla Gigafactory’s to power the world. Tesla can’t do it alone, but the Fortune 500, at the demand of employees, shareholders and a global public call to action, could.

The defining question of of our time is: Will we make the sustainability pivot and hedge climate volatility?

A Time of Action

We live in a time of action. One could view it as the last true time of action. If we continue on the same path and do nothing or even worsen the problem, we lock in the baton pass from human impact to climate chaos. This dark horizon awaits our grand children with many, many challenges in between.

There are many structural impediments to action. World leaders who question science, intuition and global pleas from citizens everywhere. Corporations vying to protect short-term profits and manage legacy books of coal, oil and gas assets. A broken system of healthcare and consumption that can be viewed from a high-level as nothing short of self-cannibalization. Make no mistake, making the sustainability pivot and hedging Climate Volatility will be the most challenging task ever undertaking by humanity, except for one…

The only challenge greater than hedging climate volatility today is living through the consequences if we don’t.

Pivoting towards sustainability and making the hedge involves re-engineering our food and energy systems, re-thinking our systems of education and equity, and creating a global economy around local opportunity with access for consumers and businesses to make good choices. It is the only way to restore environmental and social systems to lasting prosperity. The window is short – action is required today.

But it’s possible. Possible and profitable.

The solutions and technology to build a resilient, inclusive and secure society rest at our finger tips. Across the world, millions are rising up, educating themselves and demanding swift change. They are entrepreneurs, artists, scientists, business people, politicians, activists, mothers, fathers and children.

Yes, in today’s world of ubiquitous information, the children are becoming aware of the problem, the solutions and of our collective inaction. They are asking the question, “Why?” “Why won’t we act?”. Our decisions right now craft our legacy in their knowing eyes. We have the unique ability to answer firmly, ‘We can and we will’, from a perspective of both economics and morality.

Now, more than ever, we need market-based solutions that address climate volatility and strain in social systems.

Future Bright’s Climate Volatility Hedge represents a profitable today and a prosperous tomorrow.

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About the Author:

After 13 years in High Frequency Options Trading, I noticed something troubling. The technology we were developing was making labor obsolete. Coupled with a growing awareness of environmental issues and a focus lent from the realities of the financial crisis, I pivoted towards sustainability and formed Future Bright, a think tank, consultant and portfolio of start-ups designed to represent a hedge for Climate Volatility.

In my learning, I’ve tried to apply my understanding of closed loop systems and systematic trading (HFT), which blend behavioral finance with rules based systems and derivatives, which inform us about exponential risks within an oft-thought-of linear system to understand climate challenges.

The more I learned, the more I became convinced of the need for a lifelong commitment to sustainability. You can learn more about Future Bright’s efforts HERE.

This article presents the Future Bright thesis and hedge for Climate Volatility based on 5 years of research, observation and work with practitioners in clean food and energy, investment funds and banks.

The OpEd of a Citizen

The OpEd of a Citizen

To be clear, I haven’t become disinterested in politics. I’ve just tuned it down in favor of the positives in life.I’ve collected enough data and made a decision.

For the math, it’s Bernie Sanders.

There are some things we need to be doing.

Number one is preparing for increased climate volatility. The math is clear. We can prepare in a profitable and prosperous way now, but not in the future. We must go all-in on renewable energy and begin a dialogue about coastal migration and worker retraining. We must prepare our food systems for less water and less weather predictability. We must protect pollinators and other essential biodiversity. 

Number two is about people. We need to be accountable for inequality and allocate investment in a way that restores social systems. This is especially true of public investments. We can reduce waste in the system through transparency and by making the goals clear. We are at a critical point in maintaining stable social systems. 

Number three is about how we use technology. There is currently a rapid race occurring between technology’s ability to connect and unite us and its dual ability to change the system of commerce faster than humankind can adapt. If we don’t account for the value of people – the current economic model will eliminate them. 

Addressing inequality and utilizing technology to restore social and natural systems is another way to avoid future unmanageable conditions.

From what I’ve read, Bernie’s platform addresses these solutions. The least we can do is to choose leaders who acknowledge the problems and come to the table with solutions.

Many people aren’t receiving this message: We are equally close to the solutions, which are economically viable, as we are to the abyss, where social and environmental breakdown makes money the least of our issues. 

We need to act boldly today. To vote for action and with the math, it’s Sanders every time. This is not an ideological argument and, in reality, is less about the one vote than it is about addressing the reality of our situation. There is a tremendous and historic choice available to us and, we live in a world of staggering beauty. 

My hope is that we can all turn to the positives of life. There is great opportunity. The technology to take us there exists and is far cheaper than the status quo. The barrier seems to be an inability to directly discuss the current condition and the will to walk the proper path. Those impediments are simple to change. I believe we will change them. 


I know the culture of large organizations can be hard to buck against. The rhetoric and pack mentality can be powerful forces for the status quo. 

The best example is the ‘keep politics out of business adage’. But politics has, in many cases, become business. We are missing a bigger picture and our time here is too short to miss it. 

It should be clear, for most of us that fall below the management level at our organizations today, chances are the current economic model will automate us into underutilized assets as quickly as it can. 

Underutilized people are costs and risks and, they are people. Education and participation have far higher economic returns. However, our neglect to emphasize these goals has left us with many downstream, polarizing issues. We can only solve these issues upstream, with localized clean food and energy and clear goals for education, health and other social issues. Without a level economic playing field that supports people, time is only variable in the assured outcome of our current terminal path. 

We can be as certain of that, as we are of the continued liquidation of the environment (our life support) if we don’t change, act, vote, think and imagine to make the world better. We can do it – we can choose sustainability. 

In Carl Sagan’s great words, “Don’t sit this one out. Do something. By chance of fate, you are alive at an absolutely critical moment in the history of our planet.”

JPM says no to Coal

JPM says no to Coal

J.P. Morgan recently announced it would suspend most future financing for coal. The firm will consider case-by- case financing for developing markets with carbon sequestration (CCS) technology is employed. 

Future Bright explain the implications of JPM’s decision in terms of the newly reframed Climate Volatility. In fact, JPM’s decision can be viewed as Climate Volatility Risk Management. 

Once we reframe the debate, we then look to understand the risks and impacts of #ClimateVolatility on businesses and consumers across the globe. 

Parts of the following paradigm are adapted from the SASB sustainable accounting standards board. 

The risks are:

  • Physical: weather disruptions, droughts and other natural disaster, zones of social instability, depletion, knock-on effects.
  • Transitory: business impact from the secular shift towards sustainability and in particular – the choosing of resource efficient technology by consumers and businesses. Clean food and energy. 
  • Regulatory: current and future requirements and liability from climate volatility. 

We are seeing the impacts of these risks everywhere but climate volatility as a cause remains under-reported. As that paradigm shift takes hold, there is enormous opportunity for investors and communities to profit by choosing prosperity in the form of resource efficient companies and infrastructure. 

For those industries with the highest risks and who do not pivot towards resource efficiency – the writing on the wall is increasingly clear – the likelihood of your business being impacted by these risks is rising. 

Those impacts fall into four major categories:

  • Cash Flow: both rising costs and falling revenue have assailed industries on the wrong side of climate volatility risks. These companies are short volatility and short gamma.
  • Asset Values: for certain technologies and business models – assumptions on asset valuation require serious rethought in the case of rising climate volatility.
  • Financing: it is increasingly becoming viewed as a fiduciary requirement to assess the impact of investment decisions in terms of climate volatility. 
  • FutureWasteLiabilities (FWL’s): what did businesses know when? It’s become more clear that the chain of custody and disclosure will have implications for businesses past decision w.r.t. Climate Volatility. Higher FWL’s – Higher VAR.

Reframe the Debate – Hedge your Exposure – Get Long Climate Volatility by investing in Sustainability 

– Future Bright

  

Reframe the Debate 

Reframe the Debate 

Reframe the debate – Climate Volatility can be managed, monetized and mathematically observed – If you live in New York or Australia – your intuition is observing it. Let it through and prepare for the future. For risk managers, fiduciaries and decision makers everywhere – the implications of Climate Volatility are economic and ultimately ones of business and societal viability.

The Future Bright portfolio promotes stable, localized cash flows with little to no operational supply chain through investments in renewables, efficiency and sustainable agriculture. Ultimately, financial innovation will allow targeted deployment of investment dollars to this security strategy, profitable today and with numerous growth catalysts. 

Cleanliness and transparency in food and energy systems ultimately, and over time, lowers downstream social costs. 

From a liquid lens, long the carbon price and resource efficient companies or those with the ability to pivot quickly is prudent while avoiding long supply chain extraction-based business models with high potential future waste liabilities (FWL’s).

Reframe the debate 

– Future Bright LLC 

  

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.

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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 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.

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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)

 

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)

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.

1H_GW

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)