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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.

Don’t Give Up

Don’t Give Up

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

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

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

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

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

Bridge

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

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

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

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

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

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

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

Perpetual Sustainability – large-scale sustainable infrastructure

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

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

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

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

Wallace

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

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

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

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

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

They are watching. They are hoping.

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

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

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

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

Sagan

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

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.

FB1

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)

 

Incubation – The Vibrant Loop

Incubation – The Vibrant Loop

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

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

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

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

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

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

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

5F

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

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

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

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

Goldman: Solar = Yes / Coal = No

Goldman: Solar = Yes / Coal = No

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

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

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

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

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

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

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

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

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

Roadside Array

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

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

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

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

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

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

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

Coal_Stocks

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

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

Why Coal won’t be coming back

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

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

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

Lcoe

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

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

2012Emission_bySector

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

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

Sources: EIA, Bloomberg, Future Bright, NREL

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

Future Bright’s IPCC summary

Future Bright’s IPCC summary

Future Bright’s Summary of the IPCC, UN Climate Report 2014

Future Bright – kcoulson@optonline.net

The summary for policy makers and the full report can be found here: http://www.ipcc.ch/report/ar5/wg3/

The IPCC working group was charged with assessing scientific research related to the mitigation of climate change. One of there key findings was that current trajectory of economic activity, GHG (global greenhouse gas) emissions and mitigation is inconsistent with widely discussed goals of limiting global warming at 1.5 to 2 degrees above pre-industrial levels.

The purpose of this post is to condense the summary for policy makers and to suggest possible business opportunities embedded in the necessary mitigation strategy.

Below is my summary of the key points of the IPCC report along with notes, suggestions, business ideas or investment opportunities associated with the finding. Future Bright is an advisory and think tank on sustainability looking at economic, social and cultural investment opportunities.

Sustainable Development: Best case mitigation calls for rapid improvement for energy efficiency, tripling of low carbon or renewable energy sources, nuclear, fossil fuel with carbon capture and growth in bio energy land use and afforestation.

o Business Opportunity: A banking structure whose mandate is to invest in local community infrastructure and efficiency. Offers substantially above market dividend.

Mitigation Policy: could devalue fossil fuel activities and assets

o Investment Opportunity: Future Bright’s equity thesis is focuses on capturing risk in future unrealized waste liability while benefiting from investing in sustainable business models. A long short portfolio of top ten Solar (L) vs. Fossil Fuels (S) returned > 60% in 2013. The ratio of market capitalization of these two groups is still well over 100:1.

Energy efficiency: Efficiency gains in retrofitting of buildings and existing structure can range between 16%-70%. Best case mitigation scenarios calls for reduced final consumption of energy use of 20%-30% in building and industry.

o Conclusion: The opportunity for securitization and scaling in energy efficiency is huge. Market size is between $500B to $1T (Deutche Bank 2012)

Renewable Energy: Half of all new energy supply in 2012 was from renewable sources (RE). Best case scenarios call for growth of share from RE to 30% by 2030 and 80% by 2050.

 o Conclusion: RE investment funds focusing on mature segment plus new technologies and infrastructure growth should benefit. This is Future Bright’s central thesis.

AFOLU: Agriculture, Forest and Other Land Use play a central role in food security and sustainable development. Afforestation, grazing land management and restoration of organic soils are keys to effective mitigation.

o Investment Opportunity: Organic healthy food systems and indoor farming technologies have experienced significant growth over the last decade. Opportunities for early cycle investment exist. Contact Future Bright to learn more. Think large scale production orientation of EDEN PROJECT

Investment Flows: Over the next two decades annual investment in fossil fuels is expected to decline by $30B, Low carbon electricity supply investment is expected to increase by $147B and investment in energy efficiency is expected to increase by $336B.

o Conclusion: Follow the cash flows. Renewable Energy equity, securitization, storage technologies, efficiency funds should all benefit from shifts in investment flows.

Other Key IPCC Points
Integrated Approach: An Integrated design approach is necessary: institutions both public and private must focus on societal and cultural dividends as well as economic goals to achieve success in GHG mitigation.
Global Cooperation: A global approach is necessary. Mitigation efforts can be derailed by independent pursuit of economic goals with a disregard for coordinated GHG reduction.
Current State: Amidst the technological advancements in efficiency and clean technology, global GHG emission have accelerated in absolute terms between 2000-2010
Coordination: Mitigation today can avoid self-perpetuating climate change.
Low Carbon Energy Sources: Worse case scenarios assume market share from low carbon sources to increase 105% by 2030 to ~20% and 190% by 2050 to ~42%. Best case scenario, described above as necessary to avoid greater than 2 degree temperature increase, call for increased share of low carbon sources of 145% by 2030 to 25% and 310% by 2050 to 60%.

o Conclusion: Renewable Energy is past the bubble stage. It is a proven technology that is in the deployment and growth phase.

Targeted Reductions: Scenarios to keep temperature increase below 2 degrees call for 40-70% lower GHG emission in 2050 relative to 2010.
AFOLU: Best case mitigation scenario calls for widespread adoption of afforestation and bioenergy with CCS (Carbon Capture Sequestration) in the later half of the century.
• “Delaying mitigation efforts beyond 2030 will substantially increase the difficulty in transitioning to lower long term emission levels while narrowing the options consistent with maintaining a temperature change below 2 degrees relative to re-industrial level (high confidence)”
Costs: Best case scenarios costs in consumption growth, assuming global cooperation, technological availability and single carbon price, are estimated at 0.04% to 0.14% against a scenario where consumption growth is 300%-900% over the century.
Development: Infrastructure lock-in for high GHG vs. low GHG assets will be a key determinant in adopting mitigation and policy framework.

o Conclusion: This should be a transparent election issue.

Urban Migration: The next two decades present an opportunity for integrated urban planning based on sustainable development.

o Business Opportunity: City planners, builders and policy makers that embrace integrated design and balancing economic with societal and cultural dividend should benefit.     Operational costs savings, Clean and local food production, clean transport and service based durable goods providers should benefit.

TaxBased Policy: In some countries, tax based policy had proven to weaken the link between GHG and GDP.
Policy: Credit insurance, feed-in tariff, power purchase agreements and rebates have all proven effective at promotion private investment in mitigation measures.

Other Conclusions
• Technology that focuses on resource productivity and transparency of resource use should be in high demand.
• Operational Cost Savings (OCS) opportunities exists across energy supply, industry, building and residents segments.
• Accountant embracing Full Cost or other forms of closed loop balanced accounting should be in high demand.
• Energy collectives, Investment Trusts and other forms of financial instrument innovation are ripe for development.

Sources

– IPCC WGIII AR5: Summary for Policy Makers
– Natural Capitalism (2001, Hawkins, Lovins)
– Homeenergysaver.gov

 

Future Bright is an advisory and think-tank in sustainability started by Ken Coulson to assists innovators in project development and financial presentation, study sustainability and develop tools for understanding a natural economic paradigm. Future Bright is developing framework and visualizations as it pertains to investing and the formulation of investment products. Contact Ken Coulson at kcoulson@optonline.net

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