Doc's Daily Commentary

Mind Of Mav

Why Is Green Energy Starting To Get Hot?

 

If you follow market and technology trends as I do, you may have noticed a recent surge in the price of Green Energy (Solar, Wind, Battery, EV, etc.) stocks and SPACs. Today, I’ll attempt to break down why I think this is and what it means for us as speculative future-focused investors. 

First, the high-level reasons:

1.Next president is shifting democratic. That bodes well for clean energy.
2.Election results moving away from ‘contested’ giving investors reason to buy in now.
3.New tech. solar is getting cheaper and better.
4.Higher adoption. More residential buys AND more commercial buyers including utilities.
5.Batteries boost solar and wind. Solar and wind don’t produce steady flows of electricity. New battery tech like Tesla MegaPack/GigaPack is offsetting this problem and the price of battery tech is expected to drop.

This is a market level explanation, I leave it to you to choose which companies you think best position for the world we are entering. I don’t think you can go wrong with ETFs, namely $ICLN, $TAN, and $FAN.

Essentially, renewable energy is the place to be. Here are some killer green stocks to check out. Our favorite Solar and wind companies are

Jinko Solar ($JKS)

Canadian Solar ($CSIQ)

SolarEdge ($SEDG)

Enphase Energy ($ENPH)

Vestas Wind ($VWDRY)

If you’d rather stick to more ETFs, I’d also suggest researching $SPWR, $LIT, $ACES, $PBW, $QCLN, or $QQQ. Stocks I’d suggest looking into on their own: AQN, NPI, FTS, BEP(C), BLX, RNW, RUN, VSLR, HASI, NEP, BEPC, ENPH, DNNGY, HYLN, DPHC, WKHS, and some I’d only take a punt on are DYA.TO, EWS.V, SHRC.V, POND.V, SAY.V.

Now, returning to the central question of ‘why green energy / renewable stocks are increasing in price?’, I think we can narrow it down to three specific forces.

1. Renewables got cheap Renewables have “decreased from $3.50 per peak watt in 2006 to $0.40 per peak watt in 2019”Here’s Lazard’s cost per megawatt-hour (MWh):

Coal: $33-$155 CCG: $44-$68 Gas: $150-$199 Nuclear: $118-$192 Onshore wind: $28-$54 Offshore wind: $64-$115 Solar utility: $32-$42 Solar residential: $151-$242

This leads to our first major finding: solar plants at their most expensive are comparable to coal at its cheapest. Hard to overstate how revolutionary this is. But it doesn’t stop there – residential solar is comparable to nuclear power. Think about that one for a bit as you see solar installations increasing.

2. Solar is getting cheaper faster than anyone expected Solar energy generation is dropping like a rock. Even ambitious forecasts were off by years.

3. Renewables are unlikely to get more expensive In the energy market, it is not uncommon for energy prices to fluctuate – anyone who remembers the mid-2000’s knows how wild oil price swings could cause wars and destabilize entire regions. But solar doesn’t work like that – solar gets cheaper because we get smarter. That’s what makes its cost parity with fossil fuels so damn dangerous – it can’t be reversed. barring extreme measures, the cheap price of solar is here to stay.

When you put these three facts together, it means solar has dropped its costs low enough that it no longer needs government help to succeed. I am not convinced that the current rise in solar has much to do with Biden’s lead in the polls – that wouldn’t explain $JKS sudden rise in the past two weeks, as it is a Chinese company. Rather, what I think is happening is this: solar is at cost parity with fossil fuels, but it is still only 1.8% of electricity generation. This means two things:

  1. There is tremendous growth potential for solar
  2. It is likely that some of the solar companies around today are going to be the equivalent of a solar Exxon in 20 years.

This is why solar is moving. Realistically, it should have been moving back in 2016 when it began to rapidly drop in price compared to estimates.

Another point to make – the decline of coal isn’t just a symbolic victory for solar. Many coal plants are getting converted to natural gas. This is largely due to the explosion of fracking, which is the #1 culprit in the death of coal. But it takes time to heat up a lot of coal, while ignition of gas happens much faster. This means gas can complement distributed solar power very well – on a cloudy day it can quickly step in. We are accidentally stumbling into an intelligent energy system. The shift to natural gas plants de-emphasizes the need for batteries to make distributed residential solar viable. Batteries would be nice, but this is not about them.

A further point worth noting is that at the end of September China pledged to make their economy carbon neutral by 2060, and peak emissions by 2030. That’s a huge task that will involve them needing to ramp up production at home, build out infrastructure and buy wind and solar parts, full systems, etc.

News coverage:

China Solar Stocks Are Surging After Xi’s 2060 Carbon Pledge

China’s 2060 carbon neutral goal bill could hit over $5 trillion

China pledges to become carbon neutral before 2060

Canada has also announced a similar initiative. With the USA looking to move towards a green-friendly administration, and with two of the world’s largest economies embracing carbon-neutral / green energy, it’s a very solid rationalization to see green energy as a winning sector to back. Now, is it the next ‘safe harbor’? No. It is a theme that will continue to pay off for some of the names over time? Yes, combined with what I think will continue to flow into ESG products. Are a lot of the names technically overbought in the short-term? Yep.

With that in mind, remember you’re dealing with new technologies and volatile markets no matter the timeframe, so set your expectations accordingly. 

Last note – notice how cheap wind is too, yet we haven’t seen the same movement yet for it. So if you are worried about missing solar (you are still early, btw), then you can also invest in wind.

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