Future Bright’s SR-Investor – July 2014

Future Bright’s SR-Investor – July 2014

One to Watch:

The long awaited ‘YieldCo’ will arrive on the Solar landscape this Thursday with the IPO of Terraform (TERP:NASDAQ). Terraform is a spinoff of completed and operational utility-scale solar installations from Sunedison (SUNE:NASDAQ). If you’ll remember, Sunedison and its founder, Jigar Shah, are largely credited with opening the investment landscape for rooftop solar with their boilerplate solar services agreement.

The Key Points:

• Terraform will operate largely like a REIT distributing income from electricity sales instead of rent.
• Terraform will have access to a pipeline of new projects from its proven developer and parent, SUNE. Through initial allocation and call-right exercise, Terraform expect around 740MW of power assets in 2015 and the company forecasts $162M in revenue or around $218K per MW. This is an important benchmark and comparable for similar structures.
• Assuming SUNE gets a 50% dividend and the other 50% is distributed a valuation based on a div yield of 3%-4.5% would give TERP a market cap between $930M – $1.4B.
• Future Bright believes an analysis of utility, commercial and residential defaults would show a lower comparable risk profile to many REIT’s. A point for follow up research.

In short, TERP’s reception in the secondary marketplace in an important event for energy investors and the development and maturation of the solar segment as a staples investment for any SRI portfolio.

Notable Investments:

KKR’s renewable investment – On June 24^th, KKR announced a one-third stake in the renewable energy arm of Spain’s Acciona for $567. The transaction gives the renewable component of the business a E2.6B enterprise value making the deal one of the largest to date in the sector. Plans for a YieldCo are in the works, so the transaction can largely be seen as an entry point for mature private equity.

Deutsche Bank Invests in Japan Solar – The German bank, whose home country derives more than 30% of end-use electricity from solar power, is betting on the trend continuing and focusing on Japan. Deutsche Bank plans to lend up to $1B to finance Japanese solar projects taking advantage of 20-yr Feed-In Tariff (FIT) of 32Y or 310MW/0.31Kwh US equivalent. For comparison, the highest, longest duration repeatable US FIT’s are in VT at $0.24/kwh for 25 years.

UBS invests in Texas wind – 50% stake in 161MW wind farm (terms undisclosed).

Bottom Line: Large players are circling in the water and the deal flow will be characterized by 1.) Large portfolios of performing assets and 2.) A race to lock in high value, long duration subsidies.

The Blindside:

Like it did in the semiconductor industry, I fully expect Moore’s law to throw some exciting pitches in the SRI ballgame. I most expect these in solar efficiency and conversion, investment vehicle innovation and grid/battery technology. Three different areas. Three different opportunities.

o   Solar Conversion Efficiency: At a recent PV conference, three separate companies claimed to beat the long-standing efficiency record for PV panels of 25%. Typically, PV panels in production are between 15-20% efficient at converting the sun energy that hits them into Kwh’s. Efficiency is one of the core, direct to bottom line, drivers of Solar Park profitability.

o   Investment Vehicles: let’s not stop at YieldCo’s. Real-Option analysis shows us there are many applications for valuing embedded options, floating outcomes and in new markets that should wet the appetite of the equity and volatility communities as well.

o   Battery Technology: What happened for Solar costs between 2008-2012, is happening for batteries right now. As a result of competition and innovation, costs are falling and new technologies are achieve breakthroughs that would seem incredible framed in last’s years expectation. That’s the system at work and private equity has already taken notice.

 

This note was published by Ken Coulson and Future Bright for educational and informational purposes only. It is not a solicitation to invest nor an endorsement of any investments discussed. Future Bright is a think tank and advisory in Sustainability and has worked with solar developers, renewable energy technologies, vertical farmers and investors. www.futurebrightllc.com

 

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.

• Tax–Based 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