the energy transition opportunity€¦ · free market economics trumps federal policy 12 source:...

The Energy Transition Opportunity

Source: Land Trust Alliance

1

May 2017

Overview

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• Technological innovations and industry transformationsfrequently occur faster than thought possible.

• Renewables are an increasingly competitive resource inpower markets, with rapidly improving fundamentals.

• Yet, clean energy investors often suffer from poor returnsdue to exposure to commodity-like and cyclical dynamics.

• Wind turbine and solar panel manufacturers competefiercely, driving down margins and often leading to losses.

• Renewables and energy efficiency investors are more likelyto achieve attractive returns in concentrated portfolios.

• Focus investment selection on (1) companies with stablebusiness models that have consistent cash flows and/or (2)companies that provide valuable services and technology inthe clean energy supply chain.

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Technological innovations and industry transformations frequently occur faster than

thought possible.

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Incumbent Industries are Meant to be Broken

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Source: Credit Suisse Research (Jan. 24, 2017)

The Pace of Technology Adoption Has Accelerated Over the Last Century

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Source: Harvard Business Review, The Pace of Technology Adoption is Speeding Up (Nov. 25, 2013)

Though the Scale and Impact of Change Is Often Underestimated at the Outset

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Source: BCA Research (2016); The Telegraph

“The horse is here to stay, but the automobile is only a novelty – a fad.”

– President of Michigan Savings Bank in 1903advising Henry Ford’s lawyer not to invest inthe Ford Motor Company.

“Moore’s Law” of Renewable Energy:Costs Plummet as Capacity Doubles

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“Learning Rate” represents cost declines for each doubling of solar/wind installed capacity.

Source: Bloomberg New Energy Finance (Dec. 2016)

As Manufacturing Capabilities Advance

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Source: Goldman Sachs, More Lean More Green (June 2017)

Lithium-ion Battery Prices Follow Solar/Wind Trajectory: Down 73% Since 2010

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Source: Bloomberg New Energy Finance (2017)

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Renewables are an increasingly competitive resource in power markets, with rapidly

improving fundamentals.

Globally, Renewables Investments Have Trended Up Over the Last Decade

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Global Clean Energy Investment and Annual Installed Renewables Capacity

As renewables technology/efficiency improves, each dollar invested procures more capacity.

As Renewables Become Cost Competitive,Free Market Economics Trumps Federal Policy

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Source: Lazard (Dec. 2016)

Lazard’s 2016 Unsubsidized Levelized Cost of Energy Comparison

Diamonds represents cost plus storage

Diamond represents cost without storage

Diamond represents offshore wind cost

In Many Parts of Country, Solar and Wind are Already the Lowest Full-Cost Power Resource

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The University of Texas at Austin Lowest Full-Cost of Electricity by County

Source: The University ofTexas at Austin EnergyInstitute, The Full Cost ofElectricity (Dec. 2016)

Additions to U.S. Grid Since 2005 Dominated by Cleaner and Cheaper Marginal Cost Resources

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U.S. Power Generation Additions 2005 – 2017

Large Businesses and Institutions Are Becoming Major Buyers

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Including a Recent Announcement By Goldman Sachs

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Source: http://www.smartenergydecisions.com/ (June 12, 2017)

As a Result of Improving Economics and Continued Investments, Renewables Accounted For Majority of 2016 Power Capacity Additions

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Source: Bloomberg New Energy Finance, UnitedNations Environmental Programme, Frankfurt Schoolfor Climate & Sustainable Energy Finance (2017)

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Clean energy investors often suffer from poor returns due to exposure to commodity-like and cyclical dynamics. Wind turbine and solar panel manufacturers compete fiercely, driving down

margins and often leading to losses.

Renewable Indices Experience Lagging Returns

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Source: Bloomberg

Why? Broad Renewables Exposure Suffers from Allocation to Equipment Companies

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Source: Bloomberg (as of June 7, 2017)

S&P Global Clean Energy Index – 1-Yr Returns by Index Member (as of June 7, 2017)Company Name Country Industry Trailing 1-Yr Return

TerraForm Global Inc UNITED STATES Renewable Energy Generation 83.77%Cia Energetica de Minas Gerais BRAZIL Electricity Networks 40.56%eRex Co Ltd JAPAN Renewable Energy Generation 36.17%Gamesa Corp Tecnologica SA SPAIN Wind Energy Equipment 34.02%Vestas Wind Systems A/S DENMARK Wind Energy Equipment 31.79%TerraForm Power Inc UNITED STATES Renewable Energy Generation 28.60%Boralex Inc CANADA Renewable Energy Generation 25.33%IDACORP Inc UNITED STATES Integrated Utilities 23.06%Cia Paranaense de Energia BRAZIL Electricity Networks 17.42%Renewable Energy Group Inc UNITED STATES Biofuels 17.18%Meridian Energy Ltd NEW ZEALAND Renewable Energy Generation 16.79%Enel Americas SA CHILE Electricity Networks 15.51%China Everbright International Ltd HONG KONG Renewable Energy Generation 12.86%Pattern Energy Group Inc UNITED STATES Renewable Energy Generation 10.03%Electric Power Development Co Ltd JAPAN Power Generation 9.74%EDP Renovaveis SA SPAIN Renewable Energy Generation 1.00%Huaneng Renewables Corp Ltd CHINA Renewable Energy Generation -2.19%China Longyuan Power Group Corp Ltd CHINA Renewable Energy Generation -4.01%Covanta Holding Corp UNITED STATES Solid Waste Collection & Treatment -9.88%JinkoSolar Holding Co Ltd CHINA Solar Energy Equipment -17.42%SolarEdge Technologies Inc ISRAEL Solar Energy Equipment -18.81%Xinyi Solar Holdings Ltd CHINA Solar Energy Equipment -21.37%Sunrun Inc UNITED STATES Development & Construction -24.39%GCL-Poly Energy Holdings Ltd HONG KONG Solar Energy Equipment -27.27%First Solar Inc UNITED STATES Solar Energy Equipment -27.47%Canadian Solar Inc CANADA Solar Energy Equipment -30.55%REC Silicon ASA UNITED STATES Solar Energy Equipment -40.16%SMA Solar Technology AG GERMANY Solar Energy Equipment -47.34%SunPower Corp UNITED STATES Solar Energy Equipment -54.95%Nordex SE GERMANY Wind Energy Equipment -56.11%

As in Many Commodity and Hardware Markets, Solar Market Suffers from Overcapacity

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Source: Morgan Stanley Research (April 2017); NEA

Solar Panel Capacity vs. Demand (GW)

Fierce Competition Combined with Technology Improvements Erodes Solar Panel Pricing Power

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Source: Morgan Stanley Research (April 2017); PV Insight

Solar Panel Pricing (US$/W)

Similar Dynamics have Pressured Wind Turbine Prices

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Source: Bloomberg New Energy Finance; Bloomberg

As a Result, Most Renewables Equipment Companies Operate on Low/Negative Margins

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*See Appendix for Index components

Source: Bloomberg

Cheap Component Costs Benefit Consumers, But Hurt Renewables Equipment Investors

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Source: Bloomberg

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Renewables and energy efficiency investors are more likely to achieve attractive returns in

concentrated portfolios. Focus investment selection on (1) companies with stable

business models that have consistent cash flows and/or (2) companies that provide

valuable services and technology in the clean energy supply chain.

Renewables Investors can Improve Returns byConstructing Concentrated Portfolios

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Long-Term Investment Opportunity Categories*• Best in Class Yieldcos• Renewables and Energy Efficiency Financiers and Services• Renewables Supply Chain• Utilities Committed to Renewables Development• Grid Infrastructure• Disruptive Innovators

*More detailed information on specific opportunities and companies available upon request.

Renewable Energy Yieldcos

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• Heavily contracted, dividend growth entities that are generally taxed as1099 C-corps.

• Long-term, low-risk cash flows generated by portfolios of contractedrenewable energy infrastructure assets.

• Typically structured as subsidiaries of renewables/power asset developers,with rights of first offer to acquire developer projects on attractive terms.– Structure allows developers to monetize projects and enables yieldcos to acquire

stable, cash-generating assets at prices that create value for shareholders.• Formed for investors seeking stable and growing dividend income from

diversified portfolio of power assets with lower cost of capital and cleanergeneration profile than traditional independent power producers.

• Dividend growth through asset acquisition is key.– Stronger yieldcos have ample near-term liquidity, but sector over the long-term is

dependent on access to capital markets (debt/equity) to support asset growth.• Temporary tax protection through depreciation benefits.• Right investors are those with long-term horizon who seek “real assets”

that generate consistent cash flows and growing dividend payments.

Yieldcos have Large Total Addressable Market Opportunity to Grow Generation Assets

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Source: Bloomberg New Energy Finance (2016); Credit Suisse (2016)

Yieldco Renewable Power Assets have Long Contractual Revenue Visibility

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Generation from existing renewable assets owned by All yieldcos - by sector and PPA length, 2014-40 (TWh)

0

5

10

15

20

25

30

35

40

45

50

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

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Source: Bloomberg

Yieldcos Compare Favorably to Traditional Infrastructure/Yield Asset Class – Utilities –

On a Price to Cash Flow Basis

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Source: Bloomberg

And on a Dividend Yield Basis

Renewable Energy and Energy Efficiency Financiers and Services

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• Senior position in renewables and energy efficiency financingstructure shields investors from volatility of investing inrenewables development and offers attractive returns givenlimited credit risks.

• Companies providing energy efficiency technologies/servicesstand to benefit from increasing efficiency investments, aswell as corporate and governmental initiatives targetingreductions in commercial power consumption for cost savingsand environmental purposes.

• Energy efficiency is nearly as vital to CO2 reduction in comingdecades as increasing renewables share in power markets.

Credit has Materially Safer Risk Profile forRenewables Development Investors

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Source: Pattern Energy Group Inc., Investing in Development – Understanding the Risk-Reward Profile (2017)

Renewables Development Investment Cycle Renewables Development Risk Profile

Energy Efficiency Spending in U.S.Has Consistently Grown

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Source: Navigant Research, Advanced Energy Economy, Advanced Energy Now 2017 Market Report (2017)

U.S. Building Efficiency Spending ($ Millions)

Leading to Rapid Increase in Efficient Commercial Property Space

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Though Growing, Energy Star-Certified Floor Space in U.S. Non-Residential Buildings, Only Amounts to 5% of Total Floor Space

(Bill

ion

Squa

re F

eet o

f Flo

or S

pace

)

Source: Bloomberg New Energy Finance and The Business Council for Sustainable Energy, 2017 Sustainable Energy in America Factbook (2017)

With Large Runway for Continued Investments

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* Insufficient data for total U.S. floor space of educational buildings in excess of 500,000 ft2

Source: EPA, EIA, Bloomberg New Energy Finance and The Business Council for Sustainable Energy, 2017 Sustainable Energy in America Factbook (2017)

*

Energy Star-Certified Floor Space vs. Total Floor Space for U.S. Commercial Buildings

Renewables Supply Chain

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• Businesses that provide vital supply chain and high-techservices to renewables equipment producers have morestable business models and cash flow profiles thanequipment companies.

• Whereas pure wind turbine and solar panel equipmentcompanies must navigate market supply/demand dynamicsand have suffered from pricing competition, supply chainproviders have the tailwind of generally increasing demandfor services without the risk of disappointing end-marketpricing.

Playing Key Role in Supply Chain Provides Service Companies Revenue Stability

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Sample Supply Chain Business Model

Source: Sample Company Investor Report (2017)

Utilities Committed to Renewables Development

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• While many utilities have resisted the emergence of solar, wind andbattery storage, several companies are notable for taking industryleadership promoting renewable energy.

• Though there is a general disconnect between rich utility industryvaluations and electricity demand stagnation, renewables leadershave achieved growth and trade at more attractive valuations thanpeers relative to future prospects.

• Investing in renewables allows utilities to grow their asset base,which equates to higher cash returns on equity for regulatedbusiness and provides power development/management businessesattractive, zero marginal cost assets in competitive power markets.

• Utility business model is attractive to long-term investors withinterest in owning infrastructure assets.

Example of Forward-Thinking Utility Renewable and Decarbonization Plans

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Source: Sample Company Investor Report (2017)

Grid and Power Infrastructure

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• Investments in improved grid infrastructure will be necessaryto support increase of renewables on electric grid.

• New transmission is needed to take renewables from ruralgeneration areas to urban centers.

• Generally, U.S. power infrastructure is ageing and requiresupgrades to accommodate not only renewables, but to alsoimprove vulnerability to weather events, protect againstcyber-security threats and enable a large increase ofdistributed energy resources on the grid edge (e.g., consumerbattery storage, solar and advanced meter technology).

American Society of Civil Engineers Gives U.S. 2017 a Poor Grade

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Source: American Society of Civil Engineers, Infrastructure Report Card (2017)

American Society of Civil Engineers Remarks on U.S. Electricity Infrastructure

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Electricity delivery in the U.S. depends on an aging and complex patchwork system of powergeneration facilities, transmission and distribution (T&D) grids, local distribution lines, and substations,owned by an array of investor- and publicly-owned utilities, independent power producers, andgovernmental agencies. While investor-owned utilities make up only 6% of the number of electricityproviders, they serve 68% of electric customers.

Some parts of the U.S. electric grid predate the turn of the 20th century. Most T&D lines wereconstructed in the 1950s and 1960s with a 50-year life expectancy, and were not originallyengineered to meet today’s demand, nor severe weather events. With more than 640,000 miles ofhigh-voltage transmission lines across the three interconnected electric transmission grids – theEastern Interconnection, Western Interconnection, and Texas Interconnection – the lower 48 states’power grid is at full capacity, with many lines operating well beyond their design. The resultingcongestion raises concerns with distribution, reliability, and cost of service, producing constraints fordelivering power from remote generation sites, specifically from renewable sources, to consumers.Often a single line cannot be taken out of service to perform maintenance as it will overload otherinterconnected lines in operation. Grids operating in Alaska and Hawaii are similarly congested andphysically islanded from the other states. As a result of aging infrastructure, severe weather events,and attacks and vandalism, in 2015 Americans experienced a reported 3,571 total outages, with anaverage duration of 49 minutes. Source: American Society of Civil Engineers, Infrastructure Report Card (2017) (emphasis added)

Disruptive Innovators

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• The future of the U.S. renewable industry and power industrywill be shaped more likely by outsiders than incumbents.

• Incumbent power companies are – for the most part –skeptical as to pace of change in power industry and are at riskfrom disruption from non-traditional industry participants.

• Power system management technology could lead to a moreefficient and cleaner grid by better matching supply/demandof intermittent renewable resources.

• Battery storage is a key long-term technology for acceleratinggrowth of renewables on grid.

“Software is Eating the World”

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Source: Ars Technica UK (March 14, 2017)

California Solar Drives Wholesale Prices Negative, Requiring Large Ramp-up in Prices

And Power Resources After Sundown

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Source: U.S. Energy Information Administration (April 7, 2017)

State Must Curtail Excess Solar Resources to Match Grid Demand with Supply

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Source: CAISO, Greentech Media (April 3, 2017)

Current Economics Still Unprofitable in Most Locations – Need Continued Battery Cost Declines

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Appendix

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Bloomberg Wind and Solar Equipment Manufacturer Indices (as of June 8, 2017)

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Company Name Country Industry Trailing 1-Yr ReturnGamesa Corp Tecnologica SA SPAIN Wind Energy Equipment 36.01%Vestas Wind Systems A/S DENMARK Wind Energy Equipment 31.79%Guodian Technology & Environment Group Corp Ltd CHINA Wind Energy Equipment 18.28%Suzlon Energy Ltd INDIA Wind Energy Equipment 17.48%Xiangtan Electric Manufacturing Co Ltd CHINA Wind Energy Equipment 11.10%Xinjiang Goldwind Science & Technology Co Ltd CHINA Wind Energy Equipment 3.70%Senvion SA GERMANY Wind Energy Equipment -8.02%Inox Wind Ltd INDIA Wind Energy Equipment -40.00%Sinovel Wind Group Co Ltd CHINA Wind Energy Equipment -47.48%Nordex SE GERMANY Wind Energy Equipment -57.95%

Company Name Country Industry Trailing 1-Yr ReturnJA Solar Holdings Co Ltd CHINA Solar Energy Equipment -13.11%JinkoSolar Holding Co Ltd CHINA Solar Energy Equipment -16.60%Neo Solar Power Corp TAIWAN Solar Energy Equipment -19.65%Motech Industries Inc TAIWAN Solar Energy Equipment -19.78%First Solar Inc UNITED STATES Solar Energy Equipment -25.78%GCL-Poly Energy Holdings Ltd HONG KONG Solar Energy Equipment -27.27%Canadian Solar Inc CANADA Solar Energy Equipment -28.72%Shanghai Aerospace Automobile Electromechanical Co CHINA Solar Energy Equipment -31.29%REC Silicon ASA UNITED STATES Solar Energy Equipment -40.16%Hareon Solar Technology Co Ltd CHINA Solar Energy Equipment -42.40%Hanwha Q CELLS Co Ltd SOUTH KOREA Solar Energy Equipment -49.56%SunPower Corp UNITED STATES Solar Energy Equipment -52.93%Shunfeng International Clean Energy Ltd CHINA Solar Energy Equipment -53.15%Yingli Green Energy Holding Co Ltd CHINA Solar Energy Equipment -57.37%ReneSola Ltd CHINA Solar Energy Equipment -64.75%Solarworld AG GERMANY Solar Energy Equipment -82.87%

Bloomberg Global Large Solar Energy Valuation Peers Index (BISOLAR Index)

Bloomberg Global Wind Energy Valuation Peers Index (BRWINDV Index )

Source: Bloomberg

Peter [email protected]

Phone: 847-559-9703

Stuart [email protected]

Phone: 847-559-5015

Office Address600 Central Ave., Suite 365

Highland Park, IL 60035

5252

Contact Information

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• Not an offer to buy or sell – The information provided in this brochure is for informational purposes onlyand does not constitute an offer to sell nor a solicitation of an offer to buy any interest. Any offer can onlybe made by the relevant offering memorandum and only in jurisdictions in which such an offer would belawful and exempt from registration.

• Facts & opinions – Although the statements of facts in this report have been obtained and are based uponsources believed to be reliable, their accuracy and any such information may be incomplete or condensed.All opinions and estimates included in this report constitute judgments as of the date of this brochure andare subject to change without notice.

• No recommendation – The mention of or reference to specific strategies or instruments in this brochureshould not be interpreted as a recommendation or opinion that you should make any purchase or sale orparticipate in any transaction.

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Disclosure

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the energy transition opportunity€¦ · free market economics trumps federal policy 12 source:...

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