How Finanical Markets Shape The Energy Economy
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Transcript of How Finanical Markets Shape The Energy Economy
Another Poppy
How Financial Markets Shape The Energy Economy
Tom Konrad, Ph.D. CFA
Portfolio Manager
Financial Writer
Disclosure
This presentation is intended for informational purposes only and its contents should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
I and/or my clients own stock in the following companies mentioned:
Hannon Armstrong (HASI)
We have no positions in other securities mentioned, but may initiate one at any time.
Outline
Interest rates, and the cost of electricity.
The the market and the solar boom.
The market and the shale gas boom.
The paradox of energy efficiency
Q&A
Two Of These People Shape The Energy Economy
Not the black guy, the other two.
Ben Bernanke has been promoting renewable energy for the last six years.
Janet Yellen seems likely to follow in his footsteps.
What Does Power Cost?
WindNuclearSolarEfficiencyCoalGas
Interest Rate Determines Cost
Interest rates affect different technologies differently
High up-front cost technologies (Wind, Solar, Nuclear, Geothermal) are sensitive to interest rate
High fuel cost technology depend less on interest rate, more on fuel/ operating cost.
Back to the Federal Reserve
By keeping interest rates low, Ben Bernanke has been helping Solar, Wind, and Nuclear.
Gas generation has done well because of low gas prices.
Coal has suffered.
What will Janet Yellen do?
Source: Clean Energy Trends 2014, FERC data
Fed Boosts Renewables; Gas Price Boosts Gas
It's Not All About Finance
Wind PTC expires & is renewed
Source: American Wind Energy Association
New Vehicles For Investing in Renewable Energy Issued in 2013
Source: Hannon Armstrong annual results presentation
Record Green Bond Issuance in Q1 2014
$9 billion green bonds issued
Many issues oversubscribed
Green bond index launched.
Move to asset-backed bonds (i.e. Hybrid vehicle loans.)
Source:Climatebonds.net
Finance is Shaping Residential Solar
Solar leasing companies
Acquired by solar lease co SunRun
Developing its own leasing arm
Source: GTM Research U.S. PV Leaderboard, Q1 2014
Bonds Backed By Solar Leases
11/2013: SolarCity $54.4M at 4.8%. 71% residential.
3/2014: Mosaic & RGS launch crowdfunded home solar loan program.
4/2014: SolarCity $70M, at 4.59%. 6,596 PV systems. 87% residential.
4/2014: Hannon Armstrong provides $42M debt to SunPower solar lease program.
The Power of Low Interest Rates works everywhere
Incentives needed to make projects attractive to renewable energy project developers in developing world economies could cost 30% less if delivered through subsidized debt
--Finance Mechanisms for Lowering the Cost of Renewable Energy in Rapidly Developing Countries, Climate Policy Initiative, January 2014
Outline
Interest rates, and the cost of electricity.
The the market and the solar boom.
The market and the shale gas boom.
The paradox of energy efficiency
Effective and ineffective energy policy
Natural Gas: Follow th Money
Some [shale gas] wells are profitable at $2.65 per thousand cubic feet, others need $8.10the median is $4.85-Ken Medlock, Senior Director, Rice University Baker Institute Center for Energy Studies
Data source: BP1MCF = 1.02 mmBtu
Shale Gas Production Cost Below Price
Source: Ruud Weijermars, Economic appraisal of shale gas plays in Continental Europe, Applied Energy 106 (2013) 100115
Chesapeake: Selling assets
[B]uying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 mcf. --- Aubrey McClendon, CEO of Chesapeake Energy, 2008
Less Drilling Means Declining Production
When companies can't make money, they stop drilling.
Shell hopes to exit shale plays in TX, CO, KS & OK. Focus on liquids, not gas. 3/2014
BP carves off shale operations as seperate unit, may sell. 3/2014
What Was Wall Street's Role?
Wall St banks made much money from selling distressed shale assets.
'It is highly unlikely that market-savvy bankers did not recognize a natural gas glut would occur'
Why Would Investors Pay For Unprofitable Drilling?
The same reasons they funded loans to subprime buyers during the housing boom.
Valuation models for shale gas were flawed, but not more flawed than paying for eyeballs with internet firms in 1999.
Not Enough Due Diligence
Drinking the Kool-Aid
When the music is playing, you have to dance.
Because they thought they could sell assets to greater fools.
Cheap or Abundant
Cheap gas will lead to more Asset Sales, less drilling
Investoers have been financing the drilling boom, but will not finance loss making companies forever.
Abundant gas requires more drilling, and higher prices to pay for it.
Cheap Gas and Environmental Laws Lead to Coal Plant Retirements
Annual Energy Outlook 2014- Early Release
Coal plant retirements announced Nov 2013-Mar 2014
Outline
Interest rates, and the cost of electricity.
The the market and the solar boom.
The market and the shale gas boom.
The paradox of energy efficiency
Q&A
The Paradox of Energy Efficiency
Examples:
Weather sealing
Efficient appliances
Lighting
Quick installation
Low up-front cost
No operating cost
Few disposal costs
Efficiency (i.e. Appliance Replacement)
Energy Efficiency: Cheap, but Difficult
Lack of knowledge
Hard to measure benefits
Agency problems/split incentives
Advance planning
New Methods
Small scale
Not 'Sexy'
In an efficient market, there would be no ''low hanging fruit''
Energy efficiency opportunities are usually market failures.
In a textbook 'efficient market', such missed opportunities would not exist.
Price is not the only cost of most energy efficiency improvements
The Best Energy Policies Depend on The Type of Energy Market
When markets work, interest rates and prices affect the choice of energy investments.
In these markets, price based policies are the most effective way to influence the outcome.
Cap & Trade, PTC
When markets fail, opportunities are missed.
Price based strategies ineffective and costly.
Mandates more effective, often less costly.
Appliance efficiency , building codes, CAFE.
When high-return opportunities exist, the market must not be working
Few car buyers calculate their expected fuel costs when buying a car.
Price signals do not work if buyers don't know the price.
CAFE standards are a blunt tool, but they work.
After the Vehicle Ownership and Alternatives Survey (Allcott 2011)
Vehicle fuel costs: A market failure.
Your Investments Matter
As we saw with shale gas, and are beginning to see with solar, stock prices can catalyze events in the real economy.
Collectively, we set stock prices.
If you care about what happens in the real economy, pay attention to your investments.
Look at the top holdings of your mutual funds.
Let your advisor (if you have one) know what you care about.
Q&A
Tom Konrad, Ph.D. CFA
Forbes.com/sites/tomkonrad
www.AltEnergyStocks.com
(406) 686-6067
Source: Matching Utility Loads with Solar and Wind Power in North Carolina John Blackburn, Duke University 2010.
A Portfolio Approach to Power
Source: Spatial and Temporal Interactions of Solar and Wind Resources in the Next Generation Utility, Palmintier, Hansen & Levine, 2008
It's Not All About Finance
Wind PTC expires & is renewed
Source: American Wind Energy Association
A Better Way to Value Solar
Austin Energy's Value of Solar Tariff recognized both the costs and benefits of adding solar to the system.
Minnesota is in the process of introducing a similar tariff.
Efficient Market
All participants have complete information.
No transaction costs.
Participants are rational.
All costs paid by participants
All benefits gained by participants.
Participation is optional; more of the product is always better.
