Alternative energy is a long-term investment, but returns are already rolling in, says Edward Guinness, co-manager of the Guinness Atkinson Alternative Energy Fund, which is up a whopping 67% year to date. Before you know it, rooftop solar could be as ubiquitous as mobile phones, and developments in wind energy are already creating a compelling value proposition for energy consumers—especially in Europe, where energy prices are high. Learn about the holdings driving growth for Guinness' fund in this interview with The Energy Report.
The Energy Report: Edward, welcome back to The Energy Report. What are the prospects for alternative energy today?
Edward Guinness: The prospects for alternative energy today are as good as they've ever been in the last five or ten years. If you look at the drivers behind the industry, first on my list are scarcity and high prices of fossil fuels. I put second on my list energy security; third, the environment; and fourth, climate change. All these factors remain a priority and a concern. And what has improved over the last five or ten years has been the cost and performance of some of the technologies for installations in the space. So when you look at the cost of wind or solar installations, wind installations on a per- kilowatt-hour basis have fallen by about 35% since 2007. On the solar side, installation costs have fallen by some estimates by about 80% since 2007. So you have seen a dramatic change in the economic potential of the alternative energy industry.
TER: These costs are the costs of materials, installation or the whole package?
EG: I'm thinking about it on a levelized cost-of-electricity basis. That is taking into account the whole package, and looking at it on a per-kilowatt-hour (KWh) basis.
TER: Do costs vary significantly around the world?
EG: "Yes" is the simple answer. For example, there are parts of the world that have much better wind resources. But some countries or regions pay a significantly higher price for electricity, and there the cost hurdle alternative energy needs to overcome in order to be really compelling is much lower.
TER: The prospects for renewable energy are tied to the need to reduce carbon emissions. Are there any technologies that could effectively reduce carbon emissions enough to make coal acceptable as a power-generation fuel?
EG: That's a difficult question. From our perspective, carbon emissions are linked to two of the drivers for the fund, to the environmental side of things and to concerns about climate change. At what point does coal become acceptable? That's a really difficult concept to tackle. But what I would say is that there are technologies that work today that I believe can be harnessed to replace fossil fuels over the next 50–100 years without the need for dramatic improvements in the underlying technology. I think we have the potential, particularly in solar, for installations to be considerably higher in 40 or 50 years than people are imagining today.
TER: Are any of the solar stocks in your Top 10 particularly adept at using those technologies?
EG: Absolutely. They're predominantly the manufacturers of the solar modules that underpin the sector at the moment. They're also moving into the installation market and developing sites themselves.
We own a number of Chinese service stocks that have really driven the costs down to the point where I feel much more confident that solar is going to perform a lot better than people expect. And the reason is that for a lot of consumers today, solar has got to a point where it provides an economic return without any subsidies, and all that we need to do over the next 40 years is work out how to use it efficiently. This could involve connecting solar to the grid, developing energy storage techniques, working in smaller networks or even just changing the way we consume electricity at home or in the workplace.
TER: There are several advances for solar photovoltaic technology—thin-film technology, the efficiency improvements, wide spread rooftop installations. Which of your Top-10 companies are working in those areas?
EG: I would point you to Trina Solar Ltd. (TSL:NYSE), which is a leading Chinese solar module manufacturer. At the moment the product is polysilicon-based, and I believe will remain that way. I'd look at SunPower Corp. (SPWR-A:NASDAQ; SPWR-B:NASDAQ), which is also polysilicon based. It has more expensive products but it has the highest-efficiency modules on the mass market today. That means its products are the most appropriate for rooftop use.
Another company leading the chart is China Singyes Solar Technologies Holdings Ltd. (CSSXF:OTC ; 750:HK), which is a leading Chinese installer. It buys modules and then deals with permitting and planning and grid connection. It connects the installations, whether they're rooftop or greenfield, and then typically sells those to a financial investor or an aggregator.
I think the rooftop future potential is going to be a parallel to the mobile-phone industry, where people think maybe we'll have 5–10% of rooftops covered, and then suddenly people will be saying 15–20%, and then in 40 or 50 years there will be solar electricity-generating material on almost all roofs or buildings. A huge number of buildings are suited to it: housing estates, big-box retail, factories—vast expanses of flat roofs on which panel-based installations work. Longer term, I expect the domestic rooftop market to move toward integrated solar tiles, but I think that's probably another five or ten years away.
TER: Your Top-10 list is very heavily weighted with wind and solar. What about tidal, hydro, wave energy and geothermal? Are any of these technologies looking promising?
EG: I think some of these, particularly some of the large-scale ocean technologies, have real promise, but they're a long way away from delivering. Most of them are a long way away from being able to deliver a cost estimate, let alone a competitive cost.
There are tidal installations in place today. There are a limited number of sites internationally where the opportunity is quite large, but we don't see this as a big game changer internationally. Wave energy could be, but at the moment, the cost is about 10–15 times that of solar and it is still very much at the prototype stage. And these installations operate in one of the world's most hostile environments: Salt water and moving parts don't mix. And that's why a lot of the prototype installations have either not worked or require quite significant maintenance schedules. Right now, there is no listed company for which that is a major part of the business, so I don't see any investment opportunities there yet.
Geothermal is very interesting. I see opportunities in conventional geothermal, which is where you use either hot water or steam near the surface of the earth to generate electricity directly from a turbine. There are a number of sites around the Ring of Fire in the Pacific or along fault lines in Italy, but the space is geographically constrained. There are a handful of companies, and we hold one, Ormat Technologies Inc. (ORA:NYSE), that is very well positioned. A second technology is hot-rock geothermal, where the energy source is much deeper. It might be 5–10 miles beneath the Earth's surface. And in a similar way to shale gas, you use fracking techniques to frack the rock and then you pump water down, which then goes through the fractures created in the rock to come back up additional wells, and you extract the heat from much farther down in that way. There are a number of prototype sites and a handful of listed companies with exploration prospects, but they're highly risky. The benefit is there are a lot more sites globally with the potential for producing long-term, cheap electricity using this method.