Clean energy trends, some follow-up items on solar

I attended the EFFAS-EBC conference in London on the 14^th and 15^th of October (link here).

The overall theme was long term investing but there was a large proportion of the talks on clean energy trends.

Global investments in clean energy have grown at more than 30% pa over the last 15 years although the journey has not been a straight line.

Currently, $300bn are invested each year on projects. The removal of subsidies has taken its toll though, with activity in Europe 70% down relative to the peak year (2007) and a nearly as dramatic 60% down in the US. Asia is only down 20%, boosted by the huge ramp-up of renewables in China (due to the lack of domestic fossil fuel and pollution) and Japan changing its energy mix post Fukushima.

The ever-increasing importance of solar.

I wrote recently about solar, mentioning that ex-subsidies, current technologies were not economical.

I rest my case.

Out of $300bn invested yearly, 60% are in solar (from 20% 8 years ago). What is particularly rising within solar is the “SDC” or solar distributed capacity, the solar panels you put on your roof and connect to the local grid to earn generously subsidised tariffs.

Solar capacity has reached 140GW globally (same as the capacity of France for instance) or 2.6% of the global mix. However, it is less than 1% of the available output as solar only works a few hours a day.

I hope I am not misunderstood: I think solar is the way forward since it is the most abundant source of energy however I think the current panels need a technology break to make it truly ubiquitous. Therefore, the industry remains supported by subsidies, which is a setup I am not comfortable investing in.

Funding solar projects

An interesting point to notice is that interest rates for clean energy projects have remained stable around 5% since 2008. However, global policy rates have fallen. Therefore, project spreads (the security risk premium) have ballooned from nearly 0% to 3.5%, reflecting the regulatory uncertainty.

This means that as an investor in clean energy projects, the project risk is now better remunerated, with spreads around 3.5%. This is in the crossover area of bond ratings, which is a better return profile given the positive risk created by the secured aspect of the bond and the negative risk of losing subsidies retroactively.

Investment outlook

I am still more inclined to invest in the equity or bonds of a solar farm owner, provided the project be relatively new rather than the equity of hardware manufacturers (unless they can offer the new technologies).