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We’ve recently seen several pieces of research on renewable energy. They all point out that despite the new U.S. administration’s avowed support for fossil fuels, renewable energy sources such as solar and wind power are continuing their march towards “grid parity” — the point at which they become competitive with other energy sources even without government subsidies. The cost of energy across different sources is measured by calculating the levelized cost of energy (LCOE). While the LCOE of coal has hovered around $100 per megawatt-hour for the past decade, the LCOE of solar photovoltaic has dropped from $600 a decade ago to right around $100 for utility-scale installations. Wind LCOE is at about $50 on a global basis. In about 30 countries, it’s now more economical to install solar and wind capacity than coal capacity, and within a few years, that will be true for two-thirds of the world’s power grid, according to the World Economic Forum.
The reason for this trend is simple: technological developments and economic competition are making renewables cheaper. According to the National Renewable Energy Laboratory, the efficiency of the most cutting-edge solar cells has reached 46%; commercially available cells were at 15% just five years ago. Wind power has experienced similar technological shifts. On the price side, solar panels have fallen 80% since 2009, and wind turbine prices 30% over the past three years. We think technology will continue to advance the renewable value proposition inexorably.
That doesn’t mean that the theme is investable, however. While the technology landscape is excellent, the financial performance of renewable-energy companies across the industry’s various segments is deeply linked to regulatory complexities. Turmoil in regulatory regimes is not good for companies which have engineered themselves financially to prosper under a regime that’s being replaced.
Further, as we noted in this letter almost two years ago, the arrival of grid parity may not bode particularly well for the stocks of companies in the renewable energy industry — since it could mean they’re downgraded in investors’ minds from exciting growth opportunities to purveyors of commodity products.
Investment implications: The analysis of bright technological prospects for solar is accurate, but that doesn’t translate into clear investment opportunities. Technological progress has led to economic parity by lowering prices for solar cells, wind turbines, and other products that renewables companies manufacture. In spite of that, we’re not bulls on renewable energy stocks.
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