I’m a climate activist. I ride a commuter train to work, except on the days a television network sends a hulking vehicle to pick me up, so I leave mouse-sized carbon footprints, plus tank tracks. I compost veggie scraps, reuse grocery bags, and wolf down rib eye. I’m a tree hugger, but also a golf-course fondler.
That’s why I found an analysis of renewable energy published this past week by the investment bank UBS so intriguing. It predicts rapid, radical change: Solar and wind could make up some 47% of the world’s power capacity by 2030, up from 20% next year. And the tipping point could be a force more powerful than a subsidy, cap, or how-dare-you from impressive teen scold-celebrity Greta Thunberg.
It is the falling cost of batteries, combined with the profit motive. I’m not sure if this qualifies as a green new deal, but for stock investors, there could be a good deal of green to be made.
In short, energy storage costs have fallen by nearly half in five years, and they could drop by another two-thirds or more in the coming decade. That will offset the main knock against solar and wind—that they provide cheap power only when nature cooperates. The result will be a rapid build-out of storage and a quickening of gains for alternatives. Beneficiaries could include solar-equipment companies like First Solar (ticker: FSLR); battery makers like LG Chem (051910.Korea) and Samsung SDI (006400.Korea); chemical companies like Albemarle (ALB); and utilities that already have plenty of wind and solar capacity, like NextEra Energy (NEE).
The subject of alternative energy can invite high-voltage politics, so please know that I’m neither a Democrat nor a Republican, and I’m certainly not one of those crazy centrists. I’m a rabid partisan who switches sides several times a day. But wind and solar power are a matter of technology, not policy.
Newly built wind and solar capacity is nearly as cheap as coal and natural gas, and will be cheaper in most countries by 2030; the U.S., where natural gas is plentiful, could take a decade longer. McKinsey, the global consulting firm, predicts that electricity demand will double by 2050, but that carbon emissions will peak in 2024 and then begin falling, as wind and solar power replace fossil fuels, especially coal in China.
On its own, that won’t be enough to prevent temperatures from rising, McKinsey points out. But the shift has long-term implications for investors. Natural-gas demand could plateau beginning in 2035. Oil demand could peak and begin falling after the early 2030s, depending on the uptake of electric cars.
UBS predicts that the scramble to bring down battery costs for electric cars will have a spillover effect in the power business, a subject Barron’s discussed in a cover story last year. Consider the economics of electricity in China. The Levelized cost of coal power there—the cost to generate the power and recoup plant investments—is a nickel per kilowatt-hour, versus six cents for solar and wind, and nine cents for natural gas. Batteries make wind and solar power more usable by smoothing supply across regions and over time, but they cost 10 cents per kilowatt-hour. No wonder China is the world’s largest consumer of coal.
President Xi Jinping of China says he wants to tackle pollution, and he may soon get his chance. UBS estimates that by 2025 the Levelized cost of solar power generation will fall to 2.4 cents per kilowatt-hour, and the cost of storage, to 3.4 cents. Wind could take just a couple of years longer to reach similar competitiveness. The result will be a spike in storage capacity—to as much as 13% of global power capacity by 2030, up from an estimated 3% next year.
Please don’t accuse me of sustainable investing. But I can’t help but notice that some alternative-energy stocks have down-to-earth prices. First Solar hasn’t been anyone’s idea of a steady long-term performer, but it’s up 23% this year and trades at just 14 times next year’s earnings projection. According to J.P. Morgan, which calls First Solar a top pick, the company’s transition to a new module design called Series 6 will give it a lasting competitive advantage in the global solar-panel market.
All five utilities we listed in our energy-storage cover story have beaten the market, but NextEra has done so by the most, returning 52% over 17 months. It trades at a glamorous 26 times next year’s earnings consensus, not because it owns FPL, a regulated Florida utility, but because it develops wind and solar facilities across the country, combining peppy earnings growth with a 2.1% dividend.
LG Chem and Samsung SDI are easy to like but awkward to own. They trade at 18 and 15 times next year’s earnings, respectively, but are listed in South Korea, where many U.S. brokerages don’t offer stock trading. An alternative is Charlotte, N.C.–based Albemarle, which doesn’t make batteries but is the world’s largest supplier of lithium, the element expected to dominate battery technology over the next decade and beyond. In the short term, the lithium market appears oversupplied, but that could change quickly, and Albemarle has more capacity than peers to increase production when the time comes. Shares sell for less than 11 times next year’s earnings.
Lithium mining is a nasty business, by the way—as bad for Chile’s water as batteries are good for Beijing’s air. So if you decide to add a climate-friendly stock or two, allow me to be the first to scold you.