Another Way to Play Renewables

The U.S. is already well on its way toward generating cleaner energy. But you wouldn’t know it from the sense of urgency with which policymakers, activists, and the media have framed the narrative over the past year.

In fact, I recently had a conversation with a friend who’s a green-energy zealot, and he seemed surprised when I casually mentioned that hydroelectric plus other renewables, including wind and solar, already accounted for 13.2% of net power generation in the U.S. during 2014.

And when you include nuclear power, which is a zero-emission source of generation, the percentage jumps to 32.6%.

Then if you really want to make your favorite armchair activist’s head spin, add in gas-fired generation, which brings the tally to a whopping 60.2%.

Although natural gas produces significantly higher carbon emissions than renewables, it has roughly half the emissions of coal. In fact, policymakers consider natural gas the reliable and cleaner-burning fuel of choice until technology can overcome renewables’ intermittency.

“You should kick back and relax,” I told my friend as he scratched his head in befuddlement. “You guys have already won.”

If you’re likewise surprised by the aforementioned data, there’s a good reason for it. That’s because everyone’s narrowly fixated on wind and solar, while older forms of clean energy, such as hydro and nuclear, get no respect.

These newer technologies get people excited about the future–human beings, after all, are conditioned to go for the bright, shiny new things–while older technologies are treated like humdrum has-beens, even though they’re reliable and proven.

And right now, of course, wind and solar are where the (government-subsidized) growth is. Wind along with a smaller assist from solar accounted for 61% of the nearly 14,500 megawatts of new generating capacity added in the U.S. last year.

Meanwhile, the government-subsidized gravy train keeps on rolling. In late December, Congress agreed to extend two tax credits that most see as crucial for wind and solar until these technologies come closer to economic parity with conventional generation.

The legislation extended the 30% investment tax credit for solar, which was due to expire this year, for another three years. It then declines incrementally through 2021, to 10%, a level at which it’s expected to remain thereafter.

Lawmakers also extended the 2.3-cent per kilowatt hour production tax credit for wind through next year, with a 20% drop each year through 2020. This tax credit had expired at the end of 2014, but the extension will be retroactively applied to 2015.

According to Bloomberg, the extension for solar will add an extra 20 gigawatts of solar generation over the next five years, above and beyond what would have happened without it. And the renewal of the wind production credit will add an extra 19 gigawatts of generation.

Altogether, these extensions are projected to spur $73 billion of investment.

On top of that, regulatory momentum at the state and federal levels are compelling increased adoption of renewables, with ambitious targets set for generation by renewables.

Aside from novelty and growth, there are other reasons why hydro and nuclear have largely been left by the wayside.

New nuclear is not only expensive to build—just ask Southern Company (NYSE: SO)—but it also faces entrenched opposition from NIMBY (not in my backyard) forces.

With the accident at Three Mile Island having largely faded from public memory, Japan’s Fukushima Daiichi disaster was an unwelcome reminder of what can happen when things go wrong with nuclear.

As for hydropower, perhaps policymakers are less enamored of it because it requires a specific type of geography, and it does affect the local ecosystem (i.e., “the fishies,” as my colleague Richard put it). But then again, so do wind and solar farms.

As utility investors, our bets on renewables are more cautious than opportunistic. We’d prefer to let the venture capitalists and tech investors assume most of the risk.

Our two favorite plays on renewables take a shrewd approach to this space. And subscribers get to see which ones they are, including a stock that yields 7.3%.


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