The No S*** Sherlock Award goes to…

I just want to say a huge shout-out to Nick Hubble for winning yesterday’s stating the obvious prize.

I read his piece and what a belter it was – turns out solar can’t do it all by itself. Who knew…

What I found especially fascinating was this concept of a blackout – obviously coal and gas fired electricity grids never fail so I was blissfully unaware that such a thing could happen.

The point he makes in case you missed it, is this. Solar plants cannot yet meet all the electricity needs of a country or region, at all times in any conditions.

And he’s right.

It is widely accepted that in order to meet current or growing electricity demand in the UK or worldwide, a balanced mix of renewables will be required.

This must include nuclear, which is the only renewable, clean energy solution which can deliver baseload power generation, 24/7.

Nuclear brings out strong opposition for various well-known reasons, but the facts are these.

We need it, it has caused infinitely more headlines than deaths since its creation, and dramatically fewer deaths and illnesses than coal plants. It is powerful, never sleeps, creates no emissions, and already exists and operates across the world.

So at the very least, we need to utilise the existing nuclear power plants for as long as they can be safely operated, even if cost does prove a barrier to building too many more plants in the near future.

The balanced energy mix will also require a strong system of energy storage and demand response. In Nick’s example, when the clouds come out and solar plants stop generating, energy stored in large batteries can fill the gap for until the sun comes out again. Excess power generated when it’s sunny is stored until it’s needed. Pretty simple theoretically, the challenge so far has been efficiency and cost but these are being addressed.

The cost per kilowatt hour (kwh) of energy storage is down over 85% since 2010 alone, and is predicted to at least halve again in the next decade by Bloomberg New Energy Finance.

This is one of the key trends to look at when thinking about the adoption of renewables.

Why? Because renewables + storage is now literally the cheapest electricity there has ever been, having broken that particular record in a solar power auction in Brazil earlier this year.

And improvements in the energy storage network will have other significant benefits.

For example, one of the major issues following natural disasters such as hurricanes, tsunamis and earthquakes is getting power back. Heat and light are essential to aiding the recovery effort.

In Puerto Rico, Hurricane Maria caused devastation on the island, including to the grid infrastructure, leaving 1.5 million people powerless. It took months to get any power back to large parts of the island.

At the time, energy storage enthusiasts pointed to the calamity as an example of why battery storage solutions are so good – they could have been supplying power where needed within hours or days of the disaster, rather than the months that it actually took.

This year, the government of Puerto Rico launched its renewable infrastructure project based on exactly that argument. It’s a 20-year campaign to modernise the island’s grid, starting with large solar and storage installations across the island.

“The MiniGrids are designed to ensure continued supply to critical loads (those loads most necessary for the safety and health) and provide timely recovery of the priority loads (those required to regain normalcy and restart the economy) and balance the loads within the MiniGrid,” according to the government project.

The plan puts Puerto Rico on a path for two thirds of its energy consumption to be renewable before 2040.

So not only will its energy consumption be cleaner, but also more practical, flexible, and more capable of responding to natural disasters, whether the clouds are out or not.

It’s not hard to improve on

Back to Nick’s article about a cloud causing a blackout in Alice Springs, Australia.

Yes – solar isn’t enough on its own, no it’s not perfect yet, yes the storage failing was the true problem that caused the blackout, but no, it doesn’t really tell us anything that we don’t already know.

Solar and other renewables are still relatively new. Every year brings valuable new lessons and experience, and at least the renewable technologies are being improved each year.

Because let’s be clear, blackouts are not a new problem. Yes (yawn) solar isn’t the perfect solution yet, but it’s only got coal to beat and it’s a pretty low bar. For example:

  • South Africa is currently experiencing its worst ever blackouts. Troubled state monopoly Eskon implemented a “stage 6” blackout (6,000MW removed from the grid) to avoid total grid failure. It did so because of a series of failures at coal-fired power plants.
  • In the UK just a few months ago, swathes of the country were subjected to a blackout, leaving passengers stranded underground on the Tube, and road chaos as traffic lights went dark.
  • In Australia, where Nick found a small example of solar plant failure, 200,000 customers were left without or with reduced power for days because while three coal-fired power stations were out of action for various reasons, the excessive heat reduced efficiency at the operational ones, causing grid supply to shrink.
  • A cyber-attack by Russia on the Ukraine in 2017 left one fifth of the country without power, as interconnected coal stations were switched off by the cyber-attack.

At least with renewables there are alternatives, and soon energy storage should increase its global footprint as the example of Puerto Rico is followed by other nations.

So is the green investing bubble over?

Hardly. Markets are still experiencing rapid growth, and enjoying wild predictions for added power capacity in the next ten or 20 years.

Transportation is going electric. Hydrogen can replace natural gas in heating homes, and powering cars, trucks, ships and maybe planes. Whether it’s windy, sunny, cloudy or calm, a diverse range of renewables incorporating solar, wind, hydro, biomass and nuclear, with energy storage as a backup offer the hope of not just cleaner, but more flexible and cheaper electricity. Carbon sequestration and storage can suck excess carbon dioxide out of the air 400x more efficiently than trees (in terms of space used), and with no added water required.

For investors, this bull market is only just getting going. Investment may have paused somewhat in 2018 as Nick has pointed out before, but that’s like pointing out that bitcoin crashed 68% from its peak of $32 in 2012. It sure did, but it made it to $20,000 just five years later.

Evidence, common sense, the survival instinct, and money are all pointing in one direction – years if not decades of growth in the renewable energy sector. Small examples and stories of hiccoughs, shortcomings and challenges are valuable for learning lessons, but not for investment advice.

“Investment is the arbitrage of ignorance”

Beautiful phrase, isn’t it. It’s from a great book on investing called The Zulu Principle by Jim Slater.

As an investor, in order to “win” (beat the market/average), you need an advantage.

In investment, that means you need an informational advantage.

He recommends seeking out smaller, less well-known sectors with high-growth prospects – ie, not diesel car manufacturers.

Then, study them earnestly, until you have thoroughly understood the industry, its competitive landscape, its participants.

Then, once you can claim to have an informational advantage over other people, invest appropriately.

Basically, he’s advocating looking intently for stocks in sectors which have a strong tailwind behind them, which obviously massively increases your chances of picking winners.

Renewable energy is the ultimate small sector which is set for massive growth.

No trend fits this description any better.

I can think of no better example of the Zulu Principle at work.

James Allen exemplifies the Zulu Principle. He has worked in energy for two decades, and now spends every hour, every week, every month working hard to uncover the companies within this incredible sector. His latest research has found a sector (and a company) that is set to produce incredible returns over the long run. His report is a great example of the work that he does for his subscribers, and you can find it here.

The renewable run for investors will go on, of that I have no doubt.

Have a Merry Greenmas and a Happy Renewable Year,

Kit Winder
Investment Research Analyst, Southbank Investment Research

Category: Energy

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