Fogarty and Lamb, Investing in the Renewable Power Market

The history of wealth in nineteenth-century America in large part paralleled the history of the energy markets. I grew up in a town that once boasted more millionaires per capita than any other town in the United States, thanks to coal mining. By the middle of the twentieth century most of the coal was gone; what had once been a 100-acre estate became home to the Sisters of St. Basil the Great; the town was in visible decline (and has only declined further).

Tom Fogarty and Robert Lamb take us into the twenty-first century, and into a new energy dynamic, with Investing in the Renewable Power Market: How to Profit from Energy Transformation (Wiley, 2012). Let’s put it this way, don’t start flipping through the Sotheby’s real estate listings, at least not in the near term. Unless, of course, you’re the genius who can finally solve the seemingly indomitable battery problem; at the moment battery technology can store electricity for at most four hours. Despite the fact that the authors believe that renewable energy must be a part of our energy future, Fogarty and Lamb, a practitioner and an academic, are realistic about the daunting challenges it faces.

Start with the fact that prices for renewable energy are priced off of natural gas, which has broken below $2 per million Btu. (In the summer of 2008 it traded at $13.57.) As a result, “in the short term it makes sense to bet against renewables as opposed to developing or investing in new projects.” (p. 3)

Who would want to invest in renewable energy projects? For the most part, not you or me, not even private equity. Corporations looking for tax credits are likely candidates, as are those groups seeking to purchase projects at distressed prices. “Some of the very best investment opportunities in the entire energy industry today are in purchasing at fire-sale prices many abandoned or distressed municipal bond waste-to-energy power plants in our very low interest rate market.” (p. 54) But in the final analysis, the authors conclude, “only the U.S. government can fund and take on the risk of new energy technology.” (p. 176)

The bogey man for the renewable power market, as the authors repeat frequently, is shale natural gas. Right now it is so abundant and so cheap that renewable energy can often seem like a futile dream. Moreover, as governments, especially in Europe, impose austerity measures and decide that subsidies for renewable energy are obvious candidates for the chopping block, they undermine the already fragile renewable energy stocks. Only this week First Solar announced that it was downsizing in the face of a solar panel glut and a cutback in European government support (especially Germany and Italy) for utility-scale solar installations. Its stock rallied on the news, but that was small comfort to those who bought a year ago: they’re looking at a 83% loss.

If ultra-cheap nat gas and government cutbacks were not enough, renewable energy also faces serious structural problems. Unlike traditional power plants that produce energy 24/7, wind is effective only about 30 percent of the time; solar, 16 percent. So a solar plant or wind energy farm needs a backup energy supply plant fueled by gas, oil, or coal. A backup plant “usually is much more expensive to run per hour than any normal standard power plants that are always on, running steadily.” (p. 55) A possible solution to this problem is a virtual power plant.

The authors devote separate chapters to both renewable and traditional power plants (solar, wind, natural gas, coal-fired, biomass, nuclear power, hydropower, and geothermal). They lay out the economics and environmental impacts of each and some of the regulatory hurdles each faces.

Investing in the Renewable Power Market is a sober, carefully researched analysis. Anyone contemplating investing in renewable energy stocks or ETFs—or even in traditional energy stocks—will get a solid introduction to the field.