The development of efficient renewable energy, in particular solar, is becoming a growing and competitive industry, with the world on the brink of a new ‘industrial revolution’ off the back of increased cost efficiencies from new technologies, and a focus on environment sustainability.
The past year alone has seen a number of local energy headlines such as Elon Musk’s commitment to build battery storage in South Australia that captures excess power production from wind and solar plants, an expansion to the Snowy-Hydro Scheme in NSW, or the announcements by energy supplier AGL setting explicit closure dates for three large coal-fired power plants. An increasing interest and investment in renewable sources and storage of energy is driving greater efficiency in the development of renewables that is also seeing this form or energy production becoming cheaper.
Solar and wind as the growth markets in renewable energy
Renewable energy covers a range of sources including hydro-electricity, solar power, marine energy, wind power, geothermal and bioenergy. While hydro-electricity has been a dominant force for decades and is currently responsible for 42.3% of Australia’s renewable electricity generation, it is solar and wind tipped to be dominant future growth forces1.
Bloomberg New Finance anticipates that 34% of electricity will be wind and solar by 2040 and there are already signs of the growth to meet this prediction with solar production growing 29% in 2016. This prediction factors the improvements in technology efficiency, increasing demand which has seen production costs steadily decline through mass-scale, increased access to and improvements in battery storage and increased international investment in renewable energy in an effort to meet clean energy targets. China and India are dominating this area, representing 39% of all investment into new renewable power generation.
Alongside this, Bloomberg New Finance notes solar energy is becoming a financially viable option with costs to build plants already rivalling that of new coal power plants in Germany and the US and generation costs cheaper than that of coal plants within Australia. Unlike coal power, solar also has the added benefit of being an accessible investment for private households and opening the target audiences for businesses beyond commercial. Though there are still options for wind power installation for private households, it is substantially more difficult with lower small-scale generation compared to solar and has tended to remain more oriented towards commercial operations.
Some countries have offered incentives for private household participation in renewables. For example, Australian consumers have been offered rebates on solar panel installation and early adopters may also have been able to opt into energy company schemes to buy the surplus energy generated for the public grid. Rising electricity costs have also acted as an incentive for others, given electricity prices rose 20% from 2012 to 2016 according to the Australian Bureau of Statistics.
Investing in solar
Following this, manufacturers of solar panels and inverters, once a more niche area, have expanded with a number listed on global stock exchanges, such as US companies SunPower (NASDQ:SPWR), First Solar (NASDAQ:FLSR) and Enphase Energy (NASDAQ: ENPH) or Chinese companies Trina Solar (NYSE: TSL) and China Sunergy Co (NASDAQ: CSUN)2. Some broader electronics companies have also dipped a toe in this space, such as LG Corp (KRX: 066570). Australian-listed options tend to be more on the small-to-micro cap spectrum, such as Arowana International Limited (ASX: AWN) which owns VivoPower, Thermoscan and Everthought Education, GreatCell Solar Ltd (ASX: GSL) which builds Perovskite solar cell technology and EnviroMission Ltd (ASX: EVM) which focuses on solar tower technology.
The time it has taken for market uptake of solar and for the technology to become cheaper and more efficient has not been without its casualties. For example, the influx of Chinese solar companies offering cheap panels in 2012 saw many providers struggle to compete and some completely leave the market – this also extended to seeing a number of small privately owned installation companies go bankrupt, unable to manage upkeep or claims on faulty panels. Or another cautionary tale is that of SunEdison (formerly NYSE: SUNE) which declared bankruptcy in 2016 after efforts to dominate the solar space saw it acquire nearly $12bn in debt by 2015 but the pace of revenue growth from these solar assets were insufficient to keep up.
Alongside the growth in single-focus solar companies, more established energy companies have also directed development towards solar, but from an installation and packaging front, rather than manufacturing. For example, AGL Energy (ASX: AGL), Origin Energy (ASX: ORG) and the Snowy-Hydro owned Red Energy have partnered with manufacturers like Trina Solar, Enphase and LG to offer product and installation packages.
The growth in solar power co-exists with improving battery storage. After all, what is the purpose of generating extensive energy if it can only be used in daylight hours? Advancement in batteries have seen the use of lithium ions in batteries improve their storage capabilities substantially.
Battery storage has not yet reached the return on investment of solar – some estimates from CHOICE suggest it would take on average more than 10 years to generate the return on spend for a private household on a battery power bank, noting that most of these batteries currently indicate a 10-year warranty period. By contrast, solar panels (without batteries) tend to have a 25-year warranty lifespan, with 3-5 years for payback. That said, it is still promising, as suggested by the large investment in South Australia for battery storage of wind power, increasingly residential use and the rise of electric cars, notably by Tesla (NASDAQ: TSLA), but also by a number of older established car companies such as Volkswagen (ETR: VOW3) and BMW (ETR: BMW).
Though the younger Tesla tends to be front of mind for most when it comes to battery storage systems, the industry also includes older established companies like Panasonic (TYO:6752), Samsung (KRX: 005930) and LG which also typically rate favourably for the quality of their home battery storage products.
Alongside the manufacture of battery storage, the potential growth opens opportunity and risks to lithium-producers as lithium increasingly replaces carbon-powered batteries. Australia itself is one of the world’s largest producers of lithium, though its largest mine Greenbushes is majority controlled by Tianqi Group (SHE: 002466). Other companies in this space include Albemarle Corporation (NYSE: ALB), Sociedad Quimica y Minera de Chile (SQM) (NYSE: SQM) and FMC Corporation (NYSE: FMC). As with the solar industry, domestic options are smaller scale, such as Lithium Australia NL (ASX: LIT), Pilbara Minerals (ASX: PLS) and Altura Mining (ASX: AJM).
As the world increasingly looks towards environmentally sustainable existence and continues to work towards the carbon targets set in the Paris Agreement, growth in renewables and solar is expected to continue. With government, companies and consumers alike aware of the potential growth opportunities, the challenge will be in identifying those companies able to survive in the short-term where revenue growth is still small and technology still developing but also positioned to cater towards increasing demand as this changes.
1. Clean Energy Australia Report 2016
2. Note that CSUN was delisted from NASDAQ in 2016 for failing to reach listing standards and regained listing later.
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