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Sustainability and ESG are the hot topics of discussion at the stock exchange. While decarbonization is typically the first solution that comes to mind when discussing ecology, there are various other avenues that also warrant attention, including the protection of freshwater resources, mitigation of global warming, and preservation of endangered animal populations.
Many of these problems are partially solved by using alternative sources of energy. In the article, I will consider types of alternative energy that do not have a direct impact on the environment – for example, large hydroelectric power stations are not suitable as they are considered alternative energy, but they directly affect the environment of rivers by obstructing the paths of fish and animals. I will also exclude sources that have a limited potential for dissemination – for example, there are not many places in the world where thermal energy sources or tidal energy can be used.
Let’s talk about the strong and weak points of each of the selected sources, and then consider the issuers on the stock exchange that may be of interest to investors.
Alternative energy source
Biodiesel, biogas, and other substances with methanol or ethanol
The main idea here is to replace traditional fuel with biological fuel. At first glance, everything is great: biofuel practically does not emit harmful substances into the atmosphere when burned. But there is another problem.
Either agricultural animal by-products or sugar-containing and oilseed crops are used for biofuel production. At the same time, we see a trend towards eco-friendly agriculture, including the introduction of artificial meat into our diet.
To conduct classical agriculture, a huge amount of water is required. According to water consumption standards, on average, one head of cattle needs from 70 to 100 liters of water per day. And to produce 50-65 m³ of biogas, about one ton of cattle manure is needed. If we take vegetable raw materials, then approximately one ton of oil yields 200 kg of methanol or ethanol. For example, to operate an average modern combine, 5 kg/ha of fuel is required. That is, one ton of oil is enough for approximately 40 hectares.
Below, I have provided a table of oil production from various raw materials. The increase in agricultural land threatens us with deforestation, contamination of groundwater with fertilizers and animal waste. Plus, the range of a car using this type of fuel is reduced by an average of 20-25%.
In conclusion, it can be concluded that biofuel or biogas is a cleaner fuel than traditional gasoline or diesel, but in its production we face a number of problems such as increasing crop yields or deteriorating operational quality of vehicles, which also affects the environment.
In Brazil, the use of such energy sources is highly developed because the country has faced oil crises, and this is a good alternative. But Brazil has good climatic conditions for growing almost all types of crops. And yet, Brazil is heavily criticized for the problems of hunger among its population and the unethical use of agricultural land.
Wind energy generation
This is another type of alternative energy that has excellent environmental performance at first glance – primarily the complete absence of hydrocarbons during the generation of electricity.
However, firstly, the use of wind turbines may not be possible everywhere, and secondly, the efficiency of such a station leaves much to be desired: on average, it is about 30%. According to Betz’s law, the maximum coefficient of wind energy utilization is 0.593. Taking into account the costs of energy conversion and transportation, the maximum possible efficiency will be around 35-45%.
This is due to a long chain of energy production: to power any object, a 380/220-volt alternating current network is required, and a wind turbine itself generates a 24-volt direct current – that is, an inverter is needed to convert this current.
Also, it is necessary to store energy during the moments when it is not being consumed – for this, an accumulator battery will be needed. Energy is lost in each of these links. One turbine with a height of 10 meters and a rotor diameter of 1.5 meters produces only about 0.6-0.7 kWh/day of energy, depending on the wind intensity. For example, a regular household refrigerator consumes about 0.3 kWh.
There is also a negative impact on the environment.
- A large area is needed for a wind farm, which could lead to deforestation and landscape leveling.
- Wind turbines generate vibrations at a certain frequency, which cause worms to move deeper into the ground, leaving birds with nothing to eat and disrupting food chains.
- A huge amount of batteries are needed to store energy. Rare earth metals are required to produce these batteries, and mining these metals is very dirty and harmful to the environment.
- A graveyard of worn-out wind turbine blades is a huge problem. We haven’t yet learned how to properly dispose of wind turbine blades.
According to many, this is one of the most environmentally friendly types of energy currently available. The essence lies in the principle of a photoelectric cell: when light – not necessarily solar – falls on the cell, electricity is generated. It seems that it can’t get any cleaner, but no. Solar power plants have the same problem as wind ones.
The efficiency of solar power plants does not exceed 25-30% due to the same chain as that of wind farms: inverters, battery backup for storage are needed. Large areas are also required to build the stations. One solar panel with an area of 7 square meters generates only 6-7 kWh per day. As we discussed earlier, this is not so much. Plus, they have the same problem with energy storage as “wind turbines”.
There are still issues with operating these stations: hail can damage the panels themselves; semiconductor elements can overheat; wire cross-sections must be increased – the panels should be placed in sunny locations where the temperature can be high, and the higher the temperature, the greater the resistance of the conductors.
What should we do about all of this?
I believe that our alternative energy technologies are not yet ready for large-scale decarbonization. It is necessary to invest primarily in the development of technologies, rather than in the implementation of existing ones into the global energy system.
In this regard, I see a perspective in nuclear energy, as it is one of the cleanest types of energy, if not considering extreme cases. According to the IEA data, the growth of nuclear energy usage by 2040 will be 28-62%, and according to BP’s forecasts, by 2050 it will be 42-164%. The range is large because some countries, such as China and India, are significantly increasing their production volumes and introducing new reactors into operation, while other countries, such as Japan, are reducing them.
I see even greater potential in the development of gas power plants. Gas is much cleaner than coal or oil, and the transition of thermal power stations from other types of fuel to gas is the easiest to implement in practice. Replacing coal power with gas power reduces carbon dioxide emissions by 50-70%.
Graphs presented show that according to forecasts by 2040, gas will be one of the main sources of energy, while other clean sources of energy taken together will lag behind.
On the other hand, each of the listed sources of alternative energy is highly promising in narrow-focused segments.
For example, biodiesel is perfect for agricultural machinery, biogas – for heating greenhouses or animal housing buildings, and solar panels are good for electric vehicles: the electronics in the car operates on a constant 12-24 volt DC – the efficiency of such a setup is significantly increased because several links in the production chain are eliminated.
Overview of companies
To conclude, I will give examples of companies from each segment of alternative energy discussed in this article. I will only consider companies that a Russian investor can buy without the status of a qualified investor and which I found interesting.
NextEra Energy (NEE) is the largest energy company in terms of solar and wind energy production volumes. Perhaps the main beneficiary of Biden’s future infrastructure development program, if it is accepted.
This is a communal company – it does not produce innovative products or develop software. Its business is very simple, but requires serious investments for expansion. That is why the debt is 130% of capital. Net profitability, according to recent data, is about 14% – this is an excellent indicator for communal services, but it is significantly reduced: in 2018, net profitability was about 40%, and in 2019 – 20%.
It is probably related to the price of hydrocarbons, as the higher the price of oil, gas, and coal, the more attractive electricity looks as an alternative. At current oil prices, the company has good prospects for increasing its margin again.
According to the multipliers, the company is very expensive for the utilities sector: P/E = 52.5; P/S = 8.49. However, the company constantly issues new shares, diluting the share of shareholders.
SolarEdge Technologies Inc (SEDG) is an Israeli company that develops and manufactures equipment for solar panels. When Biden came to power and all alternative energy stocks went up, it affected the company, but with some excessive zeal.
The company is worth 100 years of profits and 9 revenues – even after a 30% drop from its highs. Plus, a 10% margin is good, but for companies with such a valuation, it’s insanely small. Overall, SolarEdge Technologies has good steady growth from year to year. Revenue and shareholder equity are growing, with debt at around 60% of capital. Overall, this is a good growing business that will probably continue to develop, but it’s just too expensive.
First Solar Inc (FSLR) – in my opinion, this is the company that will receive the lion’s share of investments from Biden’s plan. They create thin-film solar panels, and this is generally a promising technology. The company has very unstable financial flows, but at the same time, it has no debts.
This year they have already shown a margin of 15%, and if you add government orders to this, it will be a very good scheme. P/E = 21, everything is good here, but P/S is a bit high at 3.12. If the company’s management can win tenders and sign good contracts with the government, then both financial indicators will improve and the company’s capitalization will grow. But there are many risks here: many players are appearing in this market.
Renewable Energy Group Inc (REGI) is engaged in the production of biodiesel. Over the year, the company has already made more than 200%, and on the peaks in March, it showed growth of more than 350%. Even now, based on the multiples, the company does not appear to be very expensive: P/E = 23, P/S = 1.35. Net Profit Margin is around 6%, which is also average for the market.
Since 2014, the company’s revenue has been growing, and only in 2020, the year of the coronavirus, it decreased, but the company remained profitable. In fact, this is a very niche business, and any agricultural producer can create biodiesel for themselves – for example, Archer Daniels Midland Company (ADM) does just that. Biodiesel consumption is unlikely to grow significantly, but Renewable Energy has found its niche and will not leave it.
TPI Composites (TPIC) produces blades for wind turbines. The company is unprofitable, but revenue is growing rapidly. We cannot evaluate it based on P/E, but P/S = 1.17 is a good indicator. The company’s capitalization is only $2 billion, and if you believe in this startup, you can hope for a good outcome. This is another American company that should benefit if Biden’s plan is accepted. At the moment, the company is down 30% from its February highs, so it may be a good time to enter.