The renewable energy industry is well past its training-wheels phase and now offers many ways to invest in all types of assets. I’ve been an investor in renewables off and on for the last couple of decades, and I offer in this column a little nonprofessional advice about how best to get into this field as an investor.
Please note that I am not a professional investment advisor and this column should not be considered legal or professional investment advice in any manner. Where I have a financial interest in my recommendations, I will indicate as much.
As with all investments, the two key things to consider are your risk tolerance and your investment horizon. I’ll start with the least risky investments that feature the longest time horizon, and then move toward more risky investments with shorter time horizons.
A friend of mine gave me his lifetime of accumulated investment wisdom recently: Figure out the big waves that you want to ride in the long term and position your surfboard accordingly. The renewables revolution is a very big wave in the distance, and more and more people are lining up to catch it. I’m not a trader -- I’m a long-term investor. And this article is written to help people who are looking to invest, not to trade.
The nearly sure thing
We are now at the point where individuals and companies can invest directly in renewable energy projects, even in small amounts. These are very low-risk investments -- as long as there is a contract in place to either sell the power (for wholesale projects) or to net-meter the electricity (for behind-the-meter projects), which is the case for all of my recommendations listed here. The risk is low, particularly forsolarPV projects, because not much can go wrong with solar PV once the facility is installed and operational.
A couple of low-risk ways to invest directly in renewables:
joinmosaic.com: This crowdsourcing startup allows you to buy a piece of a real solar project that is fully vetted by the Mosaic team. Interest rates vary from 4.5 percent to about 6 percent over a five- to six-year obligation period. Mosaic is not currently accepting new investors, but will resume accepting new investors soon. Disclosure: I’ve invested about $1,000 in a few different projects at joinmosaic.com. So far I’ve realized the exact rate of interest I was promised and was able to easily reinvest my earnings back into real solar projects.
Renewable energy bonds: Warren Buffett’s MidAmerican Energy company offered $1 billion in bonds, at 5.375 percent interest, to finance about half of the cost of its huge 550-megawatt Topaz Solar Farm in San Luis Obispo County in central California. Green bonds now total over $9 billion and there will be an increasing number of similar offerings available for qualified investors.
Slightly riskier, but with higher potential returns
The go-to investment strategy appropriate for most industries is to buy stock in related companies. In the last couple of decades, this strategy has become lower-risk due to the advent of exchange-traded funds (ETFs) in all fields. ETFs trade like individual stocks, but they are actually a basket of potentially dozens of individual stocks.
A few opportunities in the renewable energy industry:
TAN: TAN is the Guggenheim solar industry manufacturing ETF that tracks the MAC Global Solar Energy Index. This ETF is an investment in an increasingly solar-heavy future, and with solar growing at a breakneck pace around the world -- the industry installed almost 40 gigawatts of solar in 2013 -- this seems like a good bet to me. Disclosure: I own some TAN shares.
PBW: The PowerShares WilderHill Clean Energy Fund is a broad renewable energy industry ETF that tracks the Wilderhill Clean Energy Index. This is a general proxy for particular U.S.-traded renewable energy companies. I used to own some PBW shares, but lost quite a bit of money after this ETF peaked in 2008 and then declined sharply. However, this ETF has almost doubled in the last year and may well continue that growth.
LIT: A lithium mining and production ETF that tracks the Solactive Global Lithium Index. LIT is designed to track the global lithium industry, which is essential for batteries in electronics devices as well as most electric cars. LIT is an investment in an electric car future. LIT is considerably down from its highs in 2011, but my feeling is that the EV revolution is set to take off in the coming years, and we’ll likely see lithium demand soar. Disclosure: I own some LIT shares.
Riskier still, but higher potential returns
For those with a higher risk appetite and a longer time horizon, there are hundreds of individual stocks in which one can invest. As with all individual stocks, companies’ stock prices can swing wildly in short time spans, particularly in the relatively young field of renewable energy. The best way to temper risk while still investing directly in renewable energy companies is to buy shares in companies that do more than just renewables. For example:
GE (GE) is a U.S. company with a large exposure to wind power. GE Wind, fully owned by GE, is the biggest maker of wind turbines in North America.
Siemens (SI) is a German company that has large investments in wind turbines and solar panels.
GM is a large U.S. auto company that is pioneering electric vehicles, starting with the Chevy Volt. If you believe in an electric car future, GM may be a good place to invest.
Some individual stocks focused entirely on renewables or electric vehicles may offer strong returns in the future. This category is akin to recognizing the next Google, Amazon or Apple before everyone else does. A small sample of the many options available now:
Tesla Motors (TSLA) has taken the car industry by storm, rising from a plucky Silicon Valley startup to an emerging titan in just a few short years. Tesla’s market share is now almost $21 billion, rivaling that of many of its century-old competitors. While its stock price seems to be overvalued compared to even its forward earnings (it currently has no net earnings), this is a play based on Tesla’s enormous potential market share as its vehicles find new markets and become increasingly affordable. It is also a play on the amazing track record of its founder, Elon Musk. Disclosure: I own some Tesla shares.
PG&E (PCG) is the largest California utility. While PG&E and the other California utilities are generally investing in renewables largely because they’ve been forced to, PG&E offers solid returns and is in fact the U.S. leader in ownership of renewables. Utility stocks offer safe returns, and PG&E also offers a dividend to sweeten the pot.
SolarCity (SCTY) is another Musk co-creation, focused on solar services. It has become the largest solar installer in the U.S. in just a few years, with 32 percent market share in residential installations in 2013. While SCTY may also be overpriced based on current and projected earnings (it also has no net earnings currently), this stock is also a matter of recognizing the huge future market for solar PV technologies, which have come down in cost dramatically in the last five years and are now increasingly mainstream. Disclosure: I own some SolarCity stock.
Cree (CREE) is a U.S. company focused on energy-efficient products like light bulbs and light-emitting diodes for various applications. It’s been on a tear since early 2012, and may continue in the future as LEDs, which are far more efficient and durable than compact fluorescent light bulbs and other lighting technologies, take off.
Highest risk, but highest potential return
If you’re very entrepreneurial, you can invest in your own renewable energy projects. Initial investment capital to create a saleable asset in the solar field, for example, is about $50,000 minimum, for a 1-megawatt to 3-megawatt project, which includes obtaining interconnection authorization, site control (own, option or lease), and a power purchase agreement. With these items in hand, you can often sell the asset for a handsome profit, though returns are being increasingly squeezed by the ever-higher number of participants in this space.
In sum, there are many opportunities to make money in the clean energy sector today. By doing your research and treading carefully, you can minimize your risks while also doing well.
Tam Hunt is owner of Community Renewable Solutions, a consultancy and law firm specializing in community-scale renewables. Community Renewable Solutions can help developers navigate this complicated field and provide other development advice relating to interconnection, net metering, procurement and land use.