Commodities - DECEMBER 15, 2016

Alternatives and conservation

by Benjamin Cole

If the outlook for fossil fuels is challenging, then the world of alternative energies is daunting, at least from the investor perspective and in the medium-term.

Oil will eventually budge higher and give hope to alternative fuels or conservation technologies, but the days of Goldman Sachs predicting $200 a barrel oil appear over for a lifetime. In some regards, the green movement has met with too much success, and the demand for fossil fuels weakened with each new high-mpg car or energy-efficient building. The shale-oil drillers deserve kudos, but oil demand has been weak for decades, especially in the developed world. Though little noted, Europe and Japan consume less December 2016 3 23 oil today than in 1979 (the year of the first OPEC oil embargo, and sharply higher oil prices), due largely to heavy fossil-fuel taxes and continuously improving conservation.

Europe consumed 24.7 mbd in 1979 but only 18.2 mbd in 2014, while Japan consumed 5.5 mbd in 1979 and only 4.3 mbd in 2014. The United States, with its low gasoline taxes and higher domestic production, consumed 21.3 mbd in 1979, and a little more, 23.2 mbd, in 2014, all figures according to BP’s annual statistical report.

The 35 years of tepid oil demand in the developed world may be a prelude to even duller long-term oil demand, given a successful introduction of battery-powered vehicles in the next 10 years, contends Jonathan Walker, manager of mobility practice at the Rocky Mountain Institute (RMI), the energy think-tank founded by Amory and Hunter Lovins.

RMI executed an extensive study of battery-powered cars in 2014 and concluded that to be commercially viable, electric vehicles had to meet their fuel powered cousins on price, while offering 200 miles in range.

The industry is not there yet, but the trend lines are in place, and even relatively moderate oil price will not stop electric vehicles, asserts RMI.

“Once sticker-price parity is reached, the cost of fueling an electric vehicle will always be less expensive than fueling on gasoline, so oil prices are not a major barrier at all,” says Walker. Some serious industry players have been promising much better lithium batteries, and in the not-so-distant future. In July 2015, German industrial concern Bosch, the Japanese battery-maker GS Yuasa, and automaker Mitsubishi jointly announced they were “on a good path” to producing lithium batteries within five years at half the cost and two times the range of current commercial offerings. If true, the trio’s batteries would just about meet the RMI criteria for consumer crossover, and the beginning of the end of the Oil Era.

Yet the Bosch-GS Yuasa-Mitsubishi picture is a microcosm of much of the energy alternatives world from the investor viewpoint: unlike oil, relatively pure plays are hard to come by, and even those that are somewhat pure are unpredictable.  Mitsubishi is, of course, an automaker, and faces challenges and opportunities far beyond electric vehicles, while Bosch is a German-based diversified toolmaker.

GS Yuasa is probably the most pure-play of the trio and is primarily a battery maker, but it just bought Panasonic’s traditional lead acid battery business and has other lines, such as specialty power and lighting systems. There is much to like about GS Yuasa, such as its $25 million in sales and $692,000 net per employee, and a 3.16 percent dividend. However, it is also known as the maker of the lithium batteries that caught fire in Boeing’s latest jetliner.

And after all that, even if GS Yuasa makes an auto battery that works as advertised, there is no guarantee consumers will leap at it, as posited by RMI. Or perhaps another outfit will produce an even better battery, or Mitsubishi vehicles will be snubbed by buyers for unrelated reasons, such as styling.

Compare the uncertain GS Yuasa outlook to the investor who buys an oil stock that offers a good dividend and awaits what seems to be a near-certain eventual doubling or more of crude prices.

Even so, GS Yuasa is perhaps better positioned than the solar- and wind-power industries that are facing serious competition from natural gas power plants.

Investors in SunEdison, the purveyor of solar- and wind-power systems, have seen their stock tumble from $78.49 in late 2007 to $1.98 in February trading. There are many culprits in the SunEdison debacle, but the underlying fundamental is that natural gas is cheap and, thus, power from natural gas fired power plants is cheap, as well.

There may be opportunities in alternative energy for investors, but the sector is 24 3 December 2016 highly creative, evolving, diffuse and under stress. Some advisers point to “yieldcos” or companies that buy clean-energy projects such as solar and wind farms, and use the majority of free cash flow from these projects to pay dividends to investors.

But, in general, the alternative energy sector is for the brave and very well informed.


Benjamin Cole is a freelance writer based near Korat, Thailand.

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