Ahead of the Curve ™
Sustainable Energy & Industrial Technology PrimerMay 23 2018
Report by Jeffrey Osborne, Joseph Giordano, CFA, Thomas Boyes, Tristan Margot, CFA, Christopher Souther, CFA and Emily Riccio
We have created our third annual comprehensive primer on the Sustainable Energy & Industrial Technology sector to assist investors in navigating its complex and varied sub-verticals. Given the improving unsubsidized economics, stronger demand, and less reliance on government intervention, we remain bullish about long-term prospects. Our top ideas are AYI, ITRI, HASI, FSLR, XYL, ORA, and TPIC.
Deep Dive Into the Sustainable Energy & Industrial Technology Sector
We have compiled a 378-page primer on the sector. After years of underperformance vs. the broader indices, we see the group set for outperformance in the years ahead as growth is no longer predicated on subsidies and government policy. New solutions are becoming more mainstream as renewable investment added 10.6GW, 14.6GW, and 9.8GW for 2015, 2016, and 2017, respectively. We see the group set to break out as costs continue to fall and the sector becomes more mainstream and no longer a form of “alternative” energy, but the “primary” energy source. Global utilities are deploying wind and solar due to economic drivers rather than subsidies that were needed in the past. We are most excited about multi-year investment prospects in the smart grid, wind, and lighting markets. We see solar building off of its tepid recovery in 2017. The third edition of our primer includes expanded smart grid and energy storage sections as well as a complete update of our existing sections. We have updated our views on the solar sector with a more cautious stance in the near- to mid-term, but continue to see First Solar as the long-term relative winner in the sector.
Smart Grid Needed for Distributed Power; Grid/City/Building Leveraging IoT
Over the next ten years, we see the electric grid becoming more connected by still using centralized generation sources, but incorporating an increasing level of distributed generation. This will require a “smarter grid” in order to efficiently manage the combined system. A smart grid will allow utilities to have a real time view of supply and demand across a network. Not only will this interconnected network leverage utility intelligence, but we see cities participating in network transformation as they look to implement energy efficiency and increase security. We are at the beginning of a multi-decade cycle of smart buildings, leveraging the integration of smart lighting, fire, security, and HVAC to drive energy savings and operational improvements.
Utilities to Embrace Renewables as Energy Generation Becomes Competitive
As the transition to a lower carbon economy proceeds and the shift in mentality from renewables being something utilities were “forced to do” due to regulation to renewable power being the most cost effective source of generation, we see a potential tipping point for the industry. Regulatory support of renewables is no longer the only force driving clean power generation, and, with a smarter grid, utilities will be up to the challenge of managing the increased complexity of intermittent power. In our view, utilities remain committed to deploying “clean power” despite Trump’s opposition.
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