While there are a number of solar ETFs investing in promising projects globally, investors may be better off opting for a more general clean-energy-based fund strategy, writes Martin Morris.
As debate rages over when planet Earth will finally hit ‘peak oil’, a consensus has at least emerged that renewable sources of energy will increasingly need to be tapped over the coming decades.
That said, the International Energy Agency (IEA) highlighted in a recent report (November 2009) fossil fuels will remain the dominant sources of energy worldwide, accounting for 77% of the expected demand increase in the 2007-30 period.
Electricity demand, meanwhile, is forecast to grow by 76% over the same period, requiring 4,800 gigawatts (GW) of capacity additions – almost five times the existing maximum potential output of the United States.
However, higher fossil-fuel prices, as well as increasing concerns over energy security and climate change, will boost the share of renewables-based electricity generation from 18% in 2007 to 22% in 2030, the agency added.
It also noted 1.3 billion people will still lack access to electricity in 2030, compared with 1.5 billion today, adding that universal electricity access could be achieved with additional power-sector investment of $35bn annually until then – the assumption being a modest increase in overall primary energy demand and related CO2 emissions.
Solar power
With the above in mind, solar energy, if hardly a new idea in the renewables field, remains one of the ‘big ideas’ nonetheless.
Just how big – at least in terms of ambition – can be seen in the Desertec Industrial Initiative (DII) – a German project launched last year by utilities giants RWE and E.ON. Along with electro-engineering group Siemens and Deutsche Bank, they are among a dozen companies involved in the €400bn ($535bn) venture.
Though still at the feasibility stage, the DII would build solar-power generators (tapping the sun’s rays using parabolic mirrors) from Morocco across to Saudi Arabia and then pump electricity to Europe via high voltage direct current transmission lines.
The project’s proponents claim sufficient energy could be produced to meet an estimated 15% of the continent’s electricity needs by 2050. Expectations are for the first power station to come on stream in 2015.
Not surprisingly, some experts have called into question where the money for such a scheme will come from. In the here and now, however, there are plenty of smaller players and initiatives looking to exploit what remains a growing market. Similarly, an increasing number of investment funds, including ETFs, are becoming available to investors looking for a slice of the action.
Major national players in the solar energy field include Germany and China, although in the Germans’ case, attractive subsidies for firms involved in solar-panel manufacturing and associated industries are now being cut back as that country addresses its domestic budget deficit.
Advances in China
China, however, is ramping up investment in solar power (through its ‘Golden Sun’ programme) by offering 50% subsidies for industrial projects as well as relevant power transmission and distribution systems that connect to grid networks.
Subsidies of up to 70% are available for independent photovoltaic power-generating systems in remote regions with no power supply.
Meanwhile, grid companies under this initiative will be required to buy all surplus electricity output from solar-power projects that generate primarily for the developers’ own needs, at similar rates to benchmark on-grid tariffs set for coal-fired power generators.
The Chinese plan to install more than 500 megawatts of solar-power pilot projects in two to three years, with the longer-term objective of 20 gigawatts capacity by 2020.
Despite this upbeat news, June Aitken, partner at Osmosis Investment Management, which launched its Climate Solutions ETF in February, says: “We believe solar is only part of the solution in the transition towards a lower-carbon economy.
“If investors wish to access companies benefiting from this transition, it may be more appropriate to consider a broader-based ETF, providing exposure to the full range of renewable energy production and smart-grid management.”
The Climate Solutions ETF is 10% invested in solar industry firms – other relevant stakes include energy storage (9%), wind (8%), bio-energy (5%), integrated power (4%), and hydro, geothermal and marine (2%).
Aitken adds investing in specialist products such as solar ETFs requires a good understanding of the technology and drivers behind solar and, crucially, a thorough knowledge of the local regulatory framework in numerous countries. Solar stocks are notoriously volatile and not for the faint-hearted.
Optimistic outlook
Most industry analysts remain cautiously optimistic regarding the outlook for solar markets in 2010 and beyond, given ongoing overcapacity issues and consequent downward pressure on module pricing. In addition, the global downturn will continue to delay and force cuts in funding incentives, she adds: “Most notably, news of subsidy cuts in Germany caused a sharp sell-off in global solar stock prices. However, we believe global demand is likely to grow and offset cuts in Germany as a result of further development of the solar market in Japan, China, India, Italy, and in the US, where large utilities are showing interest in hybrid solar plants.”
Clean energy sector
Nizam Hamid, head of sales strategy for iShares EMEA, meanwhile, argues investing in the global-listed clean energy sector has a number of advantages compared to unlisted private companies in terms of ease of access, diversification and low costs, particularly for smaller-size investments.
iShares S&P Global Clean Energy aims to track the S&P Global Clean Energy Index, offering exposure to 30 of the largest publicly listed companies globally that are involved in clean-energy-related businesses.
Hamid notes that, while clean energy has no globally accepted definition, it broadly refers to renewable energy resources, such as solar, wind and wave power.
He adds that, over the past couple of years, clean energy has emerged as an asset class with strong long-term growth fundamentals, given they are the fastest-growing source of world energy and therefore present opportunities for investors with a longer investment horizon.
Over the short term, however, he cautions this can be a particularly volatile investment, although it can be used tactically as part of a global sector rotation strategy due to its high beta against broad equity markets.
Part of this volatility problem is that valuation of early-stage companies without stable cashflows is notorious. Investors also have a greater propensity to flee riskier sectors when the economic going gets tough. Indeed, the run-up in share prices ahead of December’s global climate change summit in Copenhagen subsequently went into reverse as delegates failed to produce definitive timelines.
Evidence of this volatility can be seen in the February performance of the two US-listed specialist solar ETFs – Market Vectors-Solar ETF and Claymore/MAC Global Solar Energy Index ETF posting losses of 11.13% and 11.52% respectively (total return basis). This compared with year-on-year gains of 26.4% and 45.05%.
And there is the rub. Investors looking for a ‘solar play’ – irrespective of whether they are considering a London- or New York-listed investment vehicle – are probably better off opting for a wider-based clean-energy-based fund strategy where they can reduce their investment risk profile, but at least participate in any sustained economic upswing impacting the industry.
