Emissions Rules Could Send This Sector Soaring

Nick Lanyi's picture

Thursday, December 3, 2015 - 12:30pm

by Nick Lanyi

As I wrote on Wednesday, the Paris climate change conference (COP21) is now in full swing. If it results in a binding global agreement to reduce greenhouse gas emissions, we'll see winners and losers as governments around the world initiate or intensify policies to execute the plan.

As an example of what might occur, take India, the world's second-largest country by population and the seventh-largest economy. Prime Minister Narendra Modi has pledged to reduce emissions by 35% of 2005 levels and raise the percentage of its power generation that comes from non-fossil fuels to 40%. That will mean quadrupling its capacity of renewable energy generation by 2022, to 175 gigawatts. (By comparison, the United States' current total renewable capacity was around 165 gigawatts in 2014.)

This is an ambitious goal, but experts say it's achievable. Amazingly, 300 million people in India have no electricity today -- so the nation needs to make enormous investments in energy infrastructure anyway. They'll just do so with renewables -- mainly solar and wind. India plans to add 100 gigawatts of solar capacity, 60 of wind, 10 of biomass and five of hydroelectric.

And that's just India. All of the major economies are making similar pledges. The U.S. goal is a 26%-28% reduction below 2005 levels by 2028, the EU is seeking to cut emissions by 40% by 2030, and so on. Now, skeptics argue that these goals are a mirage and that political and economic considerations will prevent them from being met. In some cases, that may be true. But recent trends lead me to believe that significant progress will be made -- starting with the dramatic decrease in the cost of solar and wind energy.

These Alternative Energy Sources Are Increasingly Affordable
Long thought to be prohibitively expensive and inefficient relative to fossil fuels, solar and wind have become much more viable in recent years, for two main reasons: (1) government policies that funded basic research and incentivized private sector investment, (2) economies of scale that resulted from increased production, and (3) innovations that reduced costs while increasing efficiency.

Renewables are especially competitive in Europe, for various reasons. For example, a recent report by Bloomberg New Energy Finance found that onshore wind turbine units now cost an average of only $83 per megawatt-hour of electricity, vs. $105 per megawatt-hour for coal-fired plants in Europe. 

The chart below shows how global wind power has increased by 670% since 2004.

In the United States, fossil fuels remain cheaper but the gap is narrowing. Wind power costs roughly $80 per megawatt hour and solar costs $107, vs. $65 on average for coal or natural gas fired plants, Bloomberg New Energy Finance reported.

Here you can see that solar has seen huge growth worldwide:

As the incremental cost of renewables continues to fall, these sources will become more attractive to power producers -- especially if federal and state governments continue to encourage renewables for environmental reasons.

As we look for beneficiaries of the COP-21 talks, let's start with the most obvious:

•    Renewables. Pardon the dual pun, but these are sunny days for renewables, which have the wind at their backs. The solar and wind industries are growing rapidly around the world, boosted by both lower costs and environmental concerns. In Paris, we've seen a wave of government, private-sector and nonprofit finance commitments for renewable research and deployment (led by the Bill and Melinda Gates Foundation's $1 billion pledge) that will only accelerate the trend. Other forms of renewables -- such as biomass and geothermal -- are also growing rapidly, but from a smaller base. The investment plays in this area are varied, including electric utilities that have jumped on the renewable bandwagon; makers of solar panels; and technology vendors that serve the industry. 

•    Batteries. Any attempt to reduce emissions must combine a shift to cleaner fuel sources with intensified attempts to lower the growth in electricity demand through efficiency and conservation. One way to do that is through improved energy storage -- instead of burning fuel every time you need juice, you can use energy produced earlier and stored in a battery. That's the basic idea behind hybrid and electric vehicles, and it's the reason Tesla (Nasdaq: TSLA) is pushing large batteries that can power an entire home. As emissions reductions move front and center, companies with innovative or low-cost battery solutions will thrive. 

•    Infrastructure. The massive investments in new energy infrastructure needed to fulfill the COP-21 commitments are sure to pay dividends for large engineering and construction companies, infrastructure developers and equipment makers that supply energy projects. Companies like General Electric (NYSE: GE) are already benefiting from this trend, and as the renewable energy market grows, the best-run companies in the space will look to capture and grow their share.

My colleague Andy Obermueller recently released a shocking new financial briefing about one company's "secret push" into the solar industry. 

The company he predicted to do this was none other than Google. The search engine giant has already invested hundreds of millions of dollars on solar powered projects and spent billions to acquire a company that makes energy-efficient thermostats for homes. 

Andy's included all the details on this new development in "10 Shocking Predictions for 2016" -- including the name of a little-known solar company you can invest in today

Get all of his bold forecasts for the coming year by checking out his shocking predictions report here

Nick Lanyi does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.