In last Thursday’s issue,I discussed how to invest in oil given today’s fast-changing energy market.
Today, I’d like to talk about a range of fantastic new investment opportunities outside of crude.
The reason is simple: The big picture in energy will have less and less to do with crude.
As I have discussed many times before, we are quickly moving to a new model based on a new energy balance.
That doesn’t mean oil is going to disappear. But the future demand for energy is so daunting that every viable source of power will have to contribute if we have any hopes of keeping the world humming.
In this case there are no “silver bullets” either.
But one thing is already certain: “non-oil” energy investment is exploding…
A New Paradigm of Attractive “Non-Oil” Investments
Of course, this new energy balance will require a restructuring of our own. As a result, “non-oil” energy investments have become incredibly attractive – starting with solar power.
As several editions of OEI have indicated over the last month, solar power is coming on fast. In fact, solar has now achieved grid parity in many regions of the country, meaning it’s no longer more expensive than the traditional ways of generating electricity.
That’s true even in the absence of government subsidies. Wind is likewise following suit.
Then there is the resurgence of nuclear usage worldwide. As of January 2015, 30 countries worldwide are operating 437 nuclear reactors for electricity generation and 71 new nuclear plants are under construction in 15 countries. These reactors are very expensive to build, but offer the cheapest way to generate electricity once they become operational.
Now, it’s one thing to be able to provide power at an affordable price. It is quite another to apply that energy in ways that offer a true energy balance. That requires a real exchangeability with traditional sources.
Of course, electricity is one thing; fuel for transportation is quite another.
As long as the market relies on crude as the primary transport fuel (either gasoline or diesel) the new energy balance will remain tilted in favor of oil by default.
But the use of liquefied natural gas (LNG) and compressed natural gas (CNG) to run entire fleets of high-end trucks throughout Canada, to an increasing extent in the U.S., and in much wider applications elsewhere, is one way to diminish oil’s longstanding grip.
Natural gas-powered passenger vehicles haven’t been a big hit in North America, but they have received better support globally. Natural gas powers about 150,000 vehicles in the United States and roughly 15.2 million vehicles worldwide. The primary stumbling block for these vehicles remains the cost of the engine overhauls and the development of an adequate distribution and retail network.
Electric cars and biomass additives to fuels also provide an alternative to crude. But electric cars continue to have range concerns (a game-changing battery technology is needed here), while biomass additives pose power limitations that are well known to those using gasoline with higher percentages of ethanol.
However, this new paradigm will require using all of the available sources, each providing a certain portion of the energy needed.
A combination of traditional gasoline/diesel, electric, natural gas, and biodiesel-run vehicles will be the norm in transport, while an already existing range of sources for electricity will provide for better electricity distribution worldwide.
Why the “Smart Money” is Pouring into Renewables
In this case, there are two keys to a winning “non-oil” investment approach.
One involves technical breakthroughs, while the other revolves around increasing the efficiency of the end-usage.
And for some time now, I have been tracking a series of breakthroughs that could literally change the playing field overnight in both of these categories.
On the technical side, they involve solving the two main bottlenecks that are preventing solar and wind from pricing under coal and natural gas.
The first is the need for better batteries, which would allow for the efficient storage of generated electricity. Storing generated power for use at other times – in short, perfecting a new line of cost-effective batteries – has been the industry’s single biggest hurdle.
As I discussed on Tuesday, a major advance in batteries is potentially unfolding in a significant residential test in California that could change usage patterns in renewables rather quickly.
Meanwhile, when it comes to the battery needs for electric and hybrid cars, the main challenge is to develop more compact applications that do not require lithium or expensive rare earth metals.
In fact, a small company I have been following closely for some time now has just patented two approaches that may just be the advance in this technology that everybody has been waiting for. I’ll have more on this opportunity as it develops.
The second technical challenge is solving the inversion problem. Solar cells and wind turbines produce direct current (DC), which must be “inverted” to alternating current (AC) before it can flow onto the grid. Unfortunately, as much as half (or more) of power produced is lost in the process. But a promising new approach has shown a significant improvement, attracting the interest of some heavy hitters in the renewable space.
Either one of these developments – a battery or an inversion breakthrough – would be an absolute game-changer, providing solar and wind with a pricing advantage.
That’s why the smart money is pouring into renewable power. Led by solar, worldwide capital investment in “clean” energy surged by more than 16% last year.
In fact, spending on renewable energy was so strong in 2014 that some have begun to label the recent rush into renewables as a “turning point” in the energy balance. According to a recent report in Bloomberg New Energy Finance (BNEF), the total invested in renewable power jumped to $310 billion, just $17 billion shy of the all-time record in 2011.
But here’s the real kicker…
Since renewable energy is now much cheaper to generate, last year’s investment brought in almost double the clean electricity capacity versus only four years earlier. That’s undoubtedly a bullish sign.
As for end-use applications, the opportunities are all about smart grids, efficiency networks, and better bridges between peak and off-peak generating prices. Several attractive plays have already emerged in these areas.
What’s more, the upstream-midstream-downstream sequence so familiar to oil and natural gas is now offering similar opportunities in electricity. Traditional utilities are changing rapidly and both renewable sources of power and new technologies are going to be “plugged in” to a more effective (and seamless) network.
All of these will hand us some nice profit opportunities… no matter what happens to the price of crude.
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