Defending the Cleantech Industry

 | Jan 15, 2014 | 8:15 AM EST
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Among the many sectors I track, I keep an eye on so-called clean technology. I often find opportunities there, such as the turn in solar that materialized this summer.

The cleantech "industry" often comes under criticism for various reasons, the most vociferous being "subsidized" too heavily. The group also came under attack in  a 60 Minutes piece that particularly took aim at the work of Khosla Ventures in the space. That segment created a firestorm within the industry, as companies, consultants, other venture capitalists and even the government came to its defense. Khosla himself wrote a scathing rebuttal to CBS, questioning both the quality of their research and motivations behind the spin they created in the story.

I will leave the debate to the vested interests as our focus here is not the environment or the proper role of government, -- it is to make money. Cleantech is a minefield, with many blow ups, but this is what you would expect in a developing industry. I still expect big winners due to the tailwinds propelling the need for more clean technology.

We usually focus mainly on our home market naturally but the U.S. is actually pretty clean and relatively efficient. The market opportunity is global, however, and many countries have severe pollution problems that will drive further investment and growth. China is the primary example; its air pollution problems are legendary. This fall, air pollution hit "off the chart" dangerous levels in the industrial northeastern city of Harbin, caused by the burning of coal for heat and industry. Companies that can address these sorts of pollution issues in China and other less-developed nations should see rapid growth in the years ahead.

The Cleantech Group, a consulting and advisory firm, notes: "The Beijing Municipal Bureau of Environmental Protection has estimated it will cost China $817 billion to clean its air, and $163 billion for Beijing alone to do so. It's just not air; let's consider water. Only half the water sources in Chinese cities are safe to drink. Seventy percent of the groundwater in the north China plain is unfit for human contact."

I have previously  profiled one coal-to-gas name operating in China, Houston-based Synthesis Energy Systems (SYMX), and I am now working on waste heat to power name China Recycling Energy Corporation (CREG).

My call on solar this summer is predicated on the technology costs declining significantly (thank you again China, as all the panel capacity is in Asia), which makes project IRRs very attractive.

Cleantech Group describes the trend well: "As costs of clean technology have declined, adoption is increasing rapidly. Let's look at solar photovoltaic (PV) as an example: Since the beginning of 2011, the average price of a solar panel has declined by 60%. As we look further back in time, the declines are more impressive. The price of PV cells has dropped from $76.67 per watt in 1977 to $0.74 per watt in 2013. This has led to a significant increase in PV deployments. PV installations in the US have grown approximately 50% per year from 2011 to 2013."

The story gets more interesting because these projects—and project developers—are now being monetized in an attractive way, through the so-called "yieldcos" that pay a stable or growing dividend derived from the economics of the projects. The panel business is likely to be cyclical for the balance of our careers, but projects can sit there and throw off cash for decades. 

Solar and other alternative energy yieldcos can put cash in your pocket while soothing your conscience, the ultimate win-win for green investors. These vehicles are here to stay as well. They were enabled by the MLP Parity act -- which has propelled the MLP asset class -- combined with the low interest rate/low yield environment. Some of the early interesting names include Brookfield Renewables (BEP), NRG Yield (NYLD), Pattern Energy (PEGI). Hannon Armstrong (HASI) is also an interesting name. They are in the business of securitizing the cash flows from energy efficiency projects.

In addition to solar, the LED lighting market is starting to take off. Price points are still high but declining into the "reasonable" range and the bans on carbon filament bulbs and disposal issues around CFLs make LED lighting increasingly attractive. The traditional leader is Cree (CREE), but you can also play Nexxus Lighting (NEXS) or manufacturing equipment name Aixtron (AIXG). You can watch the growth of LED lighting easily, just wander around your local Home Depot (HD) every few months and observe prices and shelf space -- that will be all you need to know!

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