Interview: How Edward Guinness' Alternative Energy Portfolio Climbed 67% in One Year
Edward Guinness joined Guinness Asset Management in 2006. He is co-manager of the Guinness Atkinson Alternative Energy Fund. Previously, he worked for HSBC in corporate finance beginning in 1998; in 2002, he joined Tiedemann Investment Group in merger arbitrage. He graduated from Magdalene College, University of Cambridge, with a Master's degree in engineering and management studies.
The Energy Report: Edward, welcome back to The Energy Report. What are the prospects for alternative energy today?
Edward Guinness: The prospects for alternative energy today are as good as they've ever been in the last five or ten years. If you look at the drivers behind the industry, first on my list are scarcity and high prices of fossil fuels. I put second on my list energy security; third, the environment; and fourth, climate change. All these factors remain a priority and a concern. And what has improved over the last five or ten years has been the cost and performance of some of the technologies for installations in the space. So when you look at the cost of wind or solar installations, wind installations on a per-kilowatt-hour basis have fallen by about 35% since 2007. On the solar side, installation costs have fallen by some estimates by about 80% since 2007. So you have seen a dramatic change in the economic potential of the alternative energy industry.
TER: These costs are the costs of materials, installation or the whole package?
EG: I'm thinking about it on a levelized cost-of-electricity basis. That is taking into account the whole package, and looking at it on a per-kilowatt-hour (KWh) basis.
TER: Do costs vary significantly around the world?
EG: "Yes" is the simple answer. For example, there are parts of the world that have much better wind resources. But some countries or regions pay a significantly higher price for electricity, and there the cost hurdle alternative energy needs to overcome in order to be really compelling is much lower.
TER: The prospects for renewable energy are tied to the need to reduce carbon emissions. Are there any technologies that could effectively reduce carbon emissions enough to make coal acceptable as a power-generation fuel?
EG: That's a difficult question. From our perspective, carbon emissions are linked to two of the drivers for the fund, to the environmental side of things and to concerns about climate change. At what point does coal become acceptable? That's a really difficult concept to tackle. But what I would say is that there are technologies that work today that I believe can be harnessed to replace fossil fuels over the next 50–100 years without the need for dramatic improvements in the underlying technology. I think we have the potential, particularly in solar, for installations to be considerably higher in 40 or 50 years than people are imagining today.
TER: Are any of the solar stocks in your Top 10 particularly adept at using those technologies?
EG: Absolutely. They're predominantly the manufacturers of the solar modules that underpin the sector at the moment. They're also moving into the installation market and developing sites themselves.
We own a number of Chinese service stocks that have really driven the costs down to the point where I feel much more confident that solar is going to perform a lot better than people expect. And the reason is that for a lot of consumers today, solar has got to a point where it provides an economic return without any subsidies, and all that we need to do over the next 40 years is work out how to use it efficiently. This could involve connecting solar to the grid, developing energy storage techniques, working in smaller networks or even just changing the way we consume electricity at home or in the workplace.
TER: There are several advances for solar photovoltaic technology—thin-film technology, the efficiency improvements, wide spread rooftop installations. Which of your Top-10 companies are working in those areas?
EG: I would point you to Trina Solar Ltd. (TSL:NYSE), which is a leading Chinese solar module manufacturer. At the moment the product is polysilicon-based, and I believe will remain that way. I'd look at SunPower Corp. (SPWR-A:NASDAQ; SPWR-B:NASDAQ), which is also polysilicon based. It has more expensive products but it has the highest-efficiency modules on the mass market today. That means its products are the most appropriate for rooftop use.
Another company leading the chart is China Singyes Solar Technologies Holdings Ltd. (CSSXF:OTC ; 750:HK), which is a leading Chinese installer. It buys modules and then deals with permitting and planning and grid connection. It connects the installations, whether they're rooftop or greenfield, and then typically sells those to a financial investor or an aggregator.
I think the rooftop future potential is going to be a parallel to the mobile-phone industry, where people think maybe we'll have 5–10% of rooftops covered, and then suddenly people will be saying 15–20%, and then in 40 or 50 years there will be solar electricity-generating material on almost all roofs or buildings. A huge number of buildings are suited to it: housing estates, big-box retail, factories—vast expanses of flat roofs on which panel-based installations work. Longer term, I expect the domestic rooftop market to move toward integrated solar tiles, but I think that's probably another five or ten years away.
TER: Your Top-10 list is very heavily weighted with wind and solar. What about tidal, hydro, wave energy and geothermal? Are any of these technologies looking promising?
EG: I think some of these, particularly some of the large-scale ocean technologies, have real promise, but they're a long way away from delivering. Most of them are a long way away from being able to deliver a cost estimate, let alone a competitive cost.
There are tidal installations in place today. There are a limited number of sites internationally where the opportunity is quite large, but we don't see this as a big game changer internationally. Wave energy could be, but at the moment, the cost is about 10–15 times that of solar and it is still very much at the prototype stage. And these installations operate in one of the world's most hostile environments: Salt water and moving parts don't mix. And that's why a lot of the prototype installations have either not worked or require quite significant maintenance schedules. Right now, there is no listed company for which that is a major part of the business, so I don't see any investment opportunities there yet.
"The prospects for alternative energy today are as good as they've ever been in the last five or ten years."
Geothermal is very interesting. I see opportunities in conventional geothermal, which is where you use either hot water or steam near the surface of the earth to generate electricity directly from a turbine. There are a number of sites around the Ring of Fire in the Pacific or along fault lines in Italy, but the space is geographically constrained. There are a handful of companies, and we hold one, Ormat Technologies Inc. (ORA:NYSE), that is very well positioned. A second technology is hot-rock geothermal, where the energy source is much deeper. It might be 5–10 miles beneath the Earth's surface. And in a similar way to shale gas, you use fracking techniques to frack the rock and then you pump water down, which then goes through the fractures created in the rock to come back up additional wells, and you extract the heat from much farther down in that way. There are a number of prototype sites and a handful of listed companies with exploration prospects, but they're highly risky. The benefit is there are a lot more sites globally with the potential for producing long-term, cheap electricity using this method.
We have a couple of hydro holdings, Verbund AG (OEZVY:OTC) and Cia Energética de Minas Gerais (CIG:NYSE). I'm very interested in ground-source heat pumps as a way of reducing energy consumed in the home. We hold one ground-source heat pump company, WaterFurnace Renewable Energy Inc. (WFI:TSX), which should be very well positioned as new housing in the U.S. begins to pick up. We have a smart metering holding, Itron Inc. (ITRI:NASDAQ), and one biofuels holding of a Peruvian biofuel company, Maple Energy Plc (MPLE:LSE), which produces its ethanol from sugar cane. On the battery technology side, I have a lithium mining holding, Canada Lithium Corp. (CLQ:TSX; CLQMF:OTCQX), because I think that the prospects for lithium prices and lithium producers are very attractive.
Another area I think is very interesting is offshore wind. We're just starting to see large numbers of offshore wind installations go in, and it's still a reasonably small percentage of the turbine manufacturers' business models. We have exposure to three of those turbine manufacturers, but it's an area I'm concerned about, and the cost of offshore wind installations seems to be about double the cost of an onshore wind installation. We are paying a large price for the convenience of not having the intrusion of onshore wind turbines, coupled with the challenge of working in a hostile offshore environment where the operating costs are much higher.
TER: Can you give me a rundown on the wind and solar holdings in your Top-10?
EG: One of my holdings is an inverter manufacturer, SMA Solar Technology AG (S92:XETRA), probably the world's highest-quality inverter manufacturer. Inverters are the key piece that links solar installations to the electrical grid. I believe the difference in output can be as much as 10% between SMA's inverters and other firms' inverters, which makes a huge difference in the economics of a project.
On the wind side I have four different trades going on. First, I hold three wind turbine manufacturers, Vestas Wind Systems A/S (VWS:COP; 0NMKL:LSE), Gamesa Corporación Tecnológica SA (GCTAF:OTC) and Nordex SE (NDX1:GR). They have all done brilliantly this year on the back of improving order books. They've restructured and cut costs and they're now beginning to see the rewards.
I then hold a handful of Chinese wind utilities that are building out Chinese wind farms. They're benefiting from the fact there's been a huge price war among the Chinese wind turbine manufacturers. They're able to build projects that deliver 15%-plus returns. In the last two years, we've seen significant investment and improvements to the Chinese grid and progressive changes to wind energy regulation—and that is feeding through to their bottom lines.
I've got three holdings in large international wind utilities: Enel Green Power (EGPW:BIT), Acciona SA (0H4K.L:LSE) and EDP Renovaveis SA (EDPR:LSE), all of which have portfolios of wind and other technologies across the world that generate healthy returns. Those three companies are listed in Italy, Spain and Portugal, respectively, and that's why you're seeing quite depressed valuations resulting from concerns on the economic situation in those countries. I think the regulatory environment is going to improve in their home markets and, in the medium to long term, the discount for stocks from those countries is likely to diminish.
"Any investor looking at alternative energy needs to think about it as a long-term investment."
Another area of the wind space includes smaller wind developers or utilities, where they might be distressed but have managed to get their assets operating and are moving into profitability. The companies there are Theolia SA (THIXY:OTC) and Greentech Energy Systems (0HFD:LSE). We've got a great Canadian utility called Boralex Inc. (BLX:TSX) that operates wind assets in Canada and is building out additional wind assets that I think are very attractive prospects.
The last company is a bit of a special case; it's a small wind utility in the U.K. called Good Energy Group Plc (GOOD:AIM), which also has 35,000 customers. We've gotten to know the management, and we understand the company's business model. I think Good Energy Group has the potential to grow its customer base to 200,000–300,000 over the next two years.
TER: Very impressive. Talk a little bit about Germany, which has been pushing the envelope on solar and wind. Is the party over there for alternative energy?
EG: I think the party is definitely quieting down. I wouldn't describe it as over. And over the long term I think Germany is in a rather unique and quite attractive position. Its solar industry's manufacturing side has fallen off quite dramatically, but the much larger part of the solar industry in Germany includes the installers and the owners and operators of assets, and they're still doing pretty well. You've seen the subsidies cut; we think installations this year will be in the 3–4GW level versus 8GW at its peak, but that still makes Germany in the top five on a country basis. The wind industry in Germany continues to be a manufacturer as well as an installer, and I think the technological advantage that companies such as Siemens AG (SI:NYSE), REpower Systems SE (a subsidiary of Suzlon Group [SUZLON:NSE]) and Nordex have built over the last 15 years count for much more on the wind side.
TER: You have said you foresee significant potential for further growth in solar energy. Which companies are most likely to experience the growth that you're anticipating this year?
EG: I think it's the leading solar companies. China is not allowing new capacity to be built unless it has significant technological improvement. Top-tier companies like Trina Solar and Yingli Green Energy Holding Co. Ltd. (YGE:NYSE) will be primary beneficiaries of volume growth increases. Last year we had around 30GW of global installations, which was the same as 2011. This year we're expecting somewhere in the 35–40GW range. And I believe we'll then move up to the 70-80GW range in the next two or three years on the back of a much broader base of demand than we've ever seen historically. I believe SMA Solar will be a direct beneficiary of that. It has a decent market share of global installations. I think it will maintain a good market share and that feeds directly through to its growth as well.
TER: How has the alternative energy fund performed this year?
EG: This year has been a standout year for the fund. We've had quite a few tough years since 2008. We've been positioned as one of the only pure-play funds in the sector. A number of our peers have moved to invest much more broadly in companies that are tangentially linked to the alternative energy sector, like General Electric Co. (GE:NYSE) and Siemens, where they do a lot more than just alternative energy. We have a much more focused approach where we have to invest in companies that are least 50% in alternative energy. We underperformed on the way down and we're now hugely outperforming on the way up. We're up 67% year-to-date and the fund is really capturing the growth and recovery of the alternative energy sector.
TER: How would you advise retail investors in the current market?
EG: I am just a humble fund manager. I try not to advise investors if I can avoid it. I think it's tricky, but clearly any investor looking at alternative energy needs to think about it as a long-term investment. The risks are clear and the riskiness and volatility of the sector are shown by the volatility of the fund performance. It's had tough times when we went through the economic crisis after 2008. And you can see how much it snapped back now. I still think there's a huge opportunity. I feel I'm at the foothills of this recovery and the high-percentage performers this year reflect how far down we've gone. I look at my job as trying to climb that mountain.
TER: This has been a delightful talk. Thank you for joining us today.
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1) Tom Armistead conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family owns shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Edward Guinness: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
( Companies Mentioned: 0H4K.L:LSE, BLX:TSX, CLQ:TSX; CLQMF:OTCQX, CSSXF:OTC ; 750:HK, CIG:NYSE, EDPR:LSE, EGPW:BIT, GCTAF:OTC, GOOD:AIM, 0HFD:LSE, ITRI:NASDAQ, MPLE:LSE, NDX1:GR, ORA:NYSE, S92:XETRA, SPWR-A:NASDAQ; SPWR-B:NASDAQ, THIXY:OTC, TSL:NYSE, OEZVY:OTC, VWS:COP; 0NMKL:LSE, WFI:TSX, YGE:NYSE, )
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