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The disruption of the $6 trillion energy sector is moving into high gear. We recommend four high-conviction stocks to buy.

We have tracked the alternative energy sector since 2003 and everywhere we look on the renewables landscape costs are falling exponentially. Solar and wind are now the cheapest option for two-thirds of the world and are increasingly competing based-on pure economics, without subsidies.

Our alternative energy related recommendations in 2019 (see WILTWs February 7, 2019, July 25, 2019, and November 7, 2019) have risen 22.3%, on average, to date versus a comparable “apples-to-apples” 12.3% average for the S&P 500 and 16.7% for the Bloomberg World Alternative Energy Index (BWENRG).

The all-in cost of solar and onshore wind power has dropped by 86% and 57%, respectively, since 2009 to an average of $50 per megawatt hour (MWh), calculates Bloomberg New Energy Finance (BNEF). The cost of lithium-ion batteries plunged 85% between 2010 and 2018—a six-fold price decline in eight years (see WILTW November 7, 2019). New breakthroughs hold promise for further cost declines.

Renewable energy and storage technologies are now entering a new phase of disruption, where it will be cheaper to build new solar and wind capacity-plus batteries than to keep existing coal and natural gas plants operating. In September, Los Angeles Power and Water signed a deal for 400 MW of power supplied by solar energy-plus batteries for a total cost of 3.3 cents/kWh—half of the estimated cost of 6 cents/kWh for a new natural gas plant.

New developments since our last memo include:

  • New solar and onshore wind plants have reached parity with wholesale power prices in California, China and parts of Europe on a cost-of-energy basis. In California, Spain and Italy, the cost of renewable energy is now lower than the 2018 average wholesale price, primarily set by existing gas plants, calculates BNEF. In China, the cost of new renewable projects is below the average tariff for coal generation, which is its benchmark for generation costs.
  • New solar and wind capacity will be cheaper than existing coal or gas plants in a growing number of countries beginning this year, most countries by 2025, and nearly everywhere by 2030, estimates McKinsey.

Source: Ramez Naam Presentation

  • The cost of offshore wind power has dropped by a factor of five over the last decade. Recently, Orsted and German chemicals firm Covestro signed the world’s largest deal for 100-MW of unsubsidized offshore wind energy.

  • Plunging battery prices are on-track to make electric cars cheaper than conventional combustion engine vehicles within three years, calculates BNEF. Sales of EVs have grown 450% in four years, essentially accounting for all growth in the auto sector. At least 16 nations have set targets to phase out internal combustion engine vehicles.

Source: Bloomberg Intelligence

Rapid EV adoption could present capacity expansion challenges for electric utilities. In the U.S., a Department of Energy study found that increased electrification across all sectors of the economy could increase national consumption by up to 38% by 2050, primarily due to electric vehicles.

However, a November 2019 report concluded that there has been nearly no increase in electricity demand nationwide over the last decade, due to efficiency gains, while capacity has grown by an average of 12 GW per year. As a result, with appropriate planning, energy production could climb at a similar rate and still meet the most aggressive estimates for adoption of electric vehicles.

  • New Semiconductors are reducing the cost of electric vehicle batteries. New chemistries used in gallium nitride (GaN) and silicon carbide (SiC) based semiconductors can operate at higher voltages than traditional silicon wafers.

  • Concentrated solar power is set to make cement, steel, glass and other industrial processes for the first time. Heliogen, a secretive Bill Gates backed startup, uses AI and a field of mirrors to concentrate enough sunlight to generate heat above 1,000 degrees Celsius. Renewable energy could now begin to disrupt industrial processes that account for over 20% of global emissions.

  • Perovskite-based solar panels are improving efficiency ratings faster than any other material. Purdue University scientists recently developed reliable hybrid perovskite-based solar cells that have a 28% efficiency rating in capturing sunlight versus 15% to 18% efficiency for current solar panels. Ultimately, the thin, flexible and lightweight Perovskite panels could reach 66% efficiency at a cost of about 10 to 20 cents per watt versus 75 cents for traditional panels, notes Dr. Peter H. Diamandis.

Source: Ramez Naam Presentation

Our favorite initial alternative energy and battery stocks for 2020 are:

  • Orsted A/S (ORSTED DC, 684.6 DKK) – is a leading developer of onshore and offshore wind farms. Orsted has recently completed development of the world’s largest offshore wind farm capable of generating 1,218 MW. Phase-II of the project will generate another 1,400 MW and is scheduled to go online in 2022.

    In November 2019, Orsted also released plans for a five-GW offshore wind hub connecting Denmark, Poland, Sweden and Germany. Orsted increased offshore energy generation by 47% y-o-y in Q3 2019 to 2.8 TWh. Orsted trades at 18.2 times cash flow, below its median of 19.1 times.

  • Nextera Energy (NEE, $251.58) – is a leading operator of solar and wind farms, and is well-positioned to capture the benefits of continued cost declines in renewable energy. In the latest earnings call, Nextera noted that its pipeline of renewables and storage projects added 1,375 MW of renewables projects in 3Q 2019, bringing the cumulative total of order backlog to 12,300 MW. ·NEE has posted a total return of 488.7% since our initial 2010 recommendation (vs. 257.2% for the S&P 500), but remains attractive, breaking out to a new all-time high this week, and trading at 12.6 times cash flow.

  • SolarEdge Technologies (SEDG, $103.61) – provides solar power optimization and photovoltaic monitoring solutions, with installations in over 130 countries. SEDG is also the world's largest maker of inverters for solar power systems.

    SEDG is expanding production capacity at its Hungary factory and contract facility in Vietnam. SEDG also offers software solutions for grid operators to efficiently manage residential solar systems. SEDG is expanding into energy management systems and grid services using data from its millions of deployed solar systems.

    SolarEdge has also acquired companies in the last two years to strengthen product portfolio, including: 1) Gamatronic, an uninterrupted power specialist; 2) Kokam, a South Korean battery manufacturer; and 3) SMRE, an Italian electric mobility firm. SEDG has gained 314.7% since our initial 2016 recommendation (vs. 58.1% for the S&P 500), but remains attractive, trading at 15.5 times consensus EV/EBITDA, below a Bloomberg peer group average of 16.2 times.

  • Contemporary Amperex Technology A.K.A. CATL (300750 CH, 116.07 CNY)–is the world’s largest EV battery maker by installed production capacity. In 2018, CATL produced 27 GWh of batteries, and plans to add production capacity of about 20 GWh annually for the next decade, notes Benchmark Minerals Intelligence. CATL aims to supply 4.2 million EVs annually by 2028.

    CATL is investing $2 billion in Germany, its first factory outside of China, and is also exploring options in the U.S. CATL also has unveiled cell-to-pack (CTP) batteries to improve efficiency and lower costs. The technology advancement, which includes more than 70 core patents, increases mass-energy density by up to 15%, volume utilization efficiency by up to 20% and reduces the amount of parts required for battery packs by 40%.

    Other technology innovations include ultra-fast charging solutions and improving total EV battery life to 600,000 kilometers. CATL has gained 55.1% in dollars since our November 2019 recommendation (vs. 6.5% for the S&P 500), but remains attractive, trading at 25.4 times consensus EV/EBITDA, below its median of 29.7 times.

In the weeks ahead, we will explore the investment outlook in-depth for our renewable energy and storage recommendations.




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