Nathan Lim

Since breaking the psychological US$100 level in September, Brent crude oil has fallen 34%. Strangely, the Ardour Solar Index has also fallen the same amount over this same period. What the heck does the oil price have to do with solar?

Only 5% of crude oil is used to produce electricity globally and much of this is occurring in the Middle East where crude oil is cheap and abundant. Crude oil power generation is simply not a significant end market because it is not growing and is utilised mostly in regions with unique circumstances i.e. an abundance of cheap oil.

Crude oil is significant in transportation with 64% of it used to move planes, trains, ships, cars and trucks. This is clearly one area where solar has little influence at this point in time as electric cars remain well below 1% of the global vehicle fleet (perhaps even as low as 0.1%).

Electricity generation is the strongest area of growth for solar. Rooftop solar installations are by far the most exciting area given that unsubsidised panels are becoming increasingly competitive globally. This dynamic has been dubbed “grid parity” by solar supporters. For example in Australia, even without any financial assistance, the retail price of electricity is so high that the payback on a typical solar installation is well under 10 years  and can be as short as 6 years with small scale technology certificates (STC). Homeowners are recognising that using solar to meet even a portion of their total energy needs makes financial sense. It is this change in mindset that is driving adoption.

At the wholesale level, Dubai has just set a new global low for the price of electricity generated from solar, signing a power purchase agreement at 5.98 cents per kilowatt hour. This is cheaper than either coal or natural gas power generation. This follows auctions in Brazil that achieved a price of 8.7 cents which is only modest higher than the 7.8-8 cents signed with fossil and biomass fuelled power plants.

Solar has nil emissions so in an environment where governments are seeking to lower the emissions intensity of their economies, renewable energy already has a well-defined role in future planning.

The permitting and construction time for even large scale solar projects is a fraction of the time needed for conventional power plants. A conventional power plant can see the permitting process stretch out for years as rigorous environmental studies need to be conducted to protect wildlife and safeguard against emissions. The low environmental footprint of a large scale solar project (never mind the virtually nil impact of a solar panel on a rooftop) helps to speed along the permitting process. This means projects can be deployed quickly and with minimal impact on the environment or the neighbourhood. From a developer’s point of view, a solar project has lower execution risk than say a coal-fired power plant.

In summary:

• Solar does not compete with crude oil for electricity generation
• Solar dovetails into government policy seeking to reduce the emissions intensity of the economy
• Solar is becoming increasingly price competitive in more places around the world without subsidy
• Solar projects are lower risk and relatively quick to build

Given this, it makes no sense to see solar shares being sold off with the fall in the oil price.

Nathan Lim, Australian Ethical Investment’s International Equities Trust 

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Heavy investment in solar sector

The resource sector continues to be under pressure from a strong US dollar, rising long-term interest rates, growing oversupply and excess capacity which is taking its toll on the explorers and producers in the resource sector.

The oilfield services we have selected have a higher yield than bonds with significant potential to grow dividends year-after-year and we believe they are under appreciated by those in search of yield.

For more significant growth potential, however, we intend to invest more heavily into the solar sector with the remainder of our cash balance.

We believe the solar sector has the highest growth potential in the US, benefiting from significant cost reductions, making the technology profitable in its own right without reliance on government subsidies. As a “green” energy, it should continue to be a politically favored industry.

US President Obama would like to double renewable electricity generation by 2020. This could be beneficial for nuclear energy, which does not have carbon emissions, but the prime beneficiary should be solar energy, the cheapest form of renewable energy to install and maintain.

At some point we can see hard assets returning to favor once again thanks to either the potential for the unprecedented monetary stimulus that the US Fed has been feeding into the market or global economic growth rebounding on its own.

Until either of these events occurs we will remain heavily weighted towards those sectors peripheral to the resource sector and in alternative energy. Our fund is approximately 50% in cash and we are excited about continuing to turn the corner and begin to achieve our objective of outsized returns. The resource sector continues to be under pressure from a strong US dollar, rising long-term interest rates, growing oversupply and excess capacity which is taking its toll on the explorers and producers in the resource sector.

Rising interest rates due to either a growing US economy and/or the potential for the US Fed to reduce QE purchases next year has triggered a bear market for bonds, increasing the appeal of US equities.

By Rodney Stevens, Fund Manager

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