Disruptive Tech Does Not Care Who is in Washington

We invest the Essex Global Environmental Opportunities Strategy (GEOS) to capture what we believe to be a long-term, sustainable and exploitable mega-trend, the need to continue to harness global economic growth while deploying fewer resources. GEOS invests across nine environmental themes encompassing technologies and services that are benefiting from the dynamic transition to clean energy and technology. The catalysts for clean tech are multiple, and leveraged to trends such as urbanization, associated emerging markets economic growth, increased global environmental regulations, and global climate change effects and mitigation efforts. GEOS invests in companies that are working to solve these economic and environmental challenges, through technologies and services that allow economies, cities, citizens and commercial enterprises to optimize economic growth and natural resource usage. We believe these trends and catalysts are being increasingly recognized as viable by investors, following increased investment in clean technologies by multi-national corporations, an important indicator of commercial validation for distributed technologies, such as solar energy, LED lighting, and energy efficiency initiatives.

We have received many questions lately from investors asking if our new Presidential Administration, given increased rhetoric promoting uneconomic forms of energy such as coal power, will hinder the positive trajectory for clean technology. Our answer is a resounding no - disruptive technologies take share from incumbent methodologies because they offer better solutions that improve the quality of life while making productivity improvements.

There have been several executive orders from President Trump over the past few weeks rolling back environmental regulations, from the Clean Power Plan, to de-funding the EPA. A stroke of the pen from our President may send a supportive signal to his base and supporters of coal power, but such actions should not lessen the growth of commercially-viable clean tech. Adoption is occurring for technologies such as solar power, because it can reduce business risks, and has historically provided sound returns on investment. Investments in clean tech have grown 3.5 times over the past ten years to over $300 billion a year in the U.S., with another $200 billion a year invested in energy efficiency projects, according to Bloomberg New Energy Finance. GE is now investing over $1 billion a year in renewables, and GM just pledged to run on 100% renewable energy for all operations by 2050. IBM is focused on the internet of things (IOT), a key GEOS theme, as IOT enables energy efficiency across so-called smart cities (those that are installing infrastructure such as LED lighting and software-driven meters), homes and factories. J.P. Morgan has underwritten over $11 billion in renewables projects, and has banked over $12 billion in projects. Amazon wants to be at least 50% powered by renewables in 2017, and is striving to be 100% clean energy powered in the next several years. Google is already 100% renewables powered. What do most of these multi-nationals have in common? Many of their CEOs are on the President’s business council, and have gone on record stating that climate change is a threat, as well as a business opportunity (Source: GTM Research, March 14, 2017).

The growth of clean technologies is not due to central government policies, but due to investment, adoption and movements at the corporate and state and local levels. Municipalities and states recognize that growing industries present economic opportunities. Solar industry job growth was 25% in 2016, 17 times greater than the overall economy according to the Solar Foundation, and 1 in 50 jobs created was in the solar industry. Texas, and the upper mid-west may be Trump country, but this is also wind country. The red states, as demonstrated by the chart below, are now green:

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Source: University of Texas Austin Energy Institute, December, 2016.

This energy map is important as it demonstrates the share natural gas, wind and solar are taking from incumbent, highly-polluting, coal-fired, base-load power generation. The research was initiated by UT Austin using the full cost of electricity, factoring the total system cost of generating and delivering electricity. Note that while wind is more base-load electricity, solar is distributed, meaning it is located generally where it is used, or demanded. It is an asset; once installed, the owner can better manage their energy resources, while having less commodity price risk exposure. Natural gas is a strong complement to wind and solar, as it can provide peak-demand sourcing, given its clean base load nature. 

The reason natural gas, solar and wind are taking share is due to the chart below, which examines the levelized cost of energy (LCOE):

 

Not only are renewables and natural gas energy sources cheaper, but they are also cleaner, lower in particulate and carbon emissions, and more flexible and dispatchable. Technology transitions are always extremely disruptive, and historically have completely overcome existing technologies and methodologies. We have conviction that the disruption occurring in many corners of clean technology is increasing, and those with the most to lose are currently fighting the hardest. For investors, disruption brings opportunity, and exhibits the trends we have invested toward at Essex over the past 41 years. 

 

Bill Page