In 1931, Thomas Edison famously said: "I'd put my money on the sun and solar energy. What a source of power! I hope we don't have to wait until oil and coal run out before we tackle that." It's fair to say that he was ahead of his time by about a century, but what do you expect from a man like that?
A rational long term view is essential to successful investing and it surprises me how many professional investors keep missing the point when it comes to energy trends. Transitions beget opportunity for investors who can predict outcomes better than others. The rise of the telcos, such as Telstra Corporation Ltd (ASX: TLS) and Vocus Communications Limited (ASX: VOC) in the last couple of years are testament to this fact. Going back a little further, the rise of disruptive internet advertisers such as SEEK Limited (ASX: SEK), Carsales.com Limited (ASX: CRZ) and REA Group Limited (ASX: REA) is another example of how new technologies create new winners.
An opportunity arises for investors because there are plenty of fund managers (though diminishing in number) who believe that renewable energy is too expensive and cannot replace coal. While coal is required for making steel, that's just a small part of demand. Many investors overestimate the need for base-load power, underestimating both smart grid and electricity storage technology. While these technologies will need to improve before all base-load generation is removed, it is a joke to suggest grids are unable to reduce reliance on base-load power in the short-term.
The controversial Abbot Point coal export terminal project has been reinvigorated by Clive Palmer's private company, Waratah Coal, which hopes to take over the development that BHP Billiton Limited (ASX: BHP) abandoned last year. The project has huge ramifications for rail operator Aurizon Limited (ASX: AZJ), which plans to build the expansion, along with rail lines linking it to new coal mines slated for the Galilee Basin and Bowen Basin in Queensland. This project may end up stranded if, as Citibank predicts "thermal coal demand is in structural decline."
The evidence is mounting that future coal demand might not justify this project. Tim Buckley an analyst from the Institute of Energy, Economics and Financial Analysis appeared on Lateline recently, arguing that "the cost of renewables is coming down so fast, that it is now at parity with imported coal [for India]." Projections of soaring coal exports to India have been central to coal miners' justification for new mines, and if they are wrong, the Abbot Point project will be stranded.
The reality is that China is closing coal fired power plants, American coal mines (and power plants) are closing, and the vast majority of nations have stopped building new coal plants. Energy systems (with a few notable exceptions) are constantly becoming cleaner, greener and less reliant on coal.
Yet this is not translating to profits for Australian renewable energy companies. For example, Australian wind farm company Infigen Energy Ltd (ASX: IFN) is down 25% since January, probably because of fears that the government will harm the industry with changes to the Renewable Energy Target. It is a highly risky game to invest in Australian renewable energy companies because they have powerful enemies here.
Energy industry investors can still profit by investing in natural gas and oil producers such as Santos Limited (ASX: STO) and Oil Search Limited (ASX: OSH). These companies have relatively bright financial prospects, because gas and oil are far more useful than coal. These fuels are not the main obstacle to a safe climate and do not cause the most dangerous particulate air pollution, although fracking can contaminate aquifers.
Foolish takeaway
I believe an investment in Energy Action Limited (ASX: EAX) is a reasonable way to get exposure to higher gas prices and new energy technologies. In my opinion, the safest way to get exposure to renewable energy is to invest in Warren Buffett's Berkshire Hathaway Inc (NYSE: BRK.A, NYSE: BRK.B), though there are other options, such as First Solar Inc (NYSE: FSLR). First Solar just announced strong results for Q1, improving revenue by 25% and almost doubling earnings per share. While the company does have lumpy earnings, the results bode well for the company, which, after all, sells 21st-Century technology.
