For Part II go
The Energy Mix of the Future
In this last part, we'll think about the role of different
renewable energy technologies in our future. I'll remind you that
the Energy Information Association ((
)) currently has the following forecast in place:
Electricity Generation In TWh
A TWh, or a terawatt hour, is one billion KWh, or kilowatt
hours. An average American home consumes ~10,837 KWh per
I view the EIA estimate as conservative. I believe many who are
pursuing the difficult task of forecasting the future are not
accounting for computing energy consumption. With digital data
continuing to grow at 40%/year, the amount of energy required to
store that data (mostly in enormous data centers) is starting to
For now, I'll still relay the EIA forecast, to be extra
conservative. That said, I can see the computing factor
accelerating our global energy generation capacity build-out.
As the governments of the world encourage a renewable
energy-rich mix, we need to understand the current technological
barriers of the different technologies:
- Hydropower - requires a suitable available water body.
- Geothermal - requires a unique geographic location.
- Tidal Power - requires a seashore.
- Wind - requires an open field.
- Solar - requires sunlight.
If we had no other economic factors to take into account, what
technology would we choose to deploy more of?
Hydropower is limited to specific waterways, so many
places/countries lack suitable locations for that option. Some
countries do show great potential for hydropower. Tidal power can
only fit countries that have long seashores. Wind and solar can be
deployed wherever there's enough wind and enough solar
Thus, developers of renewable energy projects could find
suitable locations to develop solar projects or wind projects much
more easily than finding a suitable location for a geothermal
project, for example.
The following table compares the levelized cost of electricity
(LCOE) of different renewable technologies. Of course, a technology
that can generate electricity at lower cost is preferable. That
means that a government does not need to put forth a "fat" (or any)
More than that, a lower LCOE means higher IRRs for the project
owner at a given electricity rate. The LCOE calculations are not
always the most accurate. There are several examples of solar
projects around the world (that were connected to the grid in 2013)
that are reporting a cost per KWh of about six cents, which is
Source: REN21 annual report, June 2014
The costs of many technologies are posing a threat to coal
burners around the world. We can see that the cost of hydropower is
the lowest, coming down to two cents per KWh, which is a lot lower
than coal's LCOE. But again, we lack enough water bodies in the
right places to widely deploy hydropower beyond a certain
Solar and wind LCOE comes down to $0.04-$0.09. As I said,
real-life projects developed by solar module manufacturers reach a
much lower LCOE, as low as $0.06. We have plenty of wind and
sunshine resources, so wind and solar definitely make sense. Ocean
power is both very costly to build and needs a valuable resource:
Our Future Mix
Summing up the above, we can infer that the technologies that
have the best potential to comprise a large share of our
electricity mix are hydropower, solar and wind. Let's now compare
that to real-world data:
Source: REN21 annual report, June 2014
Our previous observations fit like a glove, when we see solar
scorching the charts with a 55% growth rate in 2008-2013. Growth
declined to 39% in 2013. The wind capacity growth was at 12.4% in
2013, demonstrating it is more mature (319 GW of wind capacity vs.
139 GW of solar).
Geothermal and hydropower growth rates are very low, at ~4% per
year. By this trend, solar and wind will become more and more
important in the renewable energy mix, given the lucrative
profitability they offer developers, the relative global support in
comparison with other renewables, and the fact they are easier and
faster to deploy. Further, a large (50 MW) solar project can take
only a few months to set up.
Building a Model
As I focus on solar investing, I would offer my newest model for
the global solar industry. The starting point of this model is the
assumption solar can generate 15% of global electricity generation
by 2040. In my view, the world could support a lot more solar,
especially when economical options start to hit the marketplace.
Companies like Ambri are on track to offer a groundbreaking
$100/KWh battery by 2015.
Solar will provide about 15% of global power generation by
Every 25 years of operation, a solar project requires a 25%
increase in panels to keep the same output.
Let's do the math:
Let me explain. First of all, let's convert the year-end
installed capacity figures for 2039 from GW to TWh. To do so, I'll
multiply it by 365 days in a year and 4 sunlight hours each day
(the 4 hours/day figure is factoring all efficiency-related
issues). We get at least 6,402.1 TWh generated from solar in
IEA forecasted 39,000 TWh of generation in 2040. So
6,402.1/39,000 = 16.4%. Slightly above my 15%-16% share
The reason you see annual shipment growth rising again in 2033
is because projects installed in 2008 are performing at 80% output
due to degradation, and are being upgraded. You can see that if
solar power is to supply 16.4% of the world's electricity in 2040,
installations will grow from year to year, from their 48 GW level
today, to 101 GW in 2019, to 352 GW in 2040.
Solar Industry Implications
The solar industry has a few other dynamics at work while annual
Many companies are turning up profits, which in some cases,
approach a 10% net margin. Given the very large revenue base,
every small % change results in significant bottom line
As consolidation continues to occur, the big players are starting
to increase their market shares. If you look at the computer
memory industry, it once included hundreds of companies, but now
it is, in fact, a duopoly. The current market shares of the
industry leaders are around 5%. Consolidation substantially
complements organic market growth.
As more and more companies are building their downstream business
of developing solar projects and then selling them, or operating
the project and selling the electricity, they enjoy a recurring
revenue stream, which further helps bottom line growth.
- Given all those factors in play, in the next few years,
you pick the right solar companies, you'll see growth that far
exceeds that of the market on the upper and bottom lines.
To conclude this series, I think that watching the developing
story of renewable energy has enabled us to identify one of the top
forces playing in that story, solar energy. Over the next 25 years,
annual shipments will double, double again, and almost double one
The special dynamics acting in the solar market enable different
companies, the better-managed ones, to reach high growth rates in
the top and the bottom line.
Given today's valuations of these companies, a terrific
investment opportunity can be seen arising into the next few years,
Join me as we go on and pick the
of the solar industry.
The author has no positions in any stocks mentioned, and no plans
to initiate any positions within the next 72 hours. The author
wrote this article themselves, and it expresses their own opinions.
The author is not receiving compensation for it. The author has no
business relationship with any company whose stock is mentioned in
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