Solar Stocks As the Best Play On The Cleantech Revolution? (Part I)
I just got around to reading a new report by Merrill Lynch (link at the end of this article) identifying cleantech as "The Sixth Revolution" (the other five being: Industrial Revolution; Age of Steam & Railways; Age of Steel, Electricity and Heavy Engineering; Age of Oil, the Automobile and Mass Production; and Age of Info and Telecommunications). Periodically, sell-side firms will release free cleantech/alt energy reports, which lay out their macro theses but stop short of providing stock picks to non-clients.
I don't generally pay these reports too much attention as I find they rarely - if ever - present new information or look at things in a different way (i.e. they are packed with existing and sometimes dated data and are quite predictable in their orientation). This isn't surprising, as their clients don't pay them to give away all of the goodies. This one, however, was quite interesting. The author, Steven Milunovich, is Merrill's "cleantech strategist." He comes from a technology equity research background and uses his knowledge of tech's historical development path, along with theories of disruptive technologies, to predict how cleantech might evolve.
In his view, once the current funding storm has passed, cleantech will enter a secular growth phase that will last many years, and that he calls nothing short of a revolution. While he likes energy efficiency applications like smart-grid, he points out that, somewhat paradoxically, greater energy efficiency will lead to higher absolute levels of energy consumption. This perspective, based on the Jevons Paradox, states that as efficiency increases and the energy intensity of a unit of output decreases, energy costs also decrease across the system, eventually boosting absolute demand because the increase in throughput outpaces efficiency gains. According to Milunovich, the "counterintuitive conclusion is that the ultimate goal of cleantech should be to provide essentially limitless energy that can be wasted."
Where does he think this energy should come from? Well, a variety of places, but he is particularly bullish on solar, for two reasons: (1) solar is by far the most abundant energy source on Earth, and (2) solar is on the steepest price-performance improvement curve. Interestingly, the author is also bullish on solar because he views the structure of the electricity market as eventually moving from vertical to horizontal, much like technology pre-1990s was dominated by large, vertically-integrated firms (e.g. IBM), only to be overtaken in the 1990s by small firms working on disruptive technologies. He thus sees a much greater role for distributed generation in the future, and it is therefore logical he should like solar given the degree to which solar can be deployed through the building stock as a load-abatement measure.
Here are a few interesting quotes:
"In our view, practical peak oil is real, so oil prices should eventually move back up."
"[U]pgrading transmission adds 30-40% to the cost of renewable energy."
"Energy storage is the holy grail of cleantech and a difficult problem."
"Huber and Mills point out that more than 85% of the growth in US energy demand since 1980 has been met by electricity."
"[O]ur early take is that increasing electrification of the economy will continue with solar the most promising approach."
"DOE's Pacific Northwest National Lab estimates that plug-ins would have to constitute over 80% of the coutnry's 220 million passenger vehicles before new base load plants would be needed."