Wednesday, 28 January 2015
Last updated 1 hour ago
Dec 9 2008 | 1:57am ET
By Karim Salamatian -- Global financial markets are a mess, credit markets are frozen, we are experiencing a once-in-a-lifetime sell-off in commodity prices, many of the largest economies are in recession, a President Elect Obama will take office in 2009 and everyone is suspicious of their counterparties. Not only is this backdrop daunting, it is leading many investors to conclude that the Clean Technology investment theme will be boring (from a positive return perspective) for at least the next 12 months.
Although we at Viresco agree that the underlying headwinds may push investment away from renewable energy, we feel Clean Technology returns will become even more exciting because investment will be broader and there will be a renewed focus on Energy Efficiency, which we believe has the greatest positive global impact on climate change, CO2 emission abatement, corporate profitability and energy sustainability.
Energy Efficiency is a difficult proposition for industry and consumers to adopt because it implies sacrifice or loss of convenience. Because of this, the push for Energy Efficiency historically came from governments in the form of higher Energy Efficiency standards. While this is still largely the case, the merits of Energy Efficiency investment stand alone in the form of profitability enhancement and CO2 emission reductions – both without sacrifice.
We are certain that higher Energy Efficiency standards coupled with increased private and public investment in Energy Efficiency technologies will lower global CO2 emissions while simultaneously assisting corporate profits.
McKinsey & Company estimates that US$170 billion in annual global Energy Efficiency spend for the next 13 years will generate US$900 billion in annual savings beyond 2020 and deliver 50% of the CO2 abatement required to cap the greenhouse gases in the atmosphere at 500 parts per million. If we stand idle, atmospheric concentrations of CO2 would reach 500 parts per million by 2050 and over 700 by 2100.
Interestingly enough, 60% of global Energy Efficiency spend will come from China and other developing markets.
As a new Clean Technology hedge fund, we sometimes face investor skepticism stemming from the notion that it is a new or immature space that has unpredictable returns. In actual fact, Clean Technology investing, with a heavy emphasis on Energy Efficiency, dates back to 1973 when OPEC cut oil supplies forcing consumers, industry and governments to address the usage and cost of energy. Developed nations have promoted Energy Efficiency since at least this period, and Clean Technology investing is at least that old.
2008’s record high crude oil price was the wake-up call for emerging markets, much like it was in 1973 for developed economies. Emerging markets are forced to embrace Energy Efficiency due to the rising cost of fuel. Their adoption has little to do with climate change, but the end result is the same. Once Energy Efficiency is achieved, it is unlikely that industry and/or consumers will revert back because the savings are material and immediate.
At the prices we saw earlier this year—$145 crude oil, $12 natural gas and $140 coal—combined with rising government support, investment to develop renewable energies is wise. However, with oil prices dropping to four-year-lows, the only economic justification for investing in Clean Technologies is government subsidies, which are moving targets. Renewable energies are simply not cost competitive at today’s fossil fuel prices. Instead, the low cost advantages of Energy Efficiency solutions are magnified and are attracting considerably more investment dollars. We believe this will fuel the decades of strong growth in the Energy Efficiency category.
Making The Case…
We present a sample case study on the merits of investing in Energy Efficiency. In our view Energy Efficiency is the low-cost abatement alternative.
Electric motors that run industrial equipment, home appliances, HVAC systems (heating, ventilation and air conditioning) and other electrical devices consume 65% of the total electricity in developed nations and in larger emerging economies.
Replacing a basic single speed 250hp industrial motor system with a same-sized variable speed motor system reduces electricity consumption by 25% or 408,000 KW/h annually and nearly 900 tonnes of CO2 emissions per year will be eliminated. The associated cost is roughly US$25,000. In contrast, accomplishing this through a renewable energy source such as solar PV or wind, the comparable capital cost is US$175,000 or US$43,000, respectively. This makes a lot of business sense in any economic environment because the payback on investment is <1 year versus 6 years for solar PV and 1.5 years for wind.
Let’s take it further – if the U.S. reduces the total motor electricity consumption by 25%, 401 million tonnes (7% of total US CO2 emissions) of CO2 emissions will be removed from the atmosphere annually at a cost of US$41 billion. The same can be accomplished via solar PV or wind, but at a cost of US$278 billion or US$68 billion, respectively.
This excludes the impact higher efficiency can have on the transportation industry which is responsible for 21% of the world’s CO2 emissions.
Yes, there will be advancements in renewable energy technology that will lower costs in the future, but the same can be said about Energy Efficiency.
The Energy Efficiency opportunity is enormous for all stakeholders. It is clear that investors can achieve higher returns-on-capital via Energy Efficiency than through alternative energy.
In emerging markets, private and public sectors cannot afford the costs to develop alternative forms of energy. Governments are not positioned to mandate renewable energy standards because the cost to economic growth will be destructive. Therefore, Energy Efficiency is the only viable solution.
I along with our investment team are advantageously based in an emerging market, Vietnam, so we witness the everyday need for pollution control in an economy where the priority is to keep costs low to foster capitalism. Politicians in emerging markets talk about battling climate change as a way to promote or preserve trade relations with the developed world. The reality is that policy making and enforcement are disappointing.
In markets such as China, Vietnam and India, CO2 emission abatement is an afterthought, so there needs to be solutions where it is a by-product. Through Energy Efficiency investment, companies operating in these countries truly achieve a double bottom line via lower costs, high IRRs and high CO2 emission reduction. This is a theme we along with other Clean Technology investors can capitalize upon in emerging markets.
We are not wholly dismissing renewable energies because one cannot denounce the long-term value they add to the overall solution (plus, we allocate a material portion of our portfolio to solar, wind and geothermal), but rather promoting Energy Efficiency as an often overlooked but key component to a successful Clean Technology investment strategy. As more investment is allocated to developing motors, lighting, battery technologies, power transmission, power systems, converters, generators, advanced metering, automated electronics, heat exchangers, boilers and automotive engines, the space will garner broader appeal and just maybe not seem so boring after all.
Karim Salamatian is a Partner and Chief Investment Officer of Viresco International Capital Management, which manages a long/short hedge fund that invests in global Clean Technology. Salamatian has been actively investing in Clean Technology and emerging markets since early 2007. Prior to joining Viresco, Salamatian was a managing director and top-ranked equity analyst with BMO Capital Markets in Toronto, Canada.
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