By Chat Reynders and Patrick McVeigh
The world has reached a critical point in its exploration of energy sources, and it stands on the cusp on redefining how we create, distribute and store power. What was once thought of “alternative energy” is now simply considered the “future of energy,” with titans like Tesla leading the way.
The market is in flux between ideas and the technology to advance those ideas. Those companies that serve as bridges to implementation are well positioned for success as the field shifts; they will serve as social and financial leaders for the energy revolution.
There are three areas that are poised for a second wind as the energy field takes shape:
1. Accelerating next-generation ethanol
The first foray into biofuels achieved nominal levels of success; efforts met with criticism due to a perceived waste of food crops and the reality that the process to create energy still resulted in increased greenhouse gas emissions. As the New York Times noted, the drive for corn-based ethanol adoption has “helped drive up global food prices, has worsened some types of air pollution and has done relatively little to reduce overall emissions of carbon dioxide.”
However, lessons taken from first-generation biofuel production are leading to a much more efficient technology that is disrupting the biofuel space. Second-generation processes use waste products from agriculture (i.e., corn husks and stalks) in a process that reduces greenhouse gas emissions by almost 90 percent over gasoline, according to the Department of Energy.
Production is still in its infancy. There are only a handful of facilities in operation globally, but there are telltale signs of more widespread adoption. As the price of production lowers to create a competitively priced product, demand will naturally follow. Indeed, Sandia National Labs says the U.S. could produce 75 billion gallons per year by 2030, meeting 50 percent of U.S. fuel demand.
Novozymes is a key player as it delivers the enzyme-based technology that brings the concept of second-generation ethanol to life. Enzymes serve as the catalyst for converting agricultural waste into energy, and Novozymes is the primary provider of the technology. The company services approximately 60 percent of the market for first-generation enzyme use, and has the potential to replicate that market share for the second generation.
2. Behind the scenes of solar
The initial promise of solar energy lured some investors away from fundamentals, as they fell in love with the idea of the end product more than the strength of the technology and the state of the market. Solar panel production itself, however, was a risky venture, as global competition – particularly from Chinese manufacturers – squeezed margins and drove down profitability.
Patient investors are also seeing greater opportunities with nuanced, central technology emerging as the real change-maker. Enphase Energy, for example, supplies inverters that convert power from solar panels to electricity in the home. Solar energy systems are now sophisticated enough to handle inverters for individual panels, enabling customers to fine tune and maximize the efficiency and effectiveness of installations.
Enphase’s market position was hard fought, with significant upside still to be gained. Residential solar installations in the United States increased by 58 percent in the third quarter of 2014, compared to the prior year, and Enphase controlled 37 percent of the domestic market for residential inverters in the first half of 2014.
3. Solving the storage challenge
The next great leap in energy storage is already well underway, and Tesla put a stake in the ground with its April 2015 announcement that it will provide energy storage (batteries) for home use that could allow users to migrate off the power grid.
Home energy storage is a significant stride in changing the way consumers approach solar energy, allowing them to generate electricity during the day and keep it overnight – instead of selling it back into the grid, as traditional systems demand.
Tesla’s system is too expensive to have an immediate impact. Its announcement, however, has helped bring the conversation about more efficient energy use from theory to reality. “Over time, lower cost, competition and network effects from a larger number of users may well increase the number of households switching to a solar-and-storage type of model Tesla is laying out,” notes CNBC.
Meanwhile, the overall storage market was already expected to expand quickly. By 2019, total U.S. sales could reach $1.5 billion – up from just $128 million in 2014, according to a March report by GTM Research.
Biofuels, solar and storage will each be important components to the evolution of energy over the next several years. Further gains in efficiency are expected as well, and smart investment strategies should focus on the technologies and processes that contribute to these advances by attacking issues at the roots. The companies that fuel the sector’s growth will be those that provide the foundation for a stable, sustainable and profitable shift.
Image credit: Flickr/Windwärts Energie GmbH / Photographer: Mark Mühlhaus/attenzione
Chat Reynders, Chairman and Chief Executive Officer of Reynders, McVeigh Capital Management LLC., has more than 25 years of experience in investment management and social venture investing. He has structured and funded public/private partnerships that have brought more than $150 million in revenues to leading cultural institutions. He has for decades produced socially oriented IMAX films, including the Oscar-nominated Dolphins and Coral Reef Adventure.
Patrick McVeigh, President and Chief Investment Officer of Reynders, McVeigh Capital Management LLC., has more than 30 years of experience in socially responsible investing (SRI). He was an owner and key employee of one of the first SRI wealth management firms, and he served on the board of the Social Investment Forum. At SIF, he pioneered research on SRI, and he has authored articles on finance, ethics and ecology, and contributed to The Social Investment Almanac (New York: Henry Holt, 1992) and Working Capital: The Power of Labor’s Pensions (Cornell University Press, 2001).