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Why Now is the Time to Buy Solar

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June 15, 2017 – Comments (0)

Why significant climate mitigation is a good bet despite US withdrawal from Paris.

What does US withdrawal from the Paris Climate Accord mean for the prospects of meaningful action to reduce carbon emissions and address climate change within the next few decades? Consider if the amount of carbon in the atmosphere at an arbitrary future point were a stock traded on an open market. Stocks are especially good tools for identifying sources of statistical signal rather than noise. The prices of a stock typically doesn’t move much when an event happens that’s within the normative band of expected outcomes because the market has already baked that into the price. You can further think about the day in which Trump announced his decision to withdraw the US from the voluntary pact as a quarterly earnings calls – a day in which the rubber meets the road for shareholders as prices can move considerably if outcomes are out of line with investor expectations. Safe to say, investors would have been expecting poor results leading up to the call. If, in our analogy, a higher price meant a greater likelihood for carbon emission reductions and a lower price meant diminished prospects, the price likely would have fallen in the days and weeks leading up to the earnings call as experts increasingly came to see US withdrawal as the most likely outcome. So what happens to a stock when earnings, good or bad, more or less meet expectations? Typically, the stock wouldn’t move much more – the outcome is ‘baked in’. I’d argue that’s exactly what would have happened to this theoretical stock on Thursday. A lot of buzz in the media, not a lot of movement in the market. Which begs the broader question: is this a good time to buy (i.e., bet on our collective ability to tackle the problem) the carbon futures stock? I’d argue yes, for three reasons. 

First, under the leadership of Scott Pruitt, current head of the EPA, the Administration had already indicated it would not pursue the Clean Power Plan, the most significant element of the United States’ commitment to reduce emissions in the Paris Accord. In addition, President Trump had previously announced his interest in relaxing CAFE standards under the Clean Air Act to make it easier for automobile manufacturers to produce SUVs and trucks – another significant chunk of committed emissions reductions from the US in Paris.

While these developments put downward pressure on the price of our stock, they are, in context of the broader factors that drive our stock’s price, somewhat less significant factors. Between the consistent drop in natural gas, solar, and wind prices and the ever-increasing viability and penetration of electric vehicles, the US is making considerable progress towards de-carbonizing the grid and electrifying its transportation fleet. That should allow the US to consider the trajectory of the Obama years, where emissions fell by 12% while the economy grew 15% overall in this time period. And it’s important to remember that our stock price is driven much more so by global action – not just events in the United States. Consider that if you zero’ed out US emissions by 2050 without significant emission reductions from the rest of the world, we would still come nowhere close to meeting the IPCC’s broader emissions reduction targets.

Which brings us to the second reason to buy: other nations (with the notable exception of Russia) as well as subnational governments and businesses are doubling down on their commitments to reduce emissions. While some of the support is to be expected – consider newly-elected French President Emanuel Macron – others would not have been expected a few years ago, notably China and India. Leaders of both developing countries reiterated their support for their agreement this week in light of the US’s decision to exit, with President Xi declaring climate change a moral issue. 

And nowhere is the commitment to reducing emissions more important than in the developing world, where an estimated 1.2 Billion people (Source: ​International Energy Agency​) still do not have reliable access to electricity. For these people, it’s all about renewables winning the race to being the cheapest form of energy before massive infrastructure investments are made that will keep these economies dependent on fossil fuels, especially coal.Which brings us to our third reason, and the most dominant factor, contributing to my buy recommendation: the consistent, and even dramatic, decline in solar PV, offshore wind, and battery pricing we’re seeing.

For the billions of people who do not currently have access to power, increasing access to electricity is a moral necessity. But the need to provide greater access to electricity across the world has typically been framed as a choice between providing cheap, dirty energy from fuels like coal or offering clean, but expensive power from renewables, that is effectively restricted through high prices.Unfortunately for Peabody shareholders, that dichotomy is becoming increasingly at odds with reality. On the same day Trump announced his withdrawal from Paris, Bloomberg Energy posted a telling article describing how a number of planned-coal plants in India are being re-evaluated by India grid operators due to the fact that solar – not coal – is consistently coming in as the cheapest bid to provide the next electron on the grid. This has been further demonstrated in other bidding processes around the world – including Dubai which saw a record $0.02 / kWh PPA last year. As a result, access to capital for solar PV is expanding, driven by a combination of capital from global financial institutions like Deutsche Bank and emerging solar funding platforms like ​Wunder Capital​.

An alternate scenario to contemplate for our stock purchase is one in which the US and the rest of the world remains committed to the Paris Accord, but technological progress against reducing the cost of renewables is stubbornly slow. Said differently, all governments are on board, but coal is still the cheapest form of energy in the market, with no likely change in site. I’d advocate selling the stock in this scenario. A savvy investor would know that the most dominant factor to watch for is the cost of the next electron – which energy source can provide it as cheaply as possible. If the answer to that question increasingly is solar, then the stock is one worth buying – especially while the rest of the market distracts itself with who’s in Paris and who’s not.

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