With the sudden crash in oil prices and the relief at the gas pump for drivers, you might have forgotten that last month Chinese leader Xi Jinping and President Obama struck a deal to limit greenhouse gases.
China, the world’s biggest emitter of greenhouse gases, made its first-ever commitment to cap carbon emissions starting in 2030. And President Obama unveiled a plan for deeper U.S. emissions reductions through 2025. China set a goal of increasing the share of non-fossil fuels to 20 percent of its energy portfolio by 2030. President Obama announced a target to cut U.S. emissions 26 percent to 28 percent below 2005 levels by 2025.
So here is a reminder—during a news cycle when everyone is talking about the “like a tax cut for everyone!” impact of lower gas prices. You can cash in on burning less carbon, too. Rebuilding our infrastructure efficiently represents the largest wealth-creation opportunity on the globe.
In fact, written into the US/China Deal is a silver lining of safe, boring investment opportunities right in your own backyard. The opportunities are in renewable energy projects, like solar, wind and even more mundane stuff, like boiler upgrades for buildings.
All of these investments are tied to the new U.S. commitment to reduce annual GHG emissions 26 percent to 28 percent by 2025. That’s an accelerated pace of emission reduction compared to a previous commitment of a 17 percent reduction starting in 2005 through 2020.
To meet these goals, we simply have to replace inefficient, broken, end-of-life infrastructure with the highly efficient versions of proven technologies. These technologies almost always cost more upfront and save money over time. But even with 20 percent-plus returns, customers rarely pay cash for more efficient hardware and save money over time. As the solar industry has proved, these technologies are quickly adopted with “no-money-down models.” These models are here and are available to everyone now.
One way to look at the U.S.-China announcement is to short fossil-fuel stocks. Conversely, one could take a long approach and invest in publicly traded solar companies, but playing the stock market can require a lot of research, as you have to pick winners and losers.
The best way to play this trend is to find projects and invest in them directly.
You can invest in a solar farm or wind farm, just like one can invest in a real estate deal. All of these projects are transparent in terms of the cash flows and contracts in place. These are small infrastructure projects that can deliver compelling risk-adjusted returns. In fact, 50 percent of the money for solar power in Germany came from individual investors.
The U.S. could follow the same example, but most Americans can’t legally access tax credits because of passive investor rules. Yield companies—such as Hannon Armstrong Sustainable Infrastructure (NYSE: HASI) and Brookfield Renewable Energy (NYSE: BEP)—are popping up, though. They provide a liquid way to play this trend, even within your 401(K), because yield companies are commonly spinoffs of alternative energy companies. They own assets such as wind or solar farms. They pay investors dividends from cash flow generated by long-term contracts to sell power to utility companies.
The good thing is that “smart” investors like Goldman Sachs, Wells Fargo and even power companies like NRG Energy have put billions of dollars into these steady-eddy return projects and promised billions more. NRG’s CEO David Crane has even gone so far as to say that there is a structural shift in the power and energy industry. That shift is from centralized to distributed energy.
Most of these mature solutions, like solar, were invented during the first oil crisis of the 1970s and have been tested in the field with real customers for decades. Companies large and small have put these solutions on the shelf because banks have said these solutions are “too small,” and traditional early investors say, “I don’t understand.”
Despite that, opportunity is starting. This year, U.S. solar projects will attract more than $10 billion of financing for more than 100,000 projects. While these financing programs are proof positive that they have figured out solar power, many other proven technologies are gathering dust. Technologies like LED lighting, vehicle efficiency, alternative fuels, batteries, waste to energy, wastewater pretreatment, geothermal, HVAC efficiency, combined heat and power, heat pumps and many other mature technologies are still struggling to solve their project finance needs.
Cashing in on carbon
The demand is real. Electric utility regulators moved by EPA regulations, customers with aging infrastructure and many others are facing real decisions in the near term. They want to make sure they are installing new infrastructure that will meet their needs and save them money. The partnership of mature technologies that need to be dusted off and capital partners that get paid back through resource savings in electricity, water and waste is increasingly looking promising for 2015. Last year these solutions attracted almost $40 billion of new capital in the U.S. alone.
It is adding up to a new resource revolution. More important, it is increasingly possible for large and small investors to put their own money into these solutions, including:
- Publicly-traded REITs that invest in energy-efficient projects, yield companies and Canadian Income Trusts are available and often have attractive yields. Brookfield Renewable, for example, is now paying 6 percent.
- Crowdfunding platforms that help fund the renewable industry, like SolarMosaic, Open Energy and others, are an option but require investors to be “accredited” until the JOBS act rules from the SEC are finalized next year.
- Private/public funds are being raised by companies like Greenbacker, Juhl Energy, Joule Assets and others, but none of them has spent the money to establish their brand names as a trusted investment vehicle.
The capital markets are starting to shift to accommodate the demands of the resource revolution. The finance industry is now prepared, and the best opportunity may have just arrived: the U.S./China climate deal.
The ways for you to cash in will increase.