A fairly significant percentage of people in the USA are skeptical about climate change. What is even more distressing, however, is that the more that climate change "believers" try to get skeptics to change their minds, the more likely the skeptics are to dig in their heels.
The current strategy isn't working, so let's stop and try something else. The "something else" I have in mind is to reframe the issue into a financial one: "taking carbon out of the air could be one of the next great investment opportunities." If we re-frame the climate change problem into an investment opportunity, I think we'll get where we want to go. There's already a bunch of evidence to show that this approach works.
The good news is that both solar and wind farms are turning out to be excellent investments. In fact, they could become the next great "fixed income" investment, an excellent complement to traditional fixed income investments, and an excellent overall addition to a typical investment portfolio.
Who traditionally buys such investments? Quite often, it's people with higher incomes and greater net worth, the very people who tend to be Republican – and Republicans tend to be the people who are most skeptical about global warming.
I think these more well to do "climate skeptics" will love what I'll call "solar farm fixed income investments". That's because they have the potential to provide a better return than traditional bonds for a comparable level of risk. The same is true for wind farms, but let's focus on solar for now.
What's the problem with good old fashioned bonds? There are two key problems: 1) interest rates have been very low, so it's been hard to generate reasonable yield without taking on too much risk; and 2) interest rates are expected to rise over the next few years, which means that anyone already holding a particular bond will see the price of the bond decrease commensurately.
The other thing that could make this particularly attractive is the high price of the stock market. That's because there's been a bull market for more than eight years. The Case-Shiller Index for the S&P 500 now stands at 32.34. It's historical mean is 16.85 and the historical median is 16.15, suggesting that stocks are very pricey, maybe even way overpriced. Now the record high for Case-Shiller is about 44, so there's still a way to go to get there, but it's still definitely on the very high end. The obvious alternative is for investors to put money in fixed income investments, but traditional fixed income investments such as corporate, municipal, and Treasury bills and bonds are not especially attractive now.
So is any of this actually happening? A recent transaction involving Southern Power and Global Atlantic Financial is instructive. Southern Power is a subsidiary of Southern Companies, a large electric utility in the US Southeast. It is what is referred to as a wholesale energy provider. Southern Power sold a 33% interest in a portfolio of 26 operating solar projects for $ 1.75 billion to Global Atlantic Financial. Global Atlantic was founded by financial powerhouse Goldman Sachs in 2004 but spun off in 2013. Global Atlantic provides life insurance and retirement financial products.
So why would a company such as Global Atlantic want to buy an interest in a bunch of solar farms? The answer is because the solar farms will provide steady, predictable cash flow to the owner for its customers. That steady cash flow will help to fund life insurance policies and various retirement plan policies. For companies like Global Atlantic, it will likely be an excellent alternative to the traditional investment of choice for such companies – bonds.
Investments such as the one Global Atlantic is making could provide an excellent form of diversification to its portfolio. That's because the portfolio of 26 solar projects will provide steady, predictable cash flow to Global Atlantic. It's also pretty likely that the cash flow will be better than alternative investments Global Atlantic might make. The company isn't going to ditch its other investments, just make such solar investments a part of its overall portfolio.
The yield that Global Atlantic will likely receive on the solar investment will likely be a good deal better than on a bond. What, then, makes the company think the cash flows will be steady and predictable? It's because each of the solar projects in the portfolio likely has a power purchase agreement with a utility.
A power purchase agreement typically is a long term agreement entered into by a power provider – in this case, a solar farm – and an electric utility that will sell power to its customers. The key to such agreements is the terms of sale. A well-crafted power purchase plan can be very beneficial to both the electric to utility and the provider.
The new economics of solar create the potential for a real "win/win". The average an electric utility can sell power for in the USA is about 12 cents/KWH. It can generate power from a coal fired plant for about 7 cents/KWH, but solar plants are now generating as low as 2.5 cents/KWH. Given these economics, the utility and solar generator might enter into a power purchase agreement at 5 cents/KWH. The utility wins because it can just buy power from the generator at a price of 2 cents/KWH less than what it can either produce it on its own or buy it from another provider. The solar generator can win because it can make power for 2.5 cents and sell it for 5 cents.
The other benefit for the electric utility is that it can get help to cover the cost of constructing plants. Traditionally, electric utilities have built and run their own plants. They do that by raising capital in the form stock and bonds. Increasingly, though, utilities buy their power from companies in the business of providing wholesale power. That's because in many cases the wholesale provider can generate at a lower cost, and it also means that the electric utility doesn't need to make an expensive investment in a new plant.
So what will Southern do with the $ 1.75 billion check it received from Global Atlantic? It may distribute some in the form of dividends to the parent company's shareholders, but more likely it will use the money to invest in more solar projects.
Expect to see more cases like the Southern Power/Global Atlantic one in the future.
As an alternative to a company like Global Atlantic, a new type of investor in solar power could be what's called a master limited partnership (MLP).
MLP's have been around a long time. The key advantage of MLP's is that the earnings are taxed like a partnership so investors avoid double taxation. A MLP gets this benefit if it pays out at least 90% of its earnings and if it is in the business of either exploration, production, or transport of energy or real estate. Historically, the energy generated has been oil or natural gas. However, solar power is energy, so an MLP should certainly be able to invest in a solar facility. It could gain the same types of benefits of ownership as a company like Global Atlantic.
A variation on the MLP is an exchange traded fund (ETF) that is based upon MLP's. These securities can be more attractive to the investor than the underlying MLP's themselves. An example of this is the Alerian MLP ETF.
So just who invests in master limited partnerships? Generally speaking, people with high incomes, just like the customers of a company like Global Atlantic. Now there is no reason a lower income person couldn't make an investment in a MLP, especially if it is an ETF, it just doesn't tend to happen.
Given the comparative unattractiveness of traditional fixed income investments, MLP's could be a good choice. The benefits of real estate investment trusts and oil and gas MLP's are well know, so what would make solar energy really attractive?
For the utility, the key risk is the possibility that the cost of getting power from a source other than the solar plant goes down. That's pretty unlikely. For the MLP, the key risk is the possibility that production costs will go up significantly. Again, that should be fairly unlikely.
Thus, MLP's and companies like Southern Power could provide a great source of financing for solar power generation. That will likely be for building additional power capacity, but I think it should also make it feasible for the electric utility to consider abandoning an existing coal plant. Now if it does that, the utility will probably take a one-time hit to earnings as it writes off the undepreciated plant. Companies, however, do that sort of thing all the time. It generally doesn't create a long term problem. Investors tend to understand, especially if it means that the cost structure will get better for the company. Conversely, the electric utility will probably score points with the public when it announces the replacement of a coal-fired plant with a solar plant.
You may ask, why would someone who doesn't believe in climate change willingly invest in a solar plant? It would be for the same reasons the person makes any investment: to make money or save money. It's become increasingly clear that alternative energy is a money-making proposition. What makes it increasingly attractive is the desire for many investors to obtain yield and the comparative unattractiveness of the stock market and other fixed income investments.
Which again demonstrates that those of us who are most concerned about climate change should spend less time talking about it and more time focused on pointing out the attractiveness of investing in the business of removing carbon from the atmosphere. Instead of trying to convince climate change skeptics that "climate change is killing the planet", the message should instead be, "you can make a lot of money taking carbon out of the air". For well to do the climate change skeptics, this latter message is already getting their attention in a way the "scary future" message probably never will.
