How Financial Markets Shape The Energy Economy


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University of Wyoming Distinguished Speaker Series. April 11, 2014

Published in: Economy & Finance
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How Financial Markets Shape The Energy Economy

  1. 1. How Financial Markets Shape The Energy Economy ● Tom Konrad, Ph.D. CFA ● Portfolio Manager ● Financial Writer
  2. 2. Disclosure This presentation is intended for informational purposes only and its contents should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. ● I and/or my clients own stock in the following companies mentioned: ● Hannon Armstrong (HASI) ● We have no positions in other securities mentioned, but may initiate one at any time.
  3. 3. Outline ● Interest rraatteess,, aanndd tthhee ccoosstt ooff eelleeccttrriicciittyy.. ● The the market and the solar boom. ● The market and the shale gas boom. ● The paradox of energy efficiency ● Q&A
  4. 4. Two Of These People Shape The Energy Economy ● Not the black guy, the other two. ● Ben Bernanke has been promoting renewable energy for the last six years. ● Janet Yellen seems likely to follow in his footsteps.
  5. 5. What Does Power Cost? Wind Nuclear Coal Efficiency Solar Gas
  6. 6. Interest Rate Determines Cost
  7. 7. Interest rates affect different technologies differently ● High up-front cost technologies (Wind, Solar, Nuclear, Geothermal) are sensitive to interest rate ● High fuel cost technology depend less on interest rate, more on fuel/ operating cost.
  8. 8. Back to the Federal Reserve ● Low interest rates have been helping Solar, Wind, and Nuclear. ● Gas generation has done well because of extreme low natural gas prices. ● Coal and Nuclear have suffered mostly because of a cheap competitor: gas generation.
  9. 9. Fed Boosts Renewables, Gas Price Boosts Gas Source: Clean Energy Trends 2014, FERC data
  10. 10. New Vehicles For Investing in Renewable Energy Issued in 2013 Source: Hannon Armstrong annual results presentation
  11. 11. Record Green Bond Issuance in Q1 2014 ● $9 billion green bonds issued ● Many issues oversubscribed ● Green bond index launched. ● Move to asset-backed bonds (i.e. Hybrid vehicle loans.)
  12. 12. Finance is Shaping Residential Solar Solar leasing companies Acquired by solar lease co SunRun Developing its own leasing arm Source: GTM Research U.S. PV Leaderboard, Q1 2014
  13. 13. Bonds Backed By Solar Leases ● 11/2013: SolarCity $54.4M at 4.8%. 71% residential. ● 3/2014: Mosaic & RGS launch crowdfunded home solar loan program. ● 4/2014: SolarCity $70M, at 4.59%. 6,596 PV systems. 87% residential. ● 4/2014: Hannon Armstrong provides $42M debt to SunPower lease program.
  14. 14. The Power of Low Interest Rates works everywhere ● “Incentives needed to make projects attractive to renewable energy project developers in developing world economies could cost 30% less if delivered through subsidized debt” --Finance Mechanisms for Lowering the Cost of Renewable Energy in Rapidly Developing Countries, Climate Policy Initiative, January 2014
  15. 15. Outline ● Interest rates, and the cost of electricity. ● The the market and the solar boom. ● The market aanndd tthhee sshhaallee ggaass bboooomm. ● The paradox of energy efficiency ● Effective and ineffective energy policy
  16. 16. Natural Gas: Follow th Money ● “Some [shale gas] wells are profitable at $2.65 per thousand cubic feet, others need $8.10…the median is $4.85” -Ken Medlock, Senior Director, Rice University Baker Institute Center for Energy Studies Data source: BP 1MCF = 1.02 mmBtu
  17. 17. Shale Gas Production Cost Below Price Source: Ruud Weijermars, Economic appraisal of shale gas plays in Continental Europe, Applied Energy 106 (2013) 100–115
  18. 18. Less Drilling Means Declining Production
  19. 19. When companies can't make money, they stop drilling. ● Shell hopes to exit shale plays in TX, CO, KS & OK. Focus on liquids, not gas. – 3/2014 ● BP carves off shale operations as seperate unit, may sell. 3/2014
  20. 20. Chesapeake: Selling Leases, not Gas ● “I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 mcf.” --Aubrey McClendon, CEO of Chesapeake Energy, 2008
  21. 21. Conspiracy? ● 'It is highly unlikely that market-savvy bankers did not recognize …a natural gas glut would occur' ● Wall St banks made much money from selling distressed shale assets.
  22. 22. Why Would Investors Pay For Unprofitable Drilling? ● The same reasons they funded loans to subprime buyers during the housing boom. ● Valuation models for shale gas were flawed, but not more flawed than paying for eyeballs with internet firms in 1999. ● Not Enough Due Diligence ● Drinking the Kool-Aid ● When the music is playing, you have to dance. ● Because they thought they could sell assets to greater fools.
  23. 23. Cheap or Abundant ● Cheap gas = Asset Sales, less drilling ● Wall Street has been financing the drilling boom, but will not finance loss making companies forever. ● Abundant gas requires more drilling, and higher prices to pay for it.
  24. 24. Cheap Gas and Environmental Laws Lead to Coal Plant Retirements Annual Energy Outlook 2014- Early Release Coal plant retirements announced Nov 2013-Mar 2014
  25. 25. Outline ● Interest rates, and the cost of electricity. ● The the market and the solar boom. ● The market and the shale gas boom. ● The paradox ooff eenneerrggyy eeffffiicciieennccyy ● Q&A
  26. 26. The Paradox of Energy Efficiency ● Examples: ● Weather sealing ● Efficient appliances ● Lighting ● Quick installation ● Low up-front cost ● No operating cost ● Few disposal costs Efficiency (i.e. Appliance Replacement)
  27. 27. The Paradox of Energy Efficiency ● Examples: ● Weather sealing ● Efficient appliances ● Lighting ● Quick installation ● Low up-front cost ● No operating cost ● Few disposal costs Efficiency (i.e. Appliance Replacement)
  28. 28. Answer: Energy Efficiency is 'Hard' ● Lack of knowledge ● Hard to measure benefits ● Agency problems/split incentives ● Advance planning ● New Methods ● Small scale ● Not 'Sexy'
  29. 29. In an efficient market, there would be no ''low hanging fruit'' ● Energy efficiency opportunities are usually market failures. ● In a textbook 'efficient market', such missed opportunities would not exist. ● Price is not the only cost of most energy efficiency improvements
  30. 30. The Best Energy Policies Depend on The Type of Energy Market ● When markets work, interest rates and prices affect the choice of energy investments. ● In these markets, price based policies are the most effective way to influence the outcome. ● Cap & Trade, PTC ● When markets fail, opportunities are missed. ● Price based strategies ineffective and costly. ● Mandates more effective, often less costly. ● Appliance efficiency , building codes, CAFE.
  31. 31. When high-return opportunities exist, the market must not be working ● Few car buyers calculate their expected fuel costs when buying a car. ● Price signals do not work if buyers don't know the price. Vehicle fuel costs: A market failure. ● CAFE standards are a blunt tool, but they work. After the Vehicle Ownership and Alternatives Survey (Allcott 2011)
  32. 32. Q&A ● Tom Konrad, Ph.D. CFA ● ● ● ● (406) 686-6067
  33. 33. Source: Matching Utility Loads with So lar and Wind Power in North Carolina John Blackburn, Duke University 2010.
  34. 34. A Portfolio Approach to Power Source: Spatial and Temporal Interactions of Solar and Wind Resources in the Next Generation Utility, Palmintier, Hansen & Levine, 2008
  35. 35. It's Not All About Finance Wind PTC expires & is renewed Source: American Wind Energy Association
  36. 36. A Better Way to Value Solar ● Austin Energy's Value of Solar Tariff recognized both the costs and benefits of adding solar to the system. ● Minnesota is in the process of introducing a similar tariff.