The Commodity Investor: An Investment Guideline for Building a Green Economy

Columnist Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the bestselling Commodities For Dummies, published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities. 

In the middle of June, over 130 heads of state and more than 50,000 participants gathered in Rio de Janeiro, Brazil to discuss sustainable development around the world. Sponsored by the United Nations, this global conference, known as Rio+20, aimed to set out development principles to help build a green economy around the world. While plenty of lofty principles were laid out, the conference did not make concrete steps to advance the implementation of a green economy.

The main point of the conference was that the world is using too many fossil fuels for its energy needs, which is increasing carbon emissions and thus harming the Earth’s environment. As an alternative, economies around the world should adopt green technologies to reduce their carbon emissions. The United Nations last hosted this summit 20 years ago, and since then the world has increased its fossil fuel emissions, but has also increased its proportional use of green energy.

Consider the case of Germany, one of the world’s largest consumers of energy. As of 2012, Germany derives more than 40 percent of its energy needs through solar power, a drastic improvement from just a decade ago; Germany’s solar power usage has increased by 50 percent and its wind power use by over 25 percent in the last five years. Denmark currently receives more than 20 percent of its electricity needs from wind power.

There is a real and significant push towards switching to more environmentally-friendly sources of energy, but the reality is that fossil fuels remain the overwhelming source for the world’s energy demands. In this week’s column, the Commodity Investor will examine which renewable energies have the potential to generate the best returns for investors in a world focused on developing a broad-based green economy.

Solar power

Even though the solar power industry has seen explosive growth during the last decade, it is still a dynamic and ever-changing industry. Every two to three years the industry is shaped by significant events that seem to completely reverse the fortunes of its market participants.

First it was the introduction of government subsidies, incentives, and tax breaks that allowed the industry to gain market momentum. Then the industry saw its cost structures challenged as ultra-low-cost Chinese manufacturers entered the market. Finally, the market experienced a turnaround due to consumers attracted by these low costs. Investing in solar can be profitable, but one has to be extremely proactive as market-moving events occur quickly and unexpectedly.

Right now, the Commodity Investor sees opportunities in the North American solar market. For many years, being in this market was a money-losing proposition as American and Canadian manufacturers were clobbered in pricing by their Chinese counterparts. However, that trend began shifting and was completely reversed in May of this year when a US Commerce Department ruling raised tariffs on Chinese solar imports by 31 percent.

In a controversial move, the Commerce Department essentially halted the price competitiveness of Chinese panels in the United States, where Chinese manufacturers had over 50 percent market share. This ruling tipped the scale in favor of domestic manufacturers.

One company that stands to benefit from this shift is SunPower (NASDAQ:SPWR). This California-based company is a leader in the manufacturing and installation of solar panels in both the commercial and residential markets. It has a significant market share in the US market and should be poised to benefit from the recent actions of the Commerce Department.

Wind power

Along with solar power, wind is one of the main alternative green energy sources. While still a nascent industry – wind power currently accounts for only 2 percent of total energy source – there is a lot of potential in this growth industry. One of the key highlights of the Rio+20 conference, wind power has many proponents in both developed and emerging economies.

A prime example of wind power’s popularity is that China and the United States account for the vast majority of wind power production capacity, and are respectively the world’s largest and second-largest producers globally. Before investing in wind power, it’s important to note that several factors determine the success and viability of such an investment.

The first and most obvious factor is weather. One of the biggest detriments in wind investing is that power generation is ultimately dependent on weather. Even though steps can be taken to develop turbines in favorable conditions, no wind means no power. The price of fossil fuels – crude, natural gas, and coal – is another determining factor. When fossil fuel prices are high, industry tends to invest more in wind. Finally, government subsidies, incentives, and tax breaks make up the other big determining factor in wind investing. Just as they do for solar power, governments around the world offer interesting incentives that can help make or break this nascent industry.

If you’re determined to get some wind exposure in your portfolio, the Commodity Investor recommends taking a look at the PowerShares Global Wind Energy Portfolio ETF (NASDAQ:PWND). PWND gives you broad exposure to this industry as it tracks some of the leading names in the space. This ETF has not performed well in recent years due to the challenges facing the industry. However, it may be set for a rebound as industry dynamics improve.

Securities Disclosure: I, Amine Bouchentouf, have no positions in the stocks mentioned.