The Essex Global Environmental Opportunities Strategy (GEOS) invests globally, in listed-equity securities providing clean technologies. GEOS invests across nine environmental themes, in companies enabling natural resource optimization, lessening dependence on fossil fuels, and providing energy efficiency solutions.
A key GEOS theme is renewable energy, where we are currently invested in solar power technology companies, primarily solar panel producers, and solar power development companies. The steep sell-off in global oil prices over the past few months has caused an associated decline in solar stocks. We strongly believe that while there has been a strong correlation between oil prices and solar stocks recently, this association is unwarranted and the two energy forms are unrelated, and complementary, not competing energy sources. While solar power is a technology providing electricity to residents and the commercial sector, most of our oil is used for on-road transport, passenger cars in particular. Thus, there is no causation between low oil prices and the swoon in solar share prices. We believe that this correction in solar stocks provides a compelling investment opportunity given this mispricing scenario.
Solar energy, as both a centralized and distributed form of power, is experiencing strong adoption rates from companies seeking to lessen their business risks by investing in, and implementing distributed energy programs. Companies are investing in solar projects purely due to strong economics in the form of high return on invested capital (ROIC). GEOS exercises the same investment philosophy – seeking strong returns on capital in companies developing commercially-viable technologies. When GEOS was launched five years ago, solar module prices were around $3.50 per watt while today modules are below $0.60 per watt. In many locations and in many applications, solar energy makes economic sense and adds to business flexibility given its distributed nature – the energy is owned, and the costs are fixed with very few input costs for at least 20 years. Solar power allows energy migration from base load to distributed form, where it becomes a flexible asset, lessening exposure to oil prices and the vagaries of utility power pricing. As energy is a significant variable cost for manufacturing and services industries, owning distributed energy sources such as solar power provides competitive advantage. Many multi-national companies are aggressively scaling solar power, led by retailers such as Kohl’s, Whole Foods, Wal-Mart and Staples, with their retail locations and distribution centers providing ample roof-top real estate for solar panel installation and use (source: EPA National Top 100, April 2014). Solar power technology is one of the fastest growing sectors of the equity market, and we believe the overall solar sector can grow about 20% over the next few years. The greatest growth opportunity for North America is the residential solar sector, as penetration rates are very low currently. We anticipate the residential solar market to grow approximately 40% annually in the coming few years, while the utility-scale solar segment slows from a 30% pace.