Energy efficiency and renewable energy are flip sides of the same coin. They are two means to the same end we humans desire: a substantial and sustainable reduction in our consumption of fossil fuels, which we blame for global warming.
Energy efficiency technologies (EETs) reduce our fossil fuel demand while renewable energy technologies (RETs) replace our fossil fuel supply.
Which of these two techs will gain more traction over the coming decades, and how can you as an investor best position yourself to profit from this drive to save the planet? This article helps you decide.
There's little doubt that we humans need to ditch fossil fuels. However, this is proving to be a massive challenge.
According to BP's Statistical Review of World Energy 2012, fossil fuels still dominate global energy consumption, with a market share of 87%, while renewable energy accounts for only 2%. By 2030, these numbers are projected to be around 81% and 6% respectively.
So we won't be totally ditching fossil fuels anytime soon. Sorry tree-huggers.
Instead, what we'll continue to do is reduce our consumption of these fuels using:
- A "supply-side" solution of replacing them with renewables; and/or
- A "demand-side" solution of becoming more energy efficient.
Unfortunately, substituting renewables for fossil fuels on a massive scale is not going to happen because of the following factors:
- Lack of International Trade: One big reason we consume so much oil, natural gas, and coal is that these fuels are internationally traded. This makes it easier for governments and corporations to manage their supplies. Conversely, you can't transport the sunshine from the Californian desert to Siberia;
- Single Use: While the use of say, natural gas, cuts across many industries like manufacturing, transportation, and electricity generation, renewables are used primarily in electricity generation. And even in electricity generation, renewables have to compete with fossil fuels;
- Subsidy Burden: Governments around the world continue to heavily-subsidize the consumption of renewables, despite rapid reductions in the production costs of some RETs like solar and wind. This subsidy dependency suggests there is low "natural demand" for renewables. When these subsidies go, and they will have to go at some point, the artificial demand for renewables may fall off the cliff.
So the supply-side solution is constrained.
Fortunately, energy efficiency is not burdened by the aforementioned factors.
Moreover, studies show that EETs are more cost-effective to deploy and pay back faster than RETs. Some studies even say that EETs cut more carbon emissions than RETs.
I'm not saying RETs are doomed. Far from it. However, as an investor you should know that in order to accelerate the reduction in global carbon emissions, policy makers around the world are likely to shift their focus from RETs to EETs in the coming decades.
Therefore, the best way to play this hot global trend of tackling global warming is to buy and hold an energy efficiency company, or a clean-tech exchange-traded fund (ETF) with considerable holdings in energy efficiency companies.
Now, during my research for such a stock, I avoided large-cap companies like ABB (ABB) and Johnson Controls Inc (JCI) because they were not "pure-plays" on energy efficiency, i.e., they were involved in other businesses i'm already exposed to through other stocks i hold.
Rather, I zoomed in on a small-cap U.S. company called Ameresco, Inc. (AMRC), which primarily designs, manufactures, and deploys EETs to a diversified customer base. As an icing on the cake they also have a smaller RETs business. So the stock gives me exposure also to renewables.
Fellow individual investors. Right now renewable energy is all the rage. But energy efficiency is about to come out of the left field. Hop on this money train now before the bandwagon arrives.
This is the third in a series of posts that examine six hot global trends you should invest in now. In the next blog, i examine the hot trend of Scarcity of Freshwater.
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