Apple's Longterm Growth Horizon is Clean Tech

Well, it's finally happened: Someone at Apple seems to have read my blog and is forming the basis of the company's growth strategy based on my advice. I should charge for this!

Ok, but seriously: Back in October 2013 I penned a post detailing five reasons why Apple's next i-thingy should be in the clean tech space. At that point, AAPL has slumped about 25% off its $100 peak (adjusted) the previous fall and speculation was rising that with Steve Job's passing, the company may have lost its ability to innovate truly innovative products. The question everyone was asking was: What's next?

Now that Apple had taken over and re-defined the music biz, the high-end cell phone biz, personal computing and the tablet, what else was there that they could make? What else could people possibly want? Apple's share price then had tumbled because of a loss of faith in innovation. While fantastic sales of the iPhone 6 have since led the company back to all-time highs, the question about where the next 10 years of growth would come from still loomed in some analysts minds.

My logical solution was clean tech. Apple is great at designing and producing electronics people wanted to use. Why not solar panels? Why not electric cars? I argued that Apple is great at disrupting, and the energy industry is ripe for disruption. Apple had the financial capital (then $140 billion in the bank -- more than 10 times the US energy R&D budget). It has the human capital (the best design and branding talent in the world). It also had a need to come up with a new industry to dominate to ensure continued ridiculous returns to its shareholders, and the energy industry is, to any objective observer, ripe for disruption with clean technology solutions.

Well, today Apple is sitting on even more cash than it was in 2013 (a whopping $178 billion, without a clear way to spend it), and they finally are taking my advice. In the past few weeks, two big pieces of Apple news have come out around clean tech:

1. A decision to become a leading consumer of electricity with a monster $850 million power purchase agreement from First Solar, which would be the biggest power purchase agreement in history for any non-utility entity.
2. Substantiated rumors swirling of a possible Apple plan to produce an iCar. 

While we don't have hard numbers or any completely conclusive information about the iCar, I think its safe to say that these rumors at minimum give Apple innovation/growth bears something to chew on, and at best open a new and huge avenue for Apple's future growth and a clear path to the magic market cap of $1 trillion in the not-too-distant future. While crossing industry lines from a high-margin (tech) to low-margin (auto mobiles) industry is no easy  task, there's arguably no company in history better positioned to execute such a transition successfully.

With Tesla Motors demonstrating that a market exists and incurring a lot of the initial exploration, research, and development, costs, Apple will likely find the growing niche electric car market market in 2020 ripe for capture.

Such a move actually fits in with Apple's core competency, which has never been fundamental innovation, but rather excellent leapfrog innovation-- essentially waiting until a small niche market had already formed with several fragmented competitors, and then blowing it wide open with superior design, branding, and the loyalty of its affluent repeat customer base. I see the electric car market in 2020 fitting this pattern nicely: sales of electric (and perhaps even self-driving cars) will continue to grow, albeit moderately over the next few years. Problems and inconveniences such as charter compatibility standards and personal device integration will continue to abound for the early adopters who are at the fore front of this market.

Enter Apple with a perfectly honed driving machine with perfect design and connected to Apple's existing technology and data management ecosystem, and suddenly electric cars will move from early-adoption phase to mainstream adoption phase. This is what happened with the original Macintosh computer, the iPod, the iPhone, and the iPad, and I see no reason to doubt that with $178 billion in cash to burn that Apple to can make it happen again with the iCar. Elon Musk was able to to launch a game-changing, aesthetically pleasing, digitally integrated high-end car in a few years with Tesla, it and he didn't have $178 billion in cash to spend. While Musk's genius level is clearly not something that Apple can buy, his employee's engineering talent is certainly up for grabs and Apple has no qualms about throwing money at senior engineers and former CEOs to ensure it dominates the world's best technical and market talent in the target industry space.

As for the solar deal, while its only a power purchase agreement and not a move from Apple into designing home solar devices, it still demonstrates Apple's understanding of its customer base's values. It also probably saves Apple money in the long run when considering California's generous tax incentives on top of federal tax credits for solar and the large and long-term nature of the agreement. It costs Apple nothing up front while giving the US solar industry a billion-dollar boost.

And sunny news for solar: Apple's not the only company making these moves. Shell, Citi, General Motors, Amazon, and Kaiser Permanente are just a handful of the other multi-hundred-billion-dollar market cap companies that have made serious clean tech commitments not just for CSR reasons but for economic ones.

Good moves all around.

If you haven't read my original article about why a move by Apple into clean tech makes sense, check it out.

Disclosure: I wrote this purely for educational value and to express my views. I am long AAPL and FSLR.

Social-Impact Investments Finally Grow Up

A great article on Barron's recently said that 18% of the $38 billion professionally managed US financial assets are now "socially responsible." While I'm all in favor, I think it does behoove us to dig a little deeper into what this means. Article here and quoted below:

By Robert Milburn

The once small community of investors looking for returns in environmentally- and socially-sensitive companies just became a lot bigger. That’s according to the biennial study put out by the U.S. SIF Foundation, a nonprofit advocate for the socially-responsible investing industry. The U.S. SIF study claims that, in the past two years, “sustainable, responsible and impact investing” assets (SRI) in the U.S. have grown by 76% to $6.57 trillion.

Do-good dollars now represent 18% of the total $36.8 trillion in professionally-managed U.S. assets. It’s the clearest indication yet that the industry has reached a tipping point, as large publicly-traded companies, family offices, and traditional money managers join the ranks of converts. This bodes well for the blossoming industry, says U.S. SIF’s CEO Lisa Woll, who sees SRI assets growing to 25% of the U.S.’s total assets under management, in the next four years.

Consider just the changing nature of the organization’s own 300 members. “In the beginning, we had the early actors like Calvert Investments and Trillium Asset Management, but now firms like Bloomberg and Morgan Stanley have joined,” she says. Among the more recent converts are private-equity fund managers and large family offices; the next wave, Woll predicts, will be wealthy individual investors and their families.

The term SRI, as defined by U.S. SIF, is a catchall that includes socially-responsible investing—screening against, say, companies that make alcohol or weapons—and the more nascent practice of social-impact investing, in which folks aim to invest in companies that generate measurable social or environmental impact. U.S. SIF has been tracking the industry since 1995, but has never seen growth comparable to what was observed in the past two years.

What has changed? U.S. SIF mined data from nearly 1,700 pension funds, foundations, endowments, fund managers and banks. It found that since 2012, fund assets managed by money managers who consider environmental, social, and governance issues (ESG) have grown threefold to $4.8 trillion. The trend is driven by investors, the organization finds, with 80% of fund managers citing client demand for why they have developed ESG products. That demand is often driven by women and millennials who want a socially-conscious diversified portfolio, not just the classic grab-bag of stocks and bonds. (For more, see Penta’s “Social-Impact Investing Is On The Rise.”)

So fund companies are simply following the money, rushing to supply new product. Woll says, just look at the recent signatories of the United Nation’s “Principles for Responsible Investment” initiative, a voluntary list that develops standards for the investment industry. Bank of America (ticker: BAC) and Vanguard Group have both signed up, proving that the biggest U.S. companies are scrambling to attach their names to this client-driven trend and to be seen as on the forefront of the movement. It’s early days, so signing up for the U.N.’s principles only requires firms like Vanguard to disclose which asset classes consider responsible-investing issues before investing, and then detail how the firm evaluates external managers for ESG products. Reporting the actual percentage of ESG exposure in a fund is, at this early stage, still voluntary.

In the meantime, environmentally-sensitive students across the country have recently been pressuring universities, such as Stanford and Yale, to divest the roughly $22 billion that are held in fossil fuel-related endowments. And, in October, the establishment $860 million Rockefeller Brothers Fund, benefitting the heirs of the Standard Oil fortune, announced it would unload the roughly 7% of its portfolio held in fossil fuel investments. Small beer, of course, but the Rockefeller Brothers’ move was highly symbolic, and, crucially, U.S. SIF’s numbers don’t even include these recent developments since their data is through January 2014.

The wish to “do no harm” drives this modern investor sentiment, of course, but investors and publicly-traded companies are increasingly following the “act responsibly” ethos for defensive reasons. Consider the garment factory building that collapsed in April of 2013 in Bangladesh’s Rana Plaza, killing more than 1,100 workers. After the building collapsed, hundreds of thousands went on strike, bringing production in the region to a standstill. “It was a terrible tragedy,” Woll says, and investors dumped the companies who relied on suppliers working in the collapsed building. Among them were Wal-Mart Stores (WMT) and JCPenney (JCP); their shares fell 1.3% and 1.7% respectively on the day. So public companies are pro-actively and increasingly trying to implement socially-responsible trading standards, simply to protect themselves from such reputation-damaging tragedies.

It’s just one example of what Woll imagines in the future, when environmental, social and governance issues will all be consciously and routinely included as basic criteria at the start of the investment process. “ESG is becoming a new standard for thoughtful money-management firms,” she says.

In other words, roll your eyes or embrace it, socially-sensitive investing is here to stay and a powerful force in today’s market.

Mixing Up the Potential of Disruptive Clean Tech and Scatter-Shot Investing Strategies

Re-posting a webinar synopsis about disruptive green technology from a Yale School of Management panel this summer. These guys share some pretty great war stories about the initial opportunity identification at First Solar and Tesla, and the constraints we need to be keeping in mind when evaluating clean tech investments.

Given the degree to which investors have pulled back from green tech investing since 2007, its tempting to think that it's the sector that is to blame. But I'd argue, and I think some of this analysis supports me, that it wasn't so much the industry that disappointed at that time, but the investing strategy form VCS that went along with it. Big funds like Khosla Ventures took a scatter shot approach looking for early-stage science wins without attention to business plans, markets, or management teams.

Unsurprisingly, a lot of those plays went bust or are yet to yield fruit. But let's not confuse the investing strategy with the medium itself. In the cases where VC's applied there traditional diligence and logic, and invested in clean tech companies with complete business plans and credible management teams with execution experience, as is normally expected in other fields, returns I suspect faired better.

The next clean tech VC rush I think many be just on the horizon now, but when it arrives, let's hope we get a little more wisdom and rigor, and a better, more sustainable investing strategy.

Click the link to watch the video or read the synopsis below. 

Green tech investors want to put their money behind firms with the potential to disrupt their industries and bring both positive environmental impacts and financial success. But what’s disruptive is by its nature unprecedented and unpredictable. How do investors assess the potential of a green technology company? Everyone is looking for the idea, product, or company that is really going to shake things up. For those willing to accept significant risk and uncertainty there are opportunities to make early-stage investments in disruptive innovations in the quickly expanding field of green technology. But what does disruption look like in that sector? 

Four experts offered their answers in a June 24 online discussion. Nancy Pfund '82, managing partner at DBL Investors and lecturer in the practice of management at Yale SOM, moderated the conversation. The panelists were Daniel Gross '98, managing director at Oaktree Capital Management; Stuart Patterson '83, an experienced tech sector investor and entrepreneur and currently president and COO of RAMP; and Rosemary Ripley '80, managing director of NGEN.  

Pfund described how her venture-stage firm approached putting money behind a green vehicle. "Any improvement on the internal combustion engine is an improvement in terms of climate impact," she said. But DBL considered hybrids to be an incremental step. Seeking a truly disruptive choice, she invested in 2005 in a company working on an all-electric vehicle. That company was Tesla. 

 One piece of finding a disruptive opportunity is understanding the industry. As in other industries, Patterson said, investors start by looking for "earlier, better, and cheaper." But there are important differences in green tech. Internet startups don't take a lot of money to get going; green tech requires expensive research and development. "If you want to have something that's truly disruptive and is going to have a major impact on the clean tech space," he said, "you need to allocate in the tens of millions if not hundreds of millions of dollars." Green tech also requires patience, he added. It often takes years to refine the technology and business model.  

In these ways—and in the need to negotiate significant regulatory overhang—green tech is more like the life sciences than other parts of the technology industry, Patterson pointed out.  

On the other hand, there are periods where change happens quickly in a new industry, and that can be a source of opportunity. Gross, who focuses on the growth stage, said, "Clean tech is such a rapidly growing industry that whenever you see things scaling up, as an investor, you can step back and look for the natural constraints." He added, "If you can spot companies that don't face those bottlenecks or control those bottlenecks, they are likely positioned for growth and market disruption."   

As an example, he pointed to a period when demand for silicon exceeded supply, resulting in prices spiking from $24 per kilogram in 2004 to $450 per kilogram in 2008. First Solar, which Gross invested in while at Goldman Sachs, "was the only company that had a proven, in-market technology to make a solar panel that didn't use silicon," Gross said. Instead, the company used cadmium telluride in its "thin film" modules. First Solar went public in 2006 and remains a major player. 

Real disruption isn't just a few months of buzz that drive an IPO. It creates ripple effects, Ripley said, that reshape multi-billion dollar industries. When she is considering an investment, she looks at how the company might maintain its initial advantage. "Once a new idea gets proven, the big players will come charging in. What does a new firm have that means the business model, product, service, or technology will remain differentiated and sustainable over time?"

If We Can't Get Big Money Out of Politics, Let's at Least Get Some Good Big Money Into It

The New York Times has run yet another major expose on Tom Steyer, the billionaire former Hedge Fund manager who has taken up investing in progressive political outcomes as a second career.

While I think most folks agree that we should be limiting the excessive amount of money flowing into politics, its at least nice to see that there is at least some cash flow coming from environmentally minded folks with an eye toward preserving a livable climate for future generations.

With a $50 million pledge to push for the revival of cap and trade on the political agenda, this is another reason to get bullish on renewables for the longrun.

According to NYT's map, he's going head to head with the Koch brothers in terms of directly backing candidates, and of course putting his money in the swing states where it will get the best bang for the buck.

Steyer's second career is an encouraging development for the environmental movement. But he's got a long way to go to catch up to the Koch brothers.

Next Steps for Solar

Solar PV prices have hit their bottom.... at least for now. So what's next for the solar industry? Gigaom's got a great article on financial and product innovation as the next steps. Read it below, and here.

A few years ago the biggest influence on the solar industry was the falling prices of solar cells, leading to some of the cheapest solar panels in history. But today, that solar panel price drop has slowed. Now solar companies are focusing on other ways to reduce costs and push the industry forward, including new types of solar panel financing, novel and more efficient panel designs and low-cost, next-gen batteries to pair with solar panels. At the solar industry conference Solar Power International, which kicked off Monday in Las Vegas, expect to hear all about the latest innovations from startups and big companies that are developing these new business models and new designs.
Photo courtesy of Apple

Batteries and energy storage

For the past couple of years, batteries have taken center stage in the solar industry, and they’ve only gotten more attention in recent months thanks to Tesla’s big battery factory bet in Reno, Nevada, which will eventually churn out some batteries for the power grid. When paired with solar panels, batteries can store solar energy at night when the sun goes down, making solar systems available to provide power around the clock. However, battery systems add significant costs to the solar system. At SPI, solar service company Sunrun announced Monday morning that it has started a pilot project to offer battery systems from OutBack Power Technologies to its solar customers. Last week, startup Stem unveiled a partnership with Kyocera Solar to offer a solar panel and battery system for commercial customers. In the early stages of this market, partnerships can help small companies compete on a larger scale, and partnerships between nimble startups and big service providers can introduce more innovative thinking.
 

Batteries ready to ship at Aquion Energy’s factory. Photo by Katie Fehrenbacher, Gigaom. Of course, these companies aren’t the first to make partnerships across the solar/battery divide. SolarCity works with Tesla for its batteries (Tesla CEO Elon Musk is also chairman of SolarCity). One Roof Energy has been working with battery maker Silent Power to launch products. SunPower is working with KB Homes to provide a solar-panel-and-battery combo to new homeowners in Irvine, El Dorado Hills and San Diego. And SunEdison has piloted a battery from startup Seeo. Other grid and solar-focused battery startups are now working on the next generation of their battery chemistries. Awhile back, startup Aquion Energyswitched its anode-materials blend to a higher-energy, better-performing one.Battery startup Ambri has made changes to its chemistry as well. Startup Eos recently showed off its first zinc battery installation for New York utility Con Edison.

Financing

Offering less expensive ways to finance solar panel systems is another way to reduce overall solar project costs. Last week SolarCity announced the first registered offering of solar bonds, starting with a $200 million fund. The earnings on the solar bonds are paid for by the income from monthly solar energy payments from SolarCity’s customers. SolarCity has developed a booming business by enabling customers to pay for solar power as a monthly service, instead of having to pay for solar panel installations up front.
 
On Monday, reinsurer PartnerRe said it plans to offer $100 million toward financing purchasing loans originated by Mosaic, the crowdfunding solar startup based in Oakland. For now, crowdfunded solar projects make up a tiny fraction of solar systems, but Mosaic has been expanding its services to other types of solar financing.

“Soft costs”

Financing is part of the “soft costs” for solar. Soft costs include everything that has to do with installing solar panels on rooftops (and large solar projects in the desert, for that matter) except for the cost of making the actual solar hardware — so it’s things like permitting, financing, taxes, marketing and customer acquisition, labor and supply chain costs. When it comes to installing solar panels on the rooftops of homes across the U.S., soft costs made up a whopping 64 percent of the total cost of the system, according to a report out late last year from the National Renewable Energy Lab (relying on data from 2012).
 

According to GTM Research, most of the reductions in solar costs are coming from the “balance of systems” costs, which are improvements in the design, engineering, labor and financing for rooftop solar systems. And soft costs make up a major part of the “balance of systems” costs. GTM expects the cost of installing solar power to fall by 33 percent between 2013 and 2017, and only six percent of that will come from a drop in the solar module prices. According to the Solar Energy Industry Association’s latest report, the U.S. installed 1.13 GW of solar panels in the second quarter of 2014. That was up 21 percent over the second quarter of 2013, and represented the fourth-largest quarter for solar installations in the history of the market.

"Environmentalism" is Dead

NPR's coverage of a recent PEW Research poll reaffirms an interesting trend in American life: The environmental movement is dead. While 44 percent of our grandparents generation self-identified as environmentalists, only 32 percent of Millennials today

Part of the issue is semantics. "Environmentalist" is just no longer a cool word, so Millenials, ever aware of the perceptions of others, just don't use it. My suspicion would be that the term will likely never return to its near 50% threshold that it enjoys with the generation that invented it.

But the death of "environmentalism" doesn't necessarily spell doom for the planet. It's not that kids these days don't care about the environment. Quite the opposite. Instead, I think it's that Millenials just don't like labels in general. "Environmentalist" is an adjective.

If PEW Research were to take a similar poll across generational groups around support for "sustainability," "climate action," "recycling," "clean energy innovation," and "environmental markets," and "ecosystem preservation," I think they would see that our generation is just as "environmentalist" as our parents and grandparents if not more so.

Indeed, from the ashes of "environmentalists," has risen a plethora of successor movements. A menagerie of conservationists, climate activists, locavores, sustainable foodies, green consumers, and green investors.

So don't fear for mother nature. The decline of environmentalism doesn't represent the decline of environmental progress. Instead, we making a healthy transition away form a focus on adjectives, and toward a focus on verbs. Actions are more important than labels anyway, so it's a shift I think can only be good for the movement and the planet.

Get Ready for the Solar Bull Market

If you are interested in or invested in solar, and have been paying attention to the market and the news in the past 6 months, you are a pretty happy person right now.

The industry is rolling along with tremendous inertia, on course to double in size every 24 - 30 months at recent growth rates. It kicked ass in 2013, expanding by roughly 35 percent in installed capacity. Worldwide, this meant 35 GW of new solar were built in 2013 alone, with analyst forecasts that 2014 will finish as an even bigger year, with 49 GW added. In the first quarter of 2014 has only continued to build steam. Nearly half of all the new power plants built around the world in 2013 were renewable, according to the latest Global Trends in Renewable Energy Investment Report, and in the first 6 months of 2014, more solar energy generation was added to the US grid than natural gas power. So much for the shale revolution. What we are about to witness is the solar revolution.

While exciting for environmentalists, these facts are not lost on the market. The Ardour Global Renewables Index was up 50%. The top solar stocks outperformed the market by 100s of percentage points (that's percentage points, not basis points). Here's a graph of what the annual solar installations have looked like in the past few years. This is not the cumulative figure.

But will these trends continue beyond the current hype? Or are we in the midst of a solar bubble? 

This is no bubble, and here are five big reasons why:

1. China 

China represents now a major source of both demand and supply in the solar industry, and they are putting it in the ground at a tremendous rate. China's goal of installing 8 GW of new rooftop solar by year end on top of the 13 GW already in existence is a strong source of global demand (China is the red in the above bar chart, clearly a significant portion of global demand). 

But China is not just installing solar at a breakneck pace, it's also manufacturing solar. Since China is now home to large chunks of the solar supply chain, as well as a considerable amount of final assembly, its unlikely that their aggressive policy-driven demand targets will slacken in the near future.

2. Financial Innovation 
One of the biggest challenges to solar has always been its high level of capital intensity, coupled with high perceived risk by investors. These two factors together result have traditionally resulted in higher financing costs for solar power. But this trend is finally winding down, never to return.

Several new financing structures have emerged to allow solar companies to capitalize on their future profits today, instead of having to wait for the 20-year payback period people think of. The first are solar-backed bonds, Solar backed bonds are a new structure, similar to mortgage backed bonds, that allow solar companies to bundle the future payments received from solar electricity sales to the grid and sell them to investors. In exchange for a modest 4% or 5% cut to entire investors, solar companies can use this structure to essentially cash out their 20-year power purchase agreements today. The capital is then freed up for further investment.

This year, Solar City issued its second set of these bonds to the tune of $200 million, and this market it just heating up.

Another financial innovation the Yield Co., operates similar, but uses an equity structure instead of debt to monetize future solar cash flows. NRG energy, a major national utility company, recently . debuted shares of its own Yield Co. in 2013 and the stock has already rewarded investors with a north of 75% return in just its first 12 months trading.

While these types of transactions are still small in relative terms, the fact that credible financial institutions like Credit Suisse, Goldman and BAML are underwriting them is a good sign that they are gaining traction and will become an increasingly attractive option for solar companies looking to finance rapid growth.


3. Costs are Plummeting, Moore's Law Style
The price of Solar PV panels dropped 99% from 1977 - 2014, and at an accelerating pace. 60% of that price drop has happened in the last three years - since 2011. Prices have plummeted so rapidly that even major financial institutions --not green groups-- are writing reports about the strategic threat solar poses to the natural gas industry.

The bottom line is that as prices continue to fall, solar has already reached the fabled point of "grid parity," in many places with or without subsidies. In plain English: solar in many places has hit the tipping point where its more expensive not to have solar than to have it.


4. Innovation in Grid-Scale Storage
One critique that has often be leveled against solar is its unpredictability. If only we had some sort of affordable battery technology, critiques argue, solar would make sense. Well, that time is also now. While battery storage is early in its technology innovation lifecycle, it's moving along at a rapid clip, driven in part by the demand created by an explosively growing solar PV market. Several small companies have recently raised capital to commercialize next generation grid-scale battery solutions, and Germany as usual is ahead of the game deploying these technologies at grid scale to prove the concept.

A new International Energy Agency study found that the grid should not have a problem absorbing all this new solar. Contrary to the frequent argument of renewable energy doubters, high penetrations of 30% should be achievable without economic disruption, according to the IEA. In California, the nation's largest grid operator announced it had a day in March this year where 18% of the grid's energy came from solar, and that in the future it believes it can absorb as much as 30% without a problem. California's solar capacity doubled 2013.

With the evidence mounting that our grid infrastructure has no problem integrating even relatively large proportions of solar generation even with current technology, even traditional coal-reliant utilities like Georgia Power and Tea Party groups are starting to get in line.

Long story short: 24/7 solar power is just around the corner.

5. Electric Car Symbiosis
Tesla is doing pretty well. If its sky-high stock price and P/E ratio is any indicator, investors as a whole are pretty bullish about electric mobility. Some interesting research out of UBS's Investment Bank has shown that solar and EV's are forming a symbiotic relationship that will be mutually beneficial to the momentum of both industries.

According to UBS, the combination of batteries, electric cars and solar power will put "enormous pressure" on the utility system by rapidly making centralized fossil-fuel based generation facilities obsolete.

So I'm pretty bullish on solar. Now you know why.