U.S. Stepping Back as Rivals Plan Job-creating Investments

Over the last few weeks two key investors made critical announcements for long-term investment in energy sources.  Saudi Aramco, the world’s largest oil producer, announced its intention to invest as much as $5 billion in renewable energy as part of a plan to diversify outside of the oil sector.  Last month the China Central Government announced the decision to cancel 104 coal-fired power plants representing total 120 gigawatts of capacity across a dozen provinces.  Instead China is planning to install 130 gigawatts of wind and solar power sources by 2020.  Yet in the U.S. president, who as a candidate for the country’s highest political office made expressed fierce statements of support for U.S. coal producers, vowed to expand jobs in the coal industry by scrapping the recently implemented Clean Power Plan. Trump was also quoted on the campaign trail claiming “I know a lot about solar  -  I love solar….Except there is a problem with it.  It’s got a lot of problems with it.  One problem is it’s so expensive.”

The stark contrast in investment decision making style and direction brings to mind a critical question.  What happens to the competitive strength of a country that invests in an unsustainable business like coal when its most significant economic rivals are moving forward with new technologies?

In a cloud of coal dust…

During the 2016 presidential election campaign Donald Trump vowed to expand the U.S. coal industry apparently to gain votes in those states where coal mines are located.  The Clean Power Plan was an easy target.  The Obama Administration had crafted the Clean Power Plan in 2015 and put it into play beginning February 2016.  Although probably not a perfect plan, its provisions require states to adopt standards that reduce emissions from power plants.  Since coal-fired power plants are among the largest emitters of carbon, they will be impacted the most by clean-up requirements.  Investment decisions remain within the utility company board rooms and hopefully will be based on the economics of generating energy while meeting emissions standards.  The standards transfer the cost of pollution back to the emitters and their customers. 

The Trump administration wants to throw the Clean Energy Plan out in favor of a cozier decision making process where coal gets a favored status regardless of clear proof that burning coal leads to health and environmental problems.  Donald Trump’s energy policies appear to favor a few partisans in select corners at the peril of the rest of the energy industry.  Trump has shown scant willingness to gather facts and learn about recent program in the alternatives to energy from fossil fuels.   Trump’s choices for cabinet posts are mostly friends of the oil and gas industry with little experience in the renewable energy sector.

The approach involves no investment in new technology, no job-creating programs other than the few that are associated with coal.  It also pushes the costs of pollution associated with coal-fired power plants back onto those who pay medical bills or experience loss related to environmental degradation.  From 30,000-foot view it does not seem like a winning investment scenario.

On the other side of the world…

Beginning mid 2016, investment banks were invited to Riyadh for the purpose of presenting acquisition targets and deals to Saudi Aramco executives. Company representatives have already indicated capital will be spread across a wide range from infrastructure projects in the oil and gas industry, solar power production and wind energy.  Even nuclear power is on the table.  The investment agenda is intended to diversify business risk for Saudi Aramco.  The company is planning an initial public offering sometime in late 2017 or early 2018.  Plans are to list on both the London and New York stock exchanges. 

Public or private, Saudi Aramco investment plants are in-line with Saudi Arabia energy policy.  In April 2016, Deputy Crown Prince Mohammed bin Salman announced plans to produce 10 gigawatts of power from renewable energy sources by 2023.  The kingdom also plans to develop a renewable energy research and manufacturing industry.

Red Dragon cleans up…

Although the Saudi’s are driven by the need to diversify, the decision by China to go ‘green’ despite significant coal resources is driven primarily by the high cost of air pollution.  Parts of northern and central China are beset by heavy smog during the winter months, delaying flights, stalling cargo operations are ports and closing schools.  With over 21 million residents, Beijing has been a flash point for activists seeking China’s participation in the Paris Agreement to combat climate change. 

The People’s Republic of China ratified the Paris Agreement in September 2016.  Just before the G20 meeting that month, China’s president, Xi Jinping, made a joint announcement with U.S. President Barack Obama, pledging China’s intentions to help reduce has emissions leading to global warming.  Separately, at a gathering of the B20 taskforce, Xi Jinping described China’s intentions to confront climate change by closing coal mines and steel mills.

Together China and the U.S. account for about 38% of the greenhouse gas emissions that are responsible for a deleterious warming of the planet.  The economic consequences are enormous.   After years of foot-dragging, China finally appears ready to deal with climate issues.  The Red Dragon is brushing off the coal dust and turning to renewable energy in a big way.  Endorsement of solar and wind energy sources means Chinese companies will have access to domestic capital for research and development.  China companies could even be beneficiaries of Saudi Aramco investment.  Innovations of more efficient solar devices or higher power turbines, as examples, could ultimately lead to more marketable products and a better competitive position in the world energy market. 

Peaks and valleys in U.S. policy….

The pinnacle of policy making in the U.S. resides in the Oval Office.  However, in the U.S. policy emanates from more rooms than just the Oval Office.  Various state governments have made significant strides in crafting cogent renewable energy plans.  Those policies make a difference.  For example, California adopted its first Renewable Energy Program in 1998, and has been active in solar and wind investment ever since.  According to the Union of Concerned Scientists, investment in clean technology companies in California has grown by six times over the last ten years in part because of state policies.   In August 2016, the California legislature reaffirmed the state’s commitment to reducing carbon emissions to 40% of the 1990 levels by the year 2030.  Renewable energy companies can count on California to be a friendly market for the next thirteen years. 

Under the current Trump administration a more relevant example of state sponsored investment in renewable energy is the Texas program called CREZ  -  Competitive Renewable Energy Zones.    Among the many natural resources in Texas are strong steady breezes that make possible prolific wind power generation.  Getting electricity to all residents of the big state of Texas requires an extensive distribution system.  Under the CREZ program $7 billion was invested in miles and miles of power lines.  The program spurred unprecedented investment in wind power that has brought the sector to about 20% of total generating capacity in the state.  On windy days the wind power sources can provide as much as 40% of the electricity consumed in Texas. 

The CREZ program is heralded as one of the most visionary infrastructure projects in Texas history.  It could also be one of the most important developments in bringing about a flourishing wind energy industry in the U.S.  Who was in the pinnacle of leadership in Texas when the CREZ program was put into place?  None other than Rick Perry, Trump’s pick to lead the Energy Department.  The CREZ program in Texas was established under Perry’s watch as Texas governor from 2000 to 2015.          

Job creation…

It will be interesting to watch Perry work with Trump if he is confirmed as Energy Czar. Will Perry remember his unique and compelling investment experience in Texas?  Will he take note of the investment decisions made by rivals of the U.S. or will energy policy simply be a tool to promote Trump’s political popularity?  Investors will have a chance to watch and observe.  If the Trump administration fails to foster viable and sustainable investments in energy in the U.S. there are always options for investors.   Perhaps by 2018, there will be a chance to invest in a leading renewable energy company  -  Saudi Aramco.  In that offering, there will be jobs created, new technologies developed and new businesses launched  -  just not in the U.S.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.