When Will Renewable Energy Companies Overtake Traditional Energy Companies?

Robert F. Kennedy Jr. brought more attention to this question with his prediction, repeated over the last several months, that clean energy would overthrow energy incumbents within the next decade. “We’re going to democratize the energy system in this country and take it away from the incumbents over the next 10 years,” he said at the Solar Power International conference in Anaheim last October.

As a new year — and new decade — begins, many hope it will launch a new era of growth and profit for renewable energy after a year of financial suffering. It's also a time when companies, as well as individuals, traditionally take stock of where they are and set new goals and resolutions. So it seems like a fitting time to examine this question and take a look at various predictions of when this might happen.

Total Energy

One of the most obvious ways to attempt to answer the question is by looking at how much of the world's energy comes from renewables today. According to the International Energy Agency's World Energy Outlook in 2008, renewables made up 18 percent — or 3,470 terawatt hours — of the global electricity generation in 2006, with most of that coming from hydroelectric and wind power. In the same report, the agency forecast renewable-electricity generation would overtake natural gas, becoming the world's second-largest source of electricity after coal, "soon after 2010." According to those predictions, renewables are on track to account for 4,970 terawatt hours in 2010 and more than 7,700 terawatt hours, or 23 percent of the global electricity production, in 2030.

That expected growth might have been slowed by financial difficulties this year. According to the 2009 World Energy Outlook, investment in renewables-based power generation "fell proportionately more than that in other types of generating capacity" in late 2008 and early 2009. The report forecast that investment in those projects may have declined by nearly one-fifth this year, and would have dropped by almost 30 percent without government stimulus packages worldwide. Even if renewables do still overtake natural gas by 2015, that isn't an apples-to-apples comparison as it compares all types of renewable electricity, including hydro, wind, solar and more, to only one type of fossil fuel.

Looking at the numbers for just one type of renewable energy, such as solar, for example, shows renewables are far behind in total production. Adam Krop, vice president for equity research at Ardour Capital Investments, said his company estimates that solar will likely only be about 1 percent of the total global electricity generating capacity for the foreseeable future — and that's an aggressive target. In the United States, which is a small solar market today, solar electricity accounts for only 0.01 percent of the total, he said, but could grow to 0.5 percent by 2020. "Growing from 0.01 percent to 0.5 percent still represents rapid growth, but growing to the size of conventional energy companies is not likely," he said.

As independent analyst Peter Lynch puts it, "If the solar industry doubled every year for the next 20 years, it wouldn't even be a significant number."

Meanwhile, an early release of this year's U.S. Department of Energy's International Energy Annual forecasts that the electricity generated from renewables worldwide will match that of natural gas in 2015, but sink slightly below it through 2030 (see chart here titled “Figure 6:World Electricity Generation by Fuel”). Renewables make up a much smaller portion of the total energy (not just electricity) usage, however. According to the report, renewables made up only 41.5 quadrillion Btu of the total world energy consumption compared with 28.5 quadrillion Btu for nuclear, 115.5 quadrillion Btu for natural gas, 136 quadrillion Btu for coal and 175.2 quadrillion Btu for liquids, including biofuels.

Profits and Revenues

But finding a single company large enough to rank among the energy majors isn't the same as comparing global energy output or usage. A common way of determining the size of a public company is its market capitalization, or the total value of all the shares owned by investors. Ardour's Krop pointed out that at $323.72 billion as of Dec. 31, Exxon Mobil's market cap is still 28 times larger than that of First Solar, the largest stock in his solar group, at $11.52 billion. It's also 26 times larger than Danish wind company Vestas Wind Systems' market cap of 64.57 billion kroner, or $12.47 billion. "My sense is that my solar group will not likely approach conventional energy company size in the foreseeable future," he said.

Another way to compare renewable- and conventional-energy companies is through their revenues and profits. Let's compare Vestas, the largest pure-play wind-turbine manufacturer, to Exxon Mobil, which sits at the very top of the Fortune 500. Exxon Mobil saw its revenue grow 18.8 percent to a whopping $442.851 billion last year as its profit grew 11.4 percent to $45.22 billion. Meanwhile, Vestas saw its revenue grow 24 percent to €6.03 billion last year — valued at $8.51 billion at the time of its annual report, according to Hoover's Inc. — while its profit grew 75.6 percent to €511 million.

If Vestas continued to grow at exactly the same annual rate, which is unlikely, it would catch up to Exxon Mobil's 2008 revenue in 18.7 years, and reach its profit in seven and a half years. (In dollar terms, revenue grew only 18.9 percent to $8.51 billion in 2008 from $7.15 billion in 2007, according to Hoover's. At that rate, it would take 23.3 years. But the discrepancy has to do with exchange rate differences, so we've instead compared euros to euros above.)

But unsurprisingly, Vestas' growth has slowed in 2009. In the first nine months of 2009, the company reported €4.13 billion in revenue, up 16.2 percent from €3.55 billion in the same period the previous year, and €264 million in profit, up 35.4 percent from the first nine months of 2008. According to its guidance, Vestas anticipates revenue of €7.2 billion for 2009, which would represent growth of 19.4 percent.

Of course, this is a simplistic way of looking at this question, as the growth of renewable energy isn't linear. Many as-yet-unknown factors play into the equation. For example, government incentives and other policies play a huge role in determining the market for renewable energy today, as well as the price of renewable projects compared to the ever-changing price of the traditional energy it might be competing with. "Until the industry can get along without government incentives, it will be at the mercy of how government incentives are structured," said Alfonso Velosa, a research director at Gartner Inc. He pointed to the consequences of the Spanish feed-in tariff, which more than quadrupled the country's solar market to 2.5 gigawatts in 2008 only to cut the program to 500 megawatts in 2009, leading to an oversupply of panels and shrinking panel prices globally. 

Infrastructure challenges such as electrical transmission or biofuel distribution, as well as the need to figure out how to smooth and control the intermittent electricity from sources such as solar and wind, also stand in the way, he said. Financing for these projects will also likely need to improve before a renewable company will reach the Fortune 500. "Financing is the No. 1 concern for any renewable-energy project; it goes hand in hand with finding a customer," Velosa said.

Companies that help arrange financing for their customers, such as SunPower Corp., which offers power-purchase agreements through financing partnerships with the likes of Morgan Stanley and Wells Fargo, could have a  big advantage, he said, adding that he expects to see more companies get into financing.  All together, Velosa said, he expects to see world-scale renewable-energy companies emerge in 15 to 20 years.

Independent analyst Peter Lynch also forecasts it will take at least 10 years — and potentially "decades," as fossil-fuel companies continue to receive subsidies and government support far beyond renewables — to see companies at that size.

Shares and Returns

From an investor perspective, what matters most isn't a company's market cap or energy output, but the potential returns — or growth in share price — which depends, in part, on anticipated future revenue and profit. As Lynch pointed out, "Investors could care less which company is bigger, but care instead which company is going to grow the most," he said.

"Solar companies are going to grow a heck of a lot faster [than conventional energy companies]. They have potentially far greater room to grow; therefore, their stocks probably have equally greater potential to grow."

It's easier to invest in solar than in wind because the sector has far more pure play companies, or "more items on the menu," he said. For example, GE is a big player in wind power, but has so many other businesses that the wind part of the company doesn't drive the stock. "You don't buy GE because they have a good wind turbine," Lynch said.

Solar stocks dramatically outperformed the market in 2005, 2006 and 2007, although they fell way down in 2008, he said (see chart on returns, below). Lynch predicts that solar will be the fastest-growing segment of the energy industry, with returns exceeding those in oil and gas, but doesn't expect solar companies' market caps will overtake those of the oil and gas giants. Not all renewable-energy sectors perform similarly, though. He pointed out that biofuel stocks are down 50 to 80 percent over the last three years.