NIMC - 2023's Untold Controversy: The Green Transition

Summary

• Many tell us the green transition is inevitable.
• It is a popular message among politicians and corporate CEOs.
• But is it plausible? Is it possible? What are the untold truths?
• These are questions I unearth in this report.

One of the biggest challenges the world has ever faced is the transition to sustainable energy and to a sustainable economy, that will take some decades to complete. - Elon Musk

Written by Sam Kovacs

Introduction

The media tells us the green transition is a done deal, but is it really?

The shift towards renewable energy and reducing carbon emissions is being presented as a done deal but, behind the scenes, there are clear lies and untold truths that are being ignored.

From the availability of renewable energy resources to the strain on supply chains and geopolitical challenges, the green transition is far from a done deal.

Join us as we uncover the key challenges that the media is not talking about.

The war for resources: over before it started

One of the key challenges of the green transition is the availability of renewable energy resources. Renewable energy sources such as solar, wind, and hydro power offer a sustainable alternative to fossil fuels, but their deployment and integration into the energy system can be challenging.

Compounding on the logistic difficulties is the geopolitical risk of China holding all the cards.

In the paragraphs below, I'll break down the various verticals involved which make blindly pursuing a "green transition" at all costs an extremely dangerous endeavor.

Solar Energy

Solar energy is one of the most promising renewable energy sources, with the potential to provide a significant portion of global electricity demand.

Companies such as First Solar ( FSLR ) and SunPower ( SPWR ) are leading manufacturers of solar panels, while Enphase Energy ( ENPH ) offers microinverter systems for solar energy. Tesla Inc ( TSLA ) also has a significant presence in the solar industry through its SolarCity brand.

However, the deployment of solar energy systems is limited by factors such as the availability of land and the cost of technology.

Additionally, the production of solar panels is dominated by a few countries, mainly China, which could lead to supply chain disruptions.

Wind Energy

Wind energy is another promising renewable energy source, but its deployment is limited by factors such as the availability of suitable sites and the cost of technology.

Companies such as General Electric ( GE ) and NextEra Energy ( NEE ) are major players in the wind energy industry, while American Superconductor Corporation ( AMSC ) offers wind turbine electronic controls and grid systems. Additionally, the integration of wind energy into the grid can be challenging, as wind energy is an intermittent resource that must be balanced with other sources of energy.

Hydroelectric power is a mature technology that can provide reliable and low-carbon electricity. However, the availability of suitable sites for hydroelectric power is limited, and the construction of large hydroelectric dams can have negative environmental and social impacts.

Scaling up the production and deployment of renewable energy technology will require significant investments in research and development, as well as the development of new infrastructure, such as transmission lines and energy storage solutions.

It will also require the cooperation of governments, businesses, and individuals around the world to overcome these challenges and accelerate the transition to a green energy system.

Below is an overview of the key players in the US.

Key Players

Solar Energy:

• First Solar ( FSLR ): They are a leading manufacturer of solar panels, doesn't pay a dividend.
• SunPower ( SPWR ): They are a manufacturer of high-efficiency solar panels and systems, does not pay a dividend.
• Enphase Energy ( ENPH ): They are a provider of microinverter systems for solar energy, does not pay a dividend.
• Sunrun Inc. ( RUN ): They are a leading provider of residential solar, battery storage and energy services, does not pay a dividend.
• Tesla Inc. ( TSLA ) : They are a leading electric vehicles and clean energy company, which has its own solar panel production under the brand name of SolarCity, does not pay a dividend.

Wind Energy:

• General Electric ( GE ): They are a diversified conglomerate with a significant presence in the wind energy industry, pays a dividend.
• NextEra Energy ( NEE ): They are one of the largest renewable energy companies in the world with a focus on developing, building, owning, and operating clean energy projects, pays a dividend.
• Brookfield Renewable Partners ( BEP ): They are a renewable energy company with a significant presence in the wind energy industry, pays a dividend.
• American Superconductor Corporation ( AMSC ): They are a global energy solutions company, providing wind turbine electronic controls and grid systems, does not pay a dividend.
• Pattern Energy Group Inc. ( PEGI ): They are an independent power company that owns and operates a portfolio of wind and solar power facilities, pays a dividend.

Hydroelectric Power:

• NextEra Energy Partners ( NEP ): They are a renewable energy company with a significant presence in the hydroelectric power industry, pays a dividend.

How to store green energy? Lithium-ion batteries

Lithium-ion batteries are rechargeable batteries that are commonly used in a wide range of applications, including electric vehicles, grid energy storage, and consumer electronics. They are composed of several different materials, including:

• Lithium: The lithium in lithium-ion batteries is typically obtained from lithium-rich brine deposits, which are found in salt flats and other evaporative environments. Chile and Argentina are the largest producers of lithium, together accounting for around 60% of global production. Other major producers include Australia and China, which account for around 20% and 10% respectively.

• Cobalt: Cobalt is used as a cathode material in lithium-ion batteries. The Democratic Republic of Congo is the largest producer of cobalt, accounting for around 60% of global production. Other major producers include China, Russia and Canada, which account for around 20%, 10% and 5% respectively.

• Nickel: Nickel is used as a cathode material in some lithium-ion batteries. Russia and Canada are the largest producers of nickel, together accounting for around 40% of global production. Other major producers include Australia, Indonesia and Brazil, which account for around 20%, 10% and 5% respectively.

• Graphite: Graphite is used as an anode material in lithium-ion batteries. China is by far the largest producer of graphite, accounting for around 70% of global production. Other major producers include Brazil and Sri Lanka, which account for around 10% and 5% respectively.

• Aluminum: China is the largest producer of aluminum, accounting for around 50% of global production, followed by Russia and Canada, which account for around 10% and 8% respectively.

• Copper: Chile is the largest producer of copper, accounting for around 30% of global production, followed by Peru and China, which account for around 20% and 10% respectively.

Now, while it seems as if a variety of countries share the resources here are a couple of noteworthy considerations.

China pops up a little too often, followed by the South American "lithium triangle". The US is absent.

China dominates Lithium-ion vertically

What is worse, is that the Chinese control more than 2/3rds of the processing of some of these key materials such a lithium and cobalt.

Here are some examples of Chinese companies extending their presence in the mining and processing of lithium, cobalt, nickel, and graphite through investments, joint ventures, and acquisitions:

1. Lithium: One of the most high-profile examples of Chinese companies investing in lithium mining is Ganfeng Lithium, which is one of the world's largest lithium producers. The company has invested in lithium mines in Australia, Argentina, and Chile, and has joint ventures with mining companies in Canada, Brazil, and Zimbabwe. Tesla reportedly buys part of their lithium from Ganfeng.

2. Cobalt: Another high-profile example of Chinese companies investing in cobalt mining is Zhejiang Huayou Cobalt, which is one of the world's largest cobalt producers. The company has invested in cobalt mines in the Democratic Republic of Congo and has joint ventures with mining companies in the DRC, Zambia, and Canada.

3. Nickel: Jinchuan Group is a large Chinese nickel producer, which has invested in nickel mines in Indonesia, Russia, and Australia.

4. Graphite: China Molybdenum is a large Chinese graphite producer, which has invested in graphite mines in Brazil and Madagascar.

These are just a few examples of Chinese companies that have invested in mining and processing of these natural resources.

6 of the 10 largest electric battery manufacturers, are Chinese.

Geopolitical risk and conflict.

If you haven't put the dots together yet, China dominates 80% of the market, is vertically integrated and any green transition, means giving China all of the cards.

They decide to cut exports and focus on making China green? Then the price of these inputs skyrocket, and the viability of green energy is in jeopardy in the rest of the world.

If they do let the rest of the world in, then they profit and crystalize their influence as the new leading nation.

Germany got a brutal reminder of what being energetically dependent to an erratic authoritarian government means.

Russia cut gas in Germany, and Germany seems to only just about be managing to maneuver through the winter, thanks in part to warm temperatures.

But Russia only produces 14% of the world's natural gas. Europe has somewhat been able to be reactionary, and flows of natural gas through the world have been rearranged.

But imagine being in the crosshairs of a country which owns 80% of the supply chain of the essential storage of clean energy.

Can we really risk this? Why is this topic not being discussed? Is it not reasonable to ask whether the challenger country, with all the cards in its hand, will not at some point move to make sure the incumbent falls back?

Geopolitical risks are cast aside too often still. Humanity is still hungover from 30 years of Goldilocks environment for globalization.

But globalization is over. The CHIPS Act in the US and the semiconductor bills in Europe are an early reminder of this. Countries will need to achieve self-sufficiency to remain competitive in a polarized world.

Semiconductors are a key part of today and tomorrow's infrastructure, making them mission critical for any country.

Energy is also mission critical.

How can you expect the US to give up their energy independence, in exchange for subservience to a Chinese dominated supply chain?

I just do not see it happening.

The logical consequences

In chess, there is a concept called "zugzwang". When it is your turn, and you have no choice but to make a move which deteriorates your position.

Does the US really want to give up sovereignty to the Chinese? No of course not, it would not serve the country's interests.

But at the same time does the US want to continue its rhythm of high pollution which is contributing to global warming?

Global warming could cause a variety of impacts on the United States, including:

1. Temperature increases: Rising temperatures can lead to heat waves, which can cause heat-related illnesses and deaths, as well as damage to infrastructure and property.

2. Sea level rise: Rising sea levels can lead to increased coastal flooding, which can damage property and infrastructure and make coastal areas more vulnerable to storms.

3. Changes in precipitation patterns: Changes in precipitation patterns can lead to droughts in some regions and flooding in others, which can impact agriculture and water resources.

4. Increased frequency and severity of storms: Global warming can lead to an increase in the frequency and severity of storms such as hurricanes and tornadoes, causing damage to property and infrastructure and loss of life.

5. Wildfire: Climate change is also expected to increase the frequency and severity of wildfires.

6. Agriculture: Global warming can lead to changes in growing seasons and crop yields, which can impact the food supply and economic activity in the agricultural sector.

7. Wildlife: Global warming can also lead to changes in the distribution and behavior of wildlife, and can increase the risk of extinction for many species.

Much of the US is in a geographic location which would be severely impacted by a changing climate.

Of course, this is also an argument against relying only on electricity from the grid for all our power needs. Natural gas and oil prove to be an effective and resilient alternative when a rising number of natural disasters jeopardizes the power grid.

The political & corporate will to push green energy forward

Despite the harsh geopolitical reality the US faces with the green transition, it hasn't stopped politicians and corporations to expedite the transition.

The push for a green energy transition in the United States has been driven by a variety of key individuals, including politicians, business leaders, and activists.

On the political side, some key figures include President Joe Biden, who has made climate change and green energy a major focus of his administration, as well as members of Congress such as Alexandria Ocasio-Cortez, who has been a vocal advocate for the "Green New Deal" proposal to transition the US to a low-carbon economy.

Of course, other politicians, such as governors and mayors, have also played a significant role in advancing green energy policies at the state and local level.

In the private sector, leaders of major companies in the renewable energy industry, such as Elon Musk of Tesla and Jeff Immelt of General Electric, have been influential in promoting green energy and pushing for policies that support its growth.

So General Electric -which has huge exposure to wind turbines- , and Musk -who's many companies align with pushing forward with green energy- are both arguing for energy advancement.

Of course they are, they are financially aligned with that course of action, which has gained support from a rising amount of Americans.

The geopolitical and strategic threats seem to be constantly overlooked, and ignored.

How to invest, knowing this?

There is one lesson I learned from being a graduate student at Sciences Po Paris, the elite French political university which has minted all but 1 of France's presidents:

People speak their preferences, but they act based on their constraints.

And while there might be a big political discourse about going green, the truth is that the US has moved with its constraints.

The US will most likely not meet is emission reductions by 2030, as the cost of doing so will be too large.

But there will need to be some "poster boy" companies which continue to tell the story of the green transition.

Among these, is NextEra Energy, which has proved a profitable model with clean energies, and because of the vast land opportunity in the US, can keep growing.

It looks like growth could be maintained at 10% per annum for another decade.

Nonetheless, as a conservative dividend investor, using the MAD Chart above ( click here to learn more about MAD Charts ) I wouldn't be interested in buying NEE unless it yields more than its median 10 year yield: 2.66%.

At some point the valuation will come down to this, I'm sure. Hype comes and goes, and at one point it will come down momentarily, and so will the price.

I'll be on watch until then, but why not buy the crowd pleaser at a good price to have exposure to the political and corporate charade of green energy?

NEE is the stock which has the best dividend policy, and so should be the favored source of exposure. If you really want exposure, consider adding when the stock yields 2.5%, but not before.

On the other hand, we know that the US is constrained to continue using its fossil fuels, especially natural gas as it at least can be promoted as clean from a CO2 standpoint.

Here ONEOK ( OKE ) has been a top pic of mine for years, and there is no reason to give up on them. Management have proven their resilience and knowledge of their industry and business model. They're now coming out of the pandemic stronger than ever, with their financials starting to look healthy and strong at last.

Right now, ONEOK is on our watchlist. It yields 5.2% but we haven't seen any dividend growth since 2020.

Management hinted that a dividend hike might be considered by year end.

The very possibility that OKE increases its dividend would make it a good buy at $70. I'm not adding to my personal position because my exposure is maxed out, but I'd definitely consider doing so if I didn't have exposure.

Another name in the natural gas segment that I like is NiSource ( NI ).

NiSource is an American energy holding company that operates in natural gas and electric utilities. The company has two main segments:

• Gas Distribution
• Electric Transmission & Distribution.

The Gas Distribution segment provides natural gas service to residential, commercial, and industrial customers in seven states.

The Electric Transmission & Distribution segment provides electric service to customers in five states.

NiSource also has a non-utility segment that includes natural gas exploration and production, as well as pipeline and storage operations.

Overall, NiSource serves over 4 million customers and has more than $9 billion in assets.

NiSource profits from the price of gas increasing in a couple of ways. One way is through its non-utility segment, which includes natural gas exploration and production.

When the price of natural gas increases, NiSource's exploration and production business becomes more profitable as they can sell the natural gas they produce at a higher price.

Another way NiSource can profit from an increase in the price of gas is through its Gas Distribution segment.

When the price of natural gas increases, NiSource's costs for purchasing the gas also increase, but they are able to pass those increased costs on to their customers through higher rates. This allows NiSource to earn a higher margin on the gas it sells, which in turn increases its profits.

NI currently yields 3.37%. This is more than its historical 3% 10 year median yield.

Based on our model, stocks with this yield need to grow the dividend 5.6% to 8.1% to be satisfying investments.

NI has been growing the dividend at a steady 6.8%-7% rate, and given management's commitment to 5% to 7% growth, I don't see it growing much faster than that.

So Ideally I'd like to see a price which is a bit below the current price. While $28 would be an OK price, it would only have great value at $25 and below.

Finally, EOG Resources ( EOG ) is once again yielding 2.5% following the latest 11% dividend increase.

The company has brilliant assets all across the US for oil and natural gas. I always say whenever EOG yields 2.5% or more, it is a buy. I only displayed the MAD chart for 5 years above, as it gives a better picture of EOG's valuation in the past few years.

The limit between the dark blue and the light blue shows a 2.5% yield.

Buying EOG up to $131 is a good idea.

Conclusion

Between political agendas, corporate influence of the media's discourse, and constraints to change while remaining relevant, the green transition is full of traps.

A safe way to approach the issue is to buy assets which we will be constrained to use, (or in NEE's case, to promote) in order to adapt.

We're in for a bumpy ride, as we have been asked to take for granted what appears to be a Pandora's box of complications. Hold on tight.

For further details see:

2023's Untold Controversy: The Green Transition