Solar Power: The Future Of Energy

This is the first of a series of industry papers from Arowana & Co which will explore the future potential of solar energy for the wider investment community. According to Tony Seba, energy disruption expert and lecturer at Stanford University , “It’s the end of the energy ….industry as we know it!”

Today, over 80% of primary energy consumption is sourced from oil, coal and natural gas. However, in the next decade, primary energy production from renewable sources such as solar and wind are expected to grow exponentially at the expense of energy produced from fossil fuels. Solar power is well known for its environmental benefit but now the economic benefit is becoming increasingly evident when compared to fossil fuels.

The viability of fossil fuels is under threat from the clean tech industry.

Technology advancements mean that Solar Photovoltaic (PV) panels have become far more efficient and cheaper over time. Costs of panels have fallen by a staggering factor of 253 times since the late ‘70s. Solar PV will become even cheaper per watt as the technology improves in the future.

There is a distinct global movement away from investing in fossil fuels.

The National Bank of Abu Dhabi (NBAD), one of the biggest banks in the oil rich Gulf, says that fossil fuels can no longer compete with solar technology on price. A 260MW(megawatt) solar project in Dubai was previously the cheapest solar project, producing electricity at a low of 5.84c/kwh, equivalent to an oil price of US$10/barrel and gas at US$5/mmbtu. The newest low cost solar project is now a 350MW solar plant in Abu Dhabi at a record low of 2.42c/kwh to produce electricity. More remarkably, The NBAD noted that whilst all previous energy investments have been in oil and gas, going forward almost all investments will be in renewable energy sources.

Globally, over 580 institutions, controlling approximately US$3.4trillion have divested from fossil fuels. In Australia, the City of Sydney Council & Queensland University of Technology recently committed to reducing their investments in fossil fuels. This follows the actions of other institutions in Australia including Australian National University, Bendigo & Adelaide Bank, Uniting Church and many more who have all committed to reducing their investments in fossil fuels.

Investors are investing more of their funds into clean energy investments

There is a paradigm shift towards investing in clean energy that is causing major disruption to the energy sector. In 2015, clean energy investment broke new records, attracting $329B. This increase occurred despite the cheaper fossil fuel prices, weakness in the European economies who are the biggest investor in renewables, the cost of solar PV falling which allows more installations for the same price and a rising US dollar which reduces the value of non-US dollar investments. Currently, solar only represents 1% of global energy production suggesting that significant disruption is still yet to occur.

The cost of solar power is now equivalent to power from the grid

According to Deutsche Bank’s recent research paper, the cost of solar power is now equivalent to power from the grid, (known by the industry as “grid parity”) in many countries including Australia, Germany, Sweden, Japan, Spain, Philippines & Brazil, to name a few. In the United States, 20 states are now at grid parity and China was on the cusp of grid parity at the time the report was written. Deutsche Bank predicts that by 2017, solar PV will be at grid parity in up to 80 per cent of the global market and the weaker oil price will do little to slow this down. Mass adoption of solar energy will reach a tipping point when the cost of unsubsidised solar falls beyond "grid-parity", or as Tony Seba refers to it "god parity”. Tony predicts that god parity will be achieved by 2020 in the US.

New power generation projects will be mainly from solar.

Looking forward globally, additional power generation is expected to come mainly from solar. The US Energy Information Administration (EIA) expects 2016 to be the first year in which utility-scale solar additions exceed additions from any other single energy source. COP21 has accelerated new solar installations with North America leading the charge. The adoption of solar will be amplified when utility-scale battery storage prices fall further in 2017.

In Australia today, the only new power generation projects committed to are in solar and wind. This trend will continue as the industry is required to double the current renewable energy supply to meet the Large-scale Renewable Energy Target (LRET) by 2020.

However, investment options in profitable solar companies for Australian investors have been limited until now.

Arowana provides a profitable & fast growing investment option into solar.

Arowana-backed VivoPower International is an Australian founded global solar company that is focused on providing solar systems to the commercial, industrial & government (CIG) sectors in OECD and ASEAN countries where grid parity is inevitable. VivoPower is responsible for all aspects of building and operating its solar projects including financing, engineering, project management and asset management.

The VivoPower team is led by an impeccably credentialed team steeped in solar experience. VivoPower’s CEO is the Non-Executive Chairman of Solar Century; was Chairman & CEO of Conergy, leading its restructuring and sale of Kawa Capital and was a board member of Solarfun Power (now Hanwha Q Cells) one of the world’s largest PV manufacturers. VivoPower’s USA head represented Germany at COP15, was a special adviser to South Africa in designing its renewable energy program, and ran mergers & acquisitions for a large US solar developer. VivoPower’s engineering team has considerable experience in developing large scale solar projects; including detailed involvement in one of the largest PV projects east of the Rocky Mountains.

VivoPower’s strategy is to grow a global solar platform that is less capital intensive than traditional players and to increase its recurring income and cash flow over time. The team will not engage in speculative solar projects that will risk value and will only commit capital to a solar project when they have secured a power purchase agreement, identified a buyer for the asset and secured construction financing. This mitigates the speculative risk of a solar development project which has been the Achilles heel for some industry players, and destructive for shareholder value.

Operationally, VivoPower is experiencing very strong growth due to a confluence of positive tailwinds and is on track to deliver US$18m-$20m EBITDA for the financial year ended 31 March 2017 with a strong growth outlook beyond that.

Arowana has made public plans to merge VivoPower with Arowana Inc (*) which will see VivoPower International listed on the NASDAQ. Investors who are seeking a direct exposure towards VivoPower can invest in Arowana Inc (Bloomberg Code: ARWA US) on the NASDAQ. Post the merger, Arowana International (ASX code: AWN) is expected to own between 30% and 57% of VivoPower.

In the next series, we will write about the future of the energy industry once solar & battery storage reaches critical mass.

*ASX update to VivoPower & Arowana Inc’s initial business combination.

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Benn Lim is the Head of Retail Distribution of Arowana & Co., joining Arowana in 2015. Previously Benn was a Financial Adviser for over 12 years, managing financial investments for High Net Worth families. His career began with Commonwealth Bank’s Private Bank and more recently was a Director at UBS Wealth Management for almost 10years.

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