Just a few short years ago a friend called me to chat about the possibility of stranded assets in oil and gas due to climate change and the expected legislation and new regulations that would entail. This was an interesting idea coming out of the UK at the time. Since then, the idea has gained more and more traction. What is starting to emerge, however, is that stranded assets in oil and gas are not going to happen merely because of climate change. It is happening as we speak because a number of potentially disrupting events are all converging on one point: our use of hydrocarbons. Some of the challenges are due to climate and some are not. What is clear, however, is that they are multiplying. Though climate change will no doubt prove to be one aspect of stranded assets, others will include a simple but powerful realization that there are simply better places to put your investment dollars…or euros…or yuan.

So what are these potentially disrupting events? Let’s start with just one.

We’ve all heard of the compound effect and how it can beneficially impact our investments. What we don’t hear as much is what it can do detrimentally as well. Because the compound effect doesn’t just work on investments. It also works on every aspect of your life. If you choose to add desserts to a couple of meals a week when you never ate dessert before, chances are that you will gain weight. It won’t seem a big deal at first. You won’t even notice it but then one day you will wake up and “somehow” you’ve gained five pounds. Something similar is happening with the alternative energies of wind and solar. While most of us were not paying attention, they were quietly adding capacity to the grid. While we were incessantly fixated on the “shale revolution” they were streamlining manufacturing processes and the costs were plunging. Even now there are those oil and gas apologists who knowingly smile and make smug pronouncements about wind and solar only accounting for a minuscule part of the overall system…and to some extent they are right. But what they have not realized is that even though the alternative energies are currently a small portion of the overall grid, they are already economically competitive! In fact, wind is now the cheapest form of electricity generation in the US and many other places globally on a levelized basis. And yes, this is without subsidies. Solar is expected to be competitive with wind in the next 18 months to two years and yet, these technologies have not reached scale. Imagine the possibilities then. UBS in a March research note stated:

“Solar is no longer necessarily an ‘alternative’ energy – and we expect the investor base to reflect this in the coming year.”

First Solar and SunPower recently announced a joint yieldco and investors were so enthusiastic that both stocks surged 10% and 18% respectively. A yieldco is a new form of investment vehicle which is essentially the alternative energy industry’s equivalent of a Master Limited Partnership which oil and gas uses extensively. Instead of selling off their solar assets to power providers which has been the typical model in the past, these solar companies will now keep them on their books. Why would this be attractive to investors? Because the proposed solar plants could generate as much as $2.8B over their life time. Further, Bloomberg calls it a “low risk opportunity for investors”.

Once investment potential is truly recognized in these new energy producers, as is happening currently, much more money becomes available. The fact that both wind and solar are already competitive with natural gas and coal fired generation will make the dynamics change very quickly. That is when the tipping point is reached and assets that once supported oil and gas and coal will shift into supporting wind and solar. There are good indications that this has already been occurring given the poor share performance of shale companies during the shale revolution and the dismal outlook for coal. Most of the top shale operators in the very best plays have not been able to match the returns of the S&P 500 index and solar shares have often outdistanced them by multiples.

So hang on for the ride. We appear to be entering a new era of wealth creation. And stranded assets in oil and gas could truly become the next Kodak moment.

Solar stocks vs. Shale