In a recent interview with Opto, Ben Goldsmith, environmentalist and pioneering sustainability investor, explained that the “era of unfettered globalisation” was over due to supply disruptions caused by Russia’s invasion of Ukraine. As a result of the global energy shift, he sees investment opportunities in power distribution but warns against investing purely in renewable stocks.
“The war has been a wake-up call to the inherent vulnerability in our energy supply and exposure to global commodity prices,” Ben Goldsmith, chief executive officer of London-listed investment firm Menhaden Capital [MHN.L], told Opto.
The Russian-Ukraine conflict has “dramatically accelerated the energy transition to renewables in the UK and the US”. As a result, Goldsmith sees increased investments in domestic sources of power “because it makes not just environmental but economic sense to do so”.
While favourable tailwinds have seen growing investment opportunities in the clean energy space, Goldsmith said that both his fund and investors would need to be selective. “The main innovations which are taking place around renewables are in the field of financing and power distribution rather than the actual generating capacity itself,” he said.
“I don’t see in the near term any leapfrog technology emerging from solar photovoltaic or wind. What we are seeing are incremental improvements dramatically bringing down the cost of existing technology and boosting efficiency. Power prices are only going one way. It is beginning to look like mobile data in that it is ubiquitously cheap.”
Margin concern in solar stocks
For Goldsmith, investing purely in renewables is a “dangerous area” because of the price drop. “It is becoming so cheap that margins will become very, very thin. Solar has now replaced coal which has become uneconomic. But we also risk 2023 solar displacing 2016 solar with long-term buyers of power at higher prices from earlier assets no longer having the incentive to honour those contracts.”
Menhaden does have a direct investment in power generator X-ELIO, however. Goldsmith praised the company for its nimbleness and “smart development of solar assets in nations where power prices are high, there are few fossil fuels, lots of sunshine and no government support”. These include the US, Australia and Spain. “X-ELIO makes outsized returns,” he said, highlighting a 2020 sale of Spanish solar assets to China Three Gorges.
Goldsmith said Menhaden’s portfolio is narrow and does not have quite the same deep focus or watch list as “greener” funds. Aside from X-ELIO its holdings include mainstream tech giants such as Microsoft [MSFT] and Amazon [AMZN] because of the work they are doing in developing clean energy. “We’re not really going to buy stakes in small or mid-caps, but I do love the clean energy theme,” he said.
Inside Menhaden Capital’s stock picks
Goldsmith believes tackling the intermittency of renewables and storage is particularly “interesting”. One example is electric vehicle (EV) batteries that can be utilised by drivers as storage capacity. The EV is charged at night when prices are cheap and then during the day any excess storage can be sold back to the grid at higher prices.
“An ordinary driver becomes an electricity trader through this system. Companies offering this will do well,” he explained. “Another interesting theme is the embedding of much more advanced meteorological forecasting into grids. If you are going to rely on sun and wind for power, then you need to know when that weather is going to happen so you can adapt your grid accordingly.”
He also likes smart demand management smoothing out the peaks and troughs in power by smart grids and smart metres used in peoples’ homes. “Before it went private, we used to have an investment in Calisen Group which are rolling out smart energy meters,” explained Goldsmith. “These metres are connected with devices in your home and switch on or off your dishwashers or tumble dryers depending on power prices at the time. It means that they will mostly be on at night when you are sleeping. These systems will become more essential in the future.”
He added that Menhaden is looking more at price setting ability in renewables. “In an era of inflation, we are concerned about investing in companies that are price takers in competitive positions,” he explained. “Electricity transmission is attractive where it doesn’t make sense to have a second power line alongside the first. That means that the infrastructure has some ability to set the price of power. Water distribution infrastructure is another example.”
Another area of interest, he added, includes large-scale battery storage plants as they become more economic. He highlights Chinese EV group BYD [BYD] and UK sustainability energy company GRIDSERVE as being innovative in this area and using them as platforms for power trading.
Other growth areas, despite the current supply chain squeeze, are semiconductors manufacturers. “We love that industry. There are a limited number of players in the market, around five or six, and we like them all,” he said. “Yes, these are sustainable investments because they are crucial in all aspects of modern life including electric vehicles, smart grids and smart meters. Demand for them continues to skyrocket.”
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