The winds of change are blowing through our energy economy, and it won't be long before they're at gale force. The simple fact is that we can't maintain our prosperity and growth without energy, and we can't continue to produce energy the way we've been doing it all along. Everything about the way we generate, transmit, and consume energy is going to have to change. This creates plenty of investment risk, but it also offers extraordinary opportunity for those who see the big picture.
The cheapest Megawatt
U.S. Deputy Secretary of Energy Daniel Poneman had a lot to say about energy efficiency at the recent Bloomberg New Energy Finance (BNEF) Summit. "Life is too short to work on second-class problems," he said by way of opening. Poneman views the transformation of our energy economy as the challenge of our generation, emphasizing that we cannot resist the transition to sustainability: We must lead it.
The U.S. energy economy has reached 100 quadrillion British thermal units (btu) per year. This is nearly 20% of the world's energy, even though the U.S. has only 5% of the world's population. Astonishingly, more than half the energy we use is wasted. Poneman asks us to think about what we could do with that energy, or with the money saved from not buying it.
This isn't just about the environment, Poneman points out. Former Energy Secretary Steven Chu says, "I believe in energy efficiency because I'm cheap." The cost of waste goes straight to the nation's bottom line. Poneman says we could save tens of billions of dollars that could be plunged right back into investment. "Sometimes we have a lack of imagination," he says.
The cheapest megawatt, Poneman says, is the one you don't have to generate: "We have got to do better than 45% energy efficiency. Einstein himself said that we cannot solve problems by using the same kind of thinking we used when we created them."
Sarbjit Nahal, head of thematic investing strategy at Bank of America Merrill Lynch, recently published an anvil-heavy tome positing the theory that the next five to 10 years will be devoted to a serious bid to improve energy efficiency, and guiding equity investors through strategies to capture opportunities on that front. The efficiency possibilities touch every sector: Serious improvements could be made in the way buildings run, data centers are cooled, semiconductors power devices, and lighting illuminates.
Michael Liebreich, chief executive of BNEF, said at the recent BNEF Summit that energy efficiency had the potential to be a game-changer. Indeed, he views energy efficiency as a critical element of our transition to a new energy architecture.
The players
Energy efficiency is a huge space to play, so I won't pretend that I can offer an exhaustive view of the companies involved. That said, here are some names that are very interesting in this area.
Johnson Controls (JCI +0.13%) is involved in making buildings run more efficiently. Commercial buildings' energy intensity has dropped by more than 40% since 1980, but there is plenty of room left for further improvement. Johnson offers products and services that optimize buildings' energy and operational efficiencies, as well as lead-acid automotive batteries and advanced batteries for hybrid and electric vehicles. In 2012, Johnson's building efficiency unit accounted for 35% of net sales.
Ameresco (AMRC +0.58%) is one of the few large, independent energy efficiency service providers. The company's principal service is the development, design, engineering and installation of projects that reduce the energy and operations and maintenance costs of its customers' facilities. Ameresco has seen declining revenues recently because of unusually long lag times in getting its projects funded, but this seems a temporary setback.
Philips Electronics (PHG 0.58%) is among the world's largest lighting manufacturers, and promoting energy-efficient lighting is one of its top priorities. Lighting accounts for more than 19% of the world's energy consumption, so Philips is well positioned to benefit from the efficiency trend. The company announced last month that it had created the world's most energy-efficient LED lamp suitable for general lighting applications. The lamp will come to market in 2015 for office and industry applications and will ultimately be available for residential use.
BorgWarner (BWA +0.27%) makes fuel-efficiency tools for cars and is among the tips Sarbjit Nahal provided in his report. The company has outperformed every auto supplier in North America over the past three years. BorgWarner's stock has slipped recently, largely because of declines in European auto sales. That could make the timing just right to consider this solid company.
And then there's General Electric (GE +0.80%), one of the pioneers of energy efficiency solutions, with its fingers in nearly all of the new energy pies. The massive conglomerate offers an entire array of products that improve the efficient operation of power plants, airplanes, railroad systems, and wind turbines, just to name a few.
