Investing to Support the Clean-Energy Revolution

While I’m definitely anti-capitalist, for the meantime, capitalism is the social form we have. So I am investigating the best ways to limit climate change within that system, while at the same time looking to overcome it.

One way to work within capitalism is in the directing of your money, both as a consumer and as an investor. Here are the results of my research into some “green” ways to invest.

Financing installation, not companies

I am focused on directly financing the rollout of existing clean energy technologies – primarily wind and solar – rather than financing R&D or buying stock in clean-energy companies. Since I still work full-time, any investment income is taxed at a high rate. But most of the investment instruments that finance the direct implementation of these technologies are income-generating assets (which makes sense). Therefore I am specifically looking for things that I can buy through my retirement accounts.

In any case, most of my investable money is in my retirement accounts (IRAs that were rolled over from 401k funds). I have them all at Vanguard, and it’s easy to set up a brokerage account. From there I can buy anything publicly traded.

YieldCos

The main type of investment I’ve invested in (of the money devoted to clean energy) is the YieldCo, a relatively new type of investment that provides a steady stream of income. The idea is that the YieldCo effectively owns income-generating assets like wind farms and solar installations and distributes most of the income as dividends. YieldCos buy these assets from developers; the developers can then take that capital and use it to build new wind farms and install more solar. Usually each YieldCo is closely tied to one developer, which does raise the potential for conflicts of interest.

I did some investigation into some of the available YieldCos. I picked a few for purity and yield (like meth). By yield of course I mean how much the dividends amount to as a percentage of the purchase price. By purity I mean how much of their assets are in clean energy. One in particular, NRG’s YieldCo, has a high percentage of dirty energy assets (natural gas power plants and even coal power plants) in order to have the tax equity to take full advantage of the federal Investment Tax Credit available for solar and wind. While I understand the rationale, I’d prefer my money to be used to fund as close to 100% clean energy as possible. And as you can see, it’s quite possible:

This graph is from an absolutely excellent overview (about a year old) at Forbes called Clean Energy Yield Cos: Growing Pains.

The YieldCos I chose to buy are:

• TransAlta Renewables (TRSWF in the US OTC (over-the-counter) stock market; RNW in Canada, RNW.TO in the graph above) – On the Canadian stock market, so costs more for me to buy and sell, although since I plan on holding for a long time, doesn’t matter too much. Wind and hydro, mostly Canadian.
• Pattern Energy Group (PEGI) – Wind.
• Hannon Armstrong Sustainable Infrastructure (HASI) – Includes a lot of energy efficiency.
• Brookfield Renewable Energy Partners LP (BEP) – Hydro and wind.

I chose to avoid those YieldCos heavily invested in CHP (combined heat and power), which, while very efficient, still builds an infrastructure that relies on natural gas. I’m a stickler – we need electrification of everything, and clean energy to generate that electricity. Natural gas is arguably worse than coal for climate change impacts in the next couple decades.

While TERP looked interesting, I chose not to buy it because of its low yield – around 3% at the time I was looking at it, versus 5-6% for the above YieldCos. (All these yields have gone down in the intervening three months as the prices for those investments have gone up.)

NEXTX

Another investment I made is in the Shelton Green Alpha Fund, which trades under NEXTX. I heard the fund manager speak about this at a local gathering, and I was impressed by their approach. Basically, instead of doing negative screens, their strategy is to try to pick the winners of the clean economy – not just energy, all sectors. So for instance, they’re invested in Tesla and Google as well as solar companies. This is more of an equity rather than an income investment.

Mosaic

Mosaic tries to match up investors with solar projects using a crowdfunding approach. While I like some aspects of it, this is not currently available using retirement funds, so I had to forgo it. If they open up their platform to retirement accounts, I’ll definitely look into it.

Solar bonds

SolarCity has created “solar bonds” which are backed by the payments people make on their solar panels. Just recently they made this available to retirement accounts. The interest rates are slightly lower (5.45% instead of 5.75% on 15-year bonds) from brokerage accounts than by directly purchasing from SolarCity (which can only be done with non-retirement funds), but that’s more than made up for by the tax advantages of using IRA money. After Mosaic, this is probably the closest you’ll get to directly funding solar installations. I was able to buy these through my IRA brokerage account without even paying a fee.

SolarCity “intend[s] to fund interest payments on Solar Bonds with cash payments we receive based on long-term energy contracts for thousands of installed and operating solar energy systems”, but there is no guarantee. It’s not actually like an asset-backed security. The “solar bonds” are really just general corporate bonds, and in the event of a default, offer no special guarantees.

Fossil-free index funds

While there exist actively managed mutual funds that eliminate fossil fuel stocks and bonds, as far as I know there are no basic index funds that simply eliminate fossil fuel companies. I’ve asked Vanguard about this, but it doesn’t seem like they will create such funds anytime soon. That’s a shame, because I like the Vanguard approach. The bulk of my investments are in basic index funds with very low expense ratios. If a major retail investment firm offered fossil-free index funds, I would rapidly switch over.