Renewable Energy in Your Trillium Portfolio(A)

As global energy demand increases and global warming advances, developing clean energy sources and using energy more efficiently becomes more essential with each passing year. Many thoughtful investors may wonder what they can do to support and encourage progress in this area. Trillium’s model portfolios already include a wide variety of companies that are developing, providing, and purchasing clean energy, as well as firms focused on energy conservation.

There are many ways to invest in renewable energy, with investments in companies that actually manufacture wind turbines, solar panels, and fuel cell power systems being the most obvious. Less apparent are companies that make systems or tools used in the generation or transmission of renewable energy, provide indirect technical support, and purchase renewable energy.

In order to gain some perspective on the megawatt (MW) numbers discussed below, it is helpful to consider that California needs approximately 50,000 MW of capacity on a hot day. A large coal power plant may have 300-700 MW of capacity and a nuclear power plant may have 1,000-2,000 MW (1-2 gigawatts) of capacity.

Wind Energy. Over 59,000 MW of wind capacity are in use throughout the world today, according to the Global Wind Energy Council. Total wind power capacity in the United States is approximately 10,000 MW according to the American Wind Energy Association.

There are a number of companies in Trillium’s portfolios that invest in wind energy, but the level of involvement for all of these companies remains relatively small. Unfortunately, there are no pure-play wind companies that are publicly traded in the U.S. Energy giant BP owns two small wind farms in the Netherlands with a total capacity of 30 MW. BP’s goal is to grow this business to 450 MW by 2008 and become a major wind operator by 2015. Electric utility Puget Energy operates a wind farm in Washington State and is building a second one due for completion in late 2006. Total capacity for these wind farms will be 380 MW. Avista and Alliant Energy both purchase wind power from the State Line Wind Farm, which has 300 MW capacity. Enbridge, a Canadian pipeline company, has a number of small wind projects underway and a 200 MW farm in development.

Companies that support wind generation include an Emerson Electric subsidiary that supplies wind turbine generators and a Thomas & Betts subsidiary that supplies steel support structures for turbines. On the retail side, Whole Foods Market has purchased enough wind energy credits in the U.S. to offset 100% of the electricity use in all of its facilities.

Solar Power. Wind power looks positively abundant when compared to solar energy, especially in the U.S. Solar photovoltaic (PV) systems supply less than 1% of the electricity in the U.S., and a large solar PV installation might have a capacity of 10-12 MW. Current solar energy capacity is limited by high costs. Refined polysilicon, used to make solar cells, is scarce, and the cost of producing it is high. A priority for the solar PV industry is to quickly lower the cost of producing solar cells. Still, with many states offering incentives for solar installations, the U.S. Department of Energy Office of Energy Efficiency and Renewable Energy predicts that by 2020, solar PV capacity could potentially reach 30,000 megawatts.

Solar related holdings in Trillium’s portfolios include BP, one of the world’s largest solar PV panel producers. MEMC Electronic Materials, another Trillium selection, manufactures polysilicon for semiconductors and solar cell makers.

Other companies on Trillium’s list support solar energy by purchasing and installing solar systems at their facilities. The latest newsmaker in this area is Google, which announced its plan to install 1.6 MW of solar panels at its Mountain View, CA, campus. Whole Foods, UPS, FedEx, Staples, Target, Interface, and Pepsi have installed solar systems at various facilities.

Geothermal Energy. A less discussed renewable energy source is geothermal energy, which taps into the hot fluids beneath the Earth’s surface to generate heat or electricity. This technology has virtually no greenhouse gas emissions associated with it. Trillium portfolio holding Ormat Technologies owns and operates geothermal power plants with more than 364 MW of capacity and also manufactures systems for recovered energy-based power generation (using waste heat from industrial processes).

Fuel Cells and Hydrogen. Fuel cells convert hydrogen-based fuels to electricity via an electrochemical process, not combustion. The result is a dramatic reduction in pollutants such as SO2 and NOx and a reduction of carbon dioxide emissions by about 20% versus the average U.S. power plant. While fuel cells are often discussed as an alternative to the internal combustion engines for automobiles, their near-term promise is in stationary applications such as generators for hotels or industrial sites. FuelCell Energy is a leading manufacturer of stationary fuel cell power plants. Toyota manufactures, on a limited basis, fuel cell vehicles. Air Products produces hydrogen fuels and is partnering with fuel cell firms to develop related technologies.

Energy Efficiency. While clean energy is getting most of the ink these days, energy efficiency is going to be a critical component of any solution to the global warming crisis. While pressing many portfolio companies to improve the energy efficiency of their operations, a couple of Trillium’s holdings offer products and services to help companies do just that. Johnson Controls designs building management systems that control lighting, heating and cooling and incorporate solar energy. Baldor Electric makes energy efficient motors. The U.S. Department of Energy estimates that 25 percent of electricity is consumed by industrial electric motors in the U.S., making it the single largest end use of electricity. Baldor markets its motors explicitly based on energy savings.

Alternative Energy Exchange Traded Fund. Another significant Trillium portfolio holding is the PowerShares WilderHill Clean Energy Portfolio (PBW), an exchange traded fund (ETF) that includes many companies developing and supporting renewable energy (including many of the companies already mentioned in this article). This fund allows Trillium to efficiently diversify exposure to clean energy in our clients’ portfolios. The ETF tracks the performance of the WilderHill Clean Energy Index, an index of clean energy related stocks that was launched in January 2001. Stocks in the index include companies in six areas: renewable energy supplies, energy storage, cleaner fuels, energy conservation, greener utilities, and power delivery and conservation. More specifically, the index includes companies focused on solar power, wind energy, fuel cells, and superconducting materials.

PBW trades like a single stock, but gives investors exposure to about 40 clean energy companies that are included in the index. This gives investors a chance to bet on the long-term future of the alternative energy industry without having to pick individual stocks or technologies that face significant risks. It’s a lower-risk way of investing in this promising but volatile area.

The companies in Trillium’s portfolios are responding to climate change by finding cleaner sources of energy, new applications for existing technologies, or new ways to reduce their own energy usage. Trillium is always looking for new investment opportunities in this area and has recently added another exchange traded fund to portfolios, the PowerShares WilderHill Progressive Energy Portfolio (PUW). There is no single answer to all our energy needs, and Trillium’s portfolios reflect the multidimensional approach we must take in finding workable solutions.