Increasing Energy Demand Highlights Investment Opportunities for Efficiency and Renewables

By Elizabeth R. Levy, CFA and Brianna Murphy
One of the significant drivers of recent economic growth has been a surge in domestic energy production, leading to a revival in manufacturing of both products and materials.
Low natural gas prices are leading to a resurgence of the chemicals industry in the U.S., predominantly on the Gulf Coast of Louisiana and Texas. Methanex, a Canadian chemicals firm, is physically relocating two methanol factories from Chile to the U.S. in order to take advantage of low gas prices, despite estimated costs of $1 billion to move the plants . As domestic manufacturing picks up, Nancy Lazar, an economist at Cornerstone Macro, has been only half-jokingly referring to the U.S. Midwest as her favorite “emerging market.” The June report of the Architectural Billings Index, a widely used indicator of construction to come, indicated solid expansionary territory in all sectors: residential, commercial/industrial, and institutional.
All of this new activity means new energy demand. The U.S. Department of Energy’s Energy Information Agency’s (EIA) 2014 Annual Energy Outlook projects an increase in electricity consumption of 29% between 2013 and 2040 , which they describe as “modest” growth. At the same time, new EPA rules proposed this year aim to reduce greenhouse gas (GHG) emissions by 30%, meaning, happily, that new energy supply is unlikely to be met by coal and that some coal electricity is likely to come off line.

A report by the Carbon Disclosure Project (CDP) found that four out of five companies earn a higher return on their carbon reduction investments than on their overall corporate capital expenditures. Nearly half, 43%, of the companies in the Fortune 500 have set targets to either reduce GHG emissions, increase energy efficiency, or increase renewable energy. The EPA is also contributing to the renewable energy investment through the proposed carbon pollution reduction rules. The proposal includes three building blocks, one of which is dedicated to expanding renewable generating capacity.

Buried in the EIA assessment is another future, where GHG emissions in 2040 are 22% lower relative to their base scenario, representing only a 7% growth from 2013. While renewable energy is part of the solution, old-fashioned efficiency decreases alone projected energy growth by 20% over the same time frame. This scenario, called the Low Electricity Demand Case , assumes that all equipment purchases are state-of-the-art efficiency.
After all, reducing GHG emissions isn’t the only reason that consumers and businesses might want to reduce energy use. In the EIA’s reference case in their 2013 Annual Energy Assessment, retail electricity prices are projected to climb 13% in constant dollars between 2012 and 2040, a cost that is avoidable by increasing efficiency . With that in mind, many companies that sell machines and equipment to consumer and other companies, even those that can be considered traditional, are aligning their products around energy efficiency.
While admittedly just a thought experiment, the EIA’s scenarios do point out a basic truth: With the expansion of economic activity—a good thing—is the coming expansion of energy use, no matter how dedicated to efficiency companies are. And so, while companies and investors are focused on reducing demand for energy through efficiency, they are also focused on supporting the growth of the right kind of energy.
Some companies are already proactively incorporating renewable energy into their climate change and business strategies. Technological improvements and large-scale projects are contributing to the continued decline of renewable energy prices, making them increasingly competitive with traditional energy. There are three main options for renewable power: onsite generation, renewable energy certificates (RECs) or credits, which separate the renewable attribute from the power attribute to allow end users to essentially turn any power into renewable power, and Power Purchase Agreements (PPAs), which are long-term commitments to purchase renewable energy from a specific facility at an equal to or less than market rate. PPAs are generally considered to be the most effective and impactful renewable energy investments that a company can make.
Large-scale renewable projects often require the commitment of a large customer before they can even be constructed. These long-term agreements with wind and solar farms give the project developer access to financing so they can build new renewable energy projects. Therefore, when companies make these commitments they aren’t just benefiting through fixed, predictable energy prices, they are also driving the growth of the renewable energy industry. There are still many challenges to making renewable energy accessible and affordable everywhere, but the reality is that renewable energy is a key part of a company’s forward thinking climate change strategy. Renewable energy is essential for companies that continue to grow but want to maintain low emissions profiles in the long term.
Companies in the technology sector have demonstrated the feasibility of sourcing renewable energy and incorporating it into their long-term climate strategies. For example, technology companies like Microsoft and Google, whose emissions primarily come from data centers, have made long-term commitments to source 100% of the energy needed to run their companies from renewables. One way they are achieving these goals is through PPAs, which provide stable energy prices while also reducing their emissions profiles. This allows Microsoft and Google to lock in on long-term prices, reducing their exposure to volatile fuel prices. By partnering with wind and solar farms, these companies are able to power their carbon intensive data centers with clean energy.

Last year Trillium engaged with several companies on setting GHG emissions reduction targets as part of our climate risk management priority. Our dialogues led to commitments to set carbon emissions reduction goals. We successfully withdrew resolutions at several companies including Church & Dwight, Lowe’s, and Valmont Industries. These companies are now taking meaningful steps toward measuring and mitigating their greenhouse gas emissions.

In addition to realizing savings, these investments should help grow wind and solar markets and make them more scalable. Notably, Google has invested more than $1 billion in large-scale wind and solar projects. These companies realize their ability to reduce their carbon footprint and positively impact the renewable energy market in a financially sustainable way.
In an economy where companies are under pressure to do more with less, Trillium is interested in those that are demonstrating leadership in energy efficiency and clean energy use. The U.S. faces significant economic risks from the impacts of climate change, necessitating the need for companies to reduce their overall GHG emissions. Companies that are identifying and mitigating climate risk are better positioned to be successful as we move into a resource-constrained, low-carbon economy.
Looking ahead, we see opportunities to engage with companies that could benefit from a renewable energy procurement strategy. This year, we plan to file several shareholder proposals asking companies to set renewable energy investment goals as a part of their climate strategy. By using the examples of leaders successfully procuring renewable energy, we believe we can press other companies to take similar actions. By filing these proposals, we hope to persuade companies to incorporate renewable energy into their emissions reduction strategy allowing them to realize savings and generate greater shareholder value.
These Long-Established Companies are Using Efficiency as a Tool to Promote Growth:
Johnson Controls (NYSE – JCI): Founded in 1885, JCI has several businesses related to efficiency. On the building side, Johnson Controls’ energy-management service businesses have saved clients over $10 billion over the last 15 years by optimizing energy usage in a wide range of settings, including schools, hospitals, airports, stadiums, government facilities, public housing, and office towers. Johnson Controls combines technologies such as efficient lighting and windows, efficient variable-speed motors on heating and cooling equipment, occupancy sensors, building management integration, and data collection and analysis. In its battery division, Johnson Controls’ Absorbent Glass Mat and Enhanced Flooded batteries are a key enabling technology of “start-stop” hybrid cars, which deliver fuel efficiency at a much lower cost than full hybrids.
Emerson Electric Company (NYSE – EMR): Founded in 1890, EMR—a diversified industrials company—offers compressors that enable high-efficiency heating and cooling equipment for residential, commercial, and industrial settings. They also offer data-center optimization products to reduce the energy demand of data centers.
Eaton (NYSE – ETN): Founded in 1919, ETN provides an array of energy-management services. In addition to backbone components of the electric grid, Eaton also sells efficient lighting systems, and 35% of its lighting systems are now LED. In addition, their vehicles division combines engine technologies than can improve engine efficiency from 2 to 19% each in a range of vehicle types from passenger cars to agricultural vehicles to medium-duty trucks.
Borg Warner (NYSE – BWA): Founded in 1928, BWA is a global company that produces automotive components. Borg Warner is a leader in improving fuel economy, as their turbo chargers allow for big bursts of power for smaller engines, leading to an up-to-30% improvement in fuel economy.
J.B. Hunt (NASDAQ – JBHT): Founded in 1961, JBHT began as a freight trucking company and went on to become the pioneer of intermodal transportation. Intermodal moves utilize both rail, for the long part of freight’s move, and trucking, for the shorter moves to and from the train. This relieves highway congestion and can save over 200 gallons of diesel fuel and two tons of GHG emissions per shipment converted .
Pentair (NYSE – PNR): Founded in 1966, PNR offers a wide array of water and fluid management technologies. Over the last decade, they have become the global leader in equipment for swimming pools by focusing on energy efficiency in products such as pool pumps, filters, heaters, and lights. For example, technologies such as variable-speed motors allow residential pool owners to reduce by up to 90% the energy used to run their pool pumps.

IMPORTANT DISCLOSURE: The views expressed are those of the authors and Trillium Asset Management, LLC as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be a forecast of future events or a guarantee of future results. These views may not be relied upon as investment advice. The information provided in this material should not be considered a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the authors on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is for informational purposes and should not be construed as a research report.
Editor’s Note: This article was originally published in the Fall 2014 issue of Trillium’s newsletter, Investing For a Better World.