The Sun is Getting Brighter

The Sun is Getting Brighter 

Another example of the long term, visionary view of Bruce Flatt and his business team at Brookfield Asset management. A different perspective from the mass media who fixate on the noise of the day and what the Fed is currently up to. And again to brainstorm off of this scenario, think of the cottage industries that might spring up servicing this possible shift in the energy sector…True there is no guarantee that things will play out the way Flatt suggests but if your looking for certainties stay away from the stock market. But if you are interested in investing in stocks, try instead to think in terms of probabilities and the value of a long-term perspective and under-used information.

We are in the midst of a 50-year long, once in a many generation, transformation of the global power grid, from 100% fossil fuels to a good portion being renewables. We are still in the early stages, and this transformation will require very substantial capital investment over multiple decades. We estimate that replacing a meaningful part of the non-renewable capacity in our core markets with wind and solar will require over $10 trillion of investment.

This transformation is now escalating, as solar and wind power have moved from a formerly marginal resource requiring government support, to the lowest cost, easiest to build, provider of bulk power. This shift from new technology to established infrastructure has occurred at a rapid pace due to a combination of environmental regulation, subsidies, and more recently, cost declines which in the last five years have made some traditional forms of thermal generation obsolete, and therefore created widespread adoption of renewables.

Over $1 trillion of capital has been invested into renewables in the last five years, and over 1 million megawatts of new renewables have been added to the global power markets. This is equivalent to the entire U.S. electrical supply being replaced by renewables in the last five years. More importantly, despite this, renewables still account for less than 30% of global power supply, of which wind and solar account for less than 8%. Accordingly, even if the world maintains its current $200-$300 billion of annual investment into renewables, the level of penetration will remain modest for years. As a result, the opportunity to invest should be substantial for many decades.

In spite of the growth of the renewable power market, investing has been highly competitive. The numerous subsidies offered by governments, combined with low interest rates and sustainability initiatives have attracted all forms of investors. We therefore continue to be patient and strategic in building our business, but believe the prospects for growth are better than they have ever been. Furthermore, subsidies were never a sustainable way to build a power grid, but over the long term as they are eliminated, opportunities will favor those with operational expertise.

Over the last 20 years we have grown our operating capabilities, built a global business, and have been patient in deploying capital. Even so, over the last five years we have invested over $10 billion of capital into new opportunities globally, resulting in a portfolio of 8,000 megawatts of utility scale hydro, 6,000 megawatts of wind and solar facilities, and 3,000 megawatts of storage through our pumped hydro and battery facilities. In addition, we are one of the largest owners of distributed solar generation in the U.S. and are expanding this capability to key markets around the world.

From an operating perspective, we now have scale in North America, Latin America, Europe, China and India. This diversity of technology and geographic presence will help us rotate our capital across markets, looking for the best risk-adjusted investment opportunities. Moreover, our ability to operate plants, develop new projects and find customers should allow us to surface significant value from our existing portfolio over the long term.

Bruce Flatt,

Brookfield Asset Management,

Q2 2018 Letter to Shareholders