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Wall Street places its energy bets

Wall Street places its energy bets
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Oil or natural gas? Wind or solar? Old technology or new?

How about all of the above?

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Wall Street investors are hedging their bets as they try to predict the future of energy, juggling investments in safe commodities with bets on potentially revolutionary developments.

While oil still dominates the world’s energy trading, a dramatic plunge in prices has experts speculating about what comes next.

The price of a barrel of oil has been tumbling for nearly a year, dropping below $27 in late January, its lowest point since 2003, and analysts don’t expect the price to climb back near $100 anytime soon.

With the U.S. expanding its oil production and countries across the world seeking to reduce their use of fossil fuels, oil’s price slide is widely seen as the new normal.

“So much is focused on oil at the moment, a lot of other energy alternatives have been shunted to the side,” said Daniel Alpert, managing partner at Westwood Capital. “The notion of generating other kinds of energy is going to take a back seat for a while.”

Beyond the oil glut, investor attention is increasingly shifting toward natural gas, which some believe could eventually challenge oil’s dominance as the global fuel of choice.

“At least in this country, the future really belongs to natural gas in the medium term,” said John Bartlett, a portfolio manager at Reaves Asset Management, which specializes in energy. “We’re going to close a lot of coal [plants], and we’re going to close some nuclear [plants], and part of that is because the price of natural gas is really quite low.”

Earlier this month, the Energy Information Administration predicted that the United States would rely more on natural gas than coal for power production in 2016, the first time in history that has happened. The lower cost of natural gas is the main factor driving the trend, though new environmental regulations are also discouraging the use of coal, the agency said.

While oil and natural gas remain the biggest investment vehicles, more attention is being paid to renewable sources like wind and solar. That’s partly because policymakers in the U.S. and around the world have taken steps to encourage the development of renewable energy resources.

Wind and solar power, for example, became more appealing to investors after Congress used year-end legislation extend lucrative tax credits for both industries.

Investments in solar production will come with a 30 percent tax credit for three years, after which the credit will gradually lessen. But the government will give out a 10 percent credit in perpetuity beginning in 2022.

The extended credit for the wind energy industry will gradually drop through 2020. 

“That really reignited wind and solar production in this country,” Bartlett said. “In the Midwest and out West, you can sign new wind deals below the price of natural gas generation because of the production tax credit.”

In California, legislators agreed in October to adopt a standard mandating that half of the state’s power come from renewable resources by the year 2030. Hawaii has done that one better, vowing to have its utilities running completely on renewable power by the year 2045.

The international climate accord struck in Paris at the end of 2015 has also accelerated the move toward renewable power sources.

In that deal, leading and developing nations agreed to take steps to fight climate change. If they follow through, the pact could produce a significant flow of cash and resources toward green energy.

But much of that effort will take time, and with oil at historically low prices, many governments will have less incentive to encourage renewable sources.

“It becomes very difficult for governments to justify and continue those subsidies when oil is so cheap,” said Alpert, adding that renewable development “is really going to be far more delayed from where people thought it would be.”

Still, a January study from Bloomberg New Energy Finance, done in conjunction with the United Nations Environment Program, found that $329 billion was invested in clean energy in 2015, an all-time high and nearly six times more than was being invested about a decade ago.

China and the U.S. were the two biggest investors, but some of the strongest growth came from the developing world, with India and Africa reporting increases of 24 percent and 54 percent compared with the prior year, respectively.

But continued support from governments for renewable energy isn’t guaranteed.

“The only argument for a government subsidy is the environmental one, so you have to see how that plays out with the politics,” Alpert said.

Beyond energy sources, Wall Street is mindful of the potential for new technology to produce dramatic change. 

Research into massive batteries, for example, could lead to a major changes if researchers find a way to let utilities store generated energy for later distribution, Bartlett said.

Battery technology has not yet become cost-effective on such a broad scale, but that could soon change. A September report from Moody’s Investors Service found that commercial and industrial batteries could become economically viable in the next three to five years.

“Utility-scale storage doesn’t really exist, so supply and demand pretty much has to be balanced around the clock,” Bartlett said.

“Imagine if you had a huge battery that could buy power at night, put it in a battery and give it to people at noon. The value you could uncork there would be absolutely tremendous.”