The Alpha Strategy – Energy Psychology

The Alpha Strategy (The Ultimate Plan of Financial Self-Defense) is a rather interesting book from the 1980s. The basic precepts outline strategies to protect your wealth from various erosive effects such as inflation, taxation and theft, primarily by storing “future consumables” as a hedge. Invest in a garden or cache food to reduce your vulnerability to inflation. Buy a chainsaw and stockpile wood and you don’t worry as much about interruptions in a natural gas supply.

The opposite trends seem to be prevalent these days, with subscriptions to cell phone services, leased cars, Netflix, cleaning services, and other monthly charges becoming commonplace for households and making us more rather than less dependent. If instead we can make investments in permanent assets that can decrease these outflows, we build ourselves a more resilient foundation. If you are curious and would like to listen to some commentary on the Alpha Strategy, try this podcast here.

Now, what in the world does this old dusty book have to do with renewable energy? Well, let’s consider a number of strategies for investments in a solar-photovoltaic (PV) system or indirect means to offset your energy bills. Since I’m not a financial advisor, this is more about the psychology of options, rather than a detailed look at system costs, taxes and internal rates of return. I’ll use approximations to my own energy use and setting as crude examples.

The Setting

As an engineer, I love, love the idea of having my own home-based energy generation system – be it PV, wind, hydro, whatever. For decades I’ve been an avid reader of Home Power magazine, which I highly recommend if you have a similar bent. If you want to maximize the benefit of subscribing, follow my lead and simply donate money to your local library so they can have a set, and then others can benefit as well. Then I go to the library and ask if I can take the old back issues after a year or so. Win-Win!

Love this magazine and the projects. Love em.

Here’s the challenge – like many of you might, I live in a very modest townhouse in an urban setting. I don’t have a river running through it, and it’s not a place where one could set up a wind turbine. It’s also on the north side of a duplex, so while in theory this region is a great PV setting, there really isn’t an aspect on my home that would have great exposure for a good solar capacity factor. How does one “scratch this itch” given the constraint of a small apartment or home?

As far as metrics, I use about 1700 kWh of electricity per year (4-5 kWh per day), at an annual cost around $250. This is not a big deal in the grand scheme of things, but how could I apply the Alpha Strategy to provide some sort of hedge for this expense?

PV System – Own Your Own

Let’s consider a case without physical constraints. Probably the most personally satisfying solution would be to own a solar PV system that could meet  daily demands. It would be a separate debate about whether this should be

• stand-alone or grid-tied with battery backup – probably the most faithful to the Alpha Strategy, which would allow one to say “f off” to the utility, or
• grid-tied without a battery backup, which would be less expensive.

Given my setting and demand (with very little thought for energy saving measures, which should be applied before making investments in energy production), it seemed a system size around 1.5 kW might produce about the same annual output as my demand, using the PVWatts estimator from the National Renewable Energy Laboratory (NREL). Table 1 shows my monthly average demand and the system estimated output.

Note that even though the annual output of the 1.5 kW system is greater than the annual demand, there are still shortfalls during the winter months, and an excess during the summer. That isn’t the most efficient if one wanted to have a stand-alone off-grid system, which would require an oversized system with battery backup to cover own needs, and would not have a discharge path for the surplus periods. Seems like a lost opportunity.

Table 1: Indicative monthly energy demand, cost, and production

To be “purer” with the Alpha Strategy and improve one’s own resilience, without too much added cost, one probably would want at least a grid-tied system with battery backup and a net metering deal with the utility. Let’s say a 1.5 kW system might have an installed cost around $5000. Per the above metrics, and neglecting a little credit for the surplus electricity (perhaps worth $30 ), sure, it might offset about $250 in utility bills, not counting other utility charges for the grid connection or net metering program.

Would there be tremendous satisfaction in watching your energy meter churn out kWh for you on a sunny day? Absolutely. Would neighbors flock to your house if an outage or the endtimes hit, when your system provides a microgrid oasis when others are blacked out? Perhaps. But here’s the thing – it may or may not be an option where you live. If physically this isn’t available, are there alternatives?

Community Solar Program – Your Share

A Community Solar program, where you are allowed to buy a “share” of an installation, and receive a monthly payment or offset on your bills, seems like a viable alternative. If I could wander down to the panels, and see a credit on my bill each month, I’d feel pretty good about that. So I looked at my utility and they indeed have a pilot community solar project. This looks to be a 500 kW system. So, what would the metrics be for this investment?

The plan is that one buys a subscription for $562, and one receives a utility bill credit each month based on the power generated and the avoided cost the utility might otherwise incur. I live in a state with low rates, so they estimate that  “Based on current projections, it adds up to about $23 per year per subscription, which means you may recoup the original subscription cost over the 25-year life of the project.”

If we take $250/23 it means it would effectively take about 11 subscriptions to offset $250 in energy bills, or a total of about $6000. You wouldn’t own the system (PV systems do boost house value), and it sounds like one gets a credit based on their decisions about what the avoided costs are, not some fixed commitment. It’s true that one could feel like one “owns” part of the community solar project for some heartwarming value, and there is no maintenance required unlike an owned system. However if you took $6000 and simply placed it in a bank account you could withdraw $240 per year over 25 years , so as an investment considering no return of capital at the end of the term this particular community solar project seems rather meh.

Utility Stock Investment – Your Shares

Another option might be to purchase shares of the utility, and use the dividends and other appreciation of their stock to offset your electricity bills. The most recent five years in the U.S are probably not characteristic of total returns going forward, so let’s say that one’s utility might provide a return of 5% in the future after inflation, which seems reasonably conservative. $250/0.05 = $5000. So an investment of $5000 might provide an offset for that $250/year stream of payments from a utility bill – and perhaps even do better. You also could sell the stock whenever you want.

Would this be satisfying? Well, my utility has a green-ish portfolio, but it’s not sending a very targeted message that more renewables are what you want – it’s just going along for the ride. It’s also true that coal forms a fair amount of their generation, and that shouldn’t be encouraged that by any means. So it’s a hedging strategy for energy costs perhaps, but if it really is about more than just the money, this strategy doesn’t foster much enthusiasm.

Renewable Energy Stocks, Bonds or other Ventures

The last option to throw out there would be to target an investment more directly into a renewable energy company or financing opportunity that provides a “clean cash flow.” There are various opportunities; a few appear to be ones like Hannon Armstrong Sustainable Infrastructure (HASI), Clean Capital and Wunder Capital. Some opportunities allow you to finance (your minute share of) renewable energy projects, and offer a stream of payments. Some link your investment to a specific portfolio of offerings, so you could feel at least some connection to a tangible project, similar to the community solar opportunity.

For Wunder, one has to be an accredited investor (make a lot or own a lot); so probably not for the young or faint at heart. The minimum investment is only $1000 though, so that allows for some experimentation and diversification. Depending on the product, they expect to pay out around 6-7+% interest, paid monthly over a term of 5 years or so, with a “bullet payment” of the remaining principal at the end. It’s fun to look at the list of projects and think you are contributing to making them possible.

Say the return after inflation is 4%. So a $6250 investment might return around $250 in interest only per year over five years. Your investment is locked in for that period however, so less liquid than buying utility stock. Are these companies solid or snakes? Would have to research that.

A key difference to me that is not stated in any of their literature is that in these cases where your investment is supporting large utility-scale solar projects that have significant economies of scale, effectively your share likely will deliver more annual kWh of renewable energy delivered to the grid than you would for the smaller scale home or community solar opportunities. It would be nice to have your investment traced to some specific kWh/year delivery as well as your $ return. Is that increased impact on the world worth the tradeoff of not having a more tangible asset? Do you want more satisfaction on a local scale, or more impact on a national scale? No wrong answers, just considerations.

Summary

Table 2 describes some of these tradeoffs between options. Some admittedly subjective definitions:

“Purity”: does this option decrease your vulnerability to your utility bill cash flow? Are others in control of your returns, or you?

“Tangibility/Satisfaction”: do you own something? Can you point to something that shows your contribution to a better world?

“Geographic Flexibility”: can you participate in this option regardless of your living situation?

“Return on Investment”: how financially profitable might this be?

Table 2: Psychology of Renewable Energy Investment Options

Do you feel you absolutely must own your own system and see that humming every day? If your physical setting permits, that may be an option. If you have a state with generous net metering rules, it may be a decent return on investment (ROI). If not, your return may be more on the psychological and resilience-in-emergency sides.

Would a community solar project make you feel better about your city? A pooled program may offer some feel-good nature, but it may not have the best economics or total kWh impact.

Does holding some utility stock help you hedge your energy bills? Probably a good ROI, but doesn’t really send a direct message that you want more renewable energy – just one step removed from any other equity investment.

Do renewable energy financing opportunities allow you to promote most effectively the building of new renewable energy capacity? Do you view not owning more local/tangible assets as a sacrifice, or do you not care? Might you still get a reasonable return on investment, or does the illiquidity and risk worry you?

It’s important for me psychologically to push this world towards lower carbon energy sources, apart from my full-time work. I’d like some of my investments to have more directed purposes. I also like the idea of building an energy hedge along the lines of the Alpha Strategy. So, what might I do?

• Would love to have my own system, and someday might put together the smallest portable one just for emergencies, but really can’t offset my utility bills with one at my current setting.
• The community solar option just doesn’t pencil out as an investment, but it might be nice to have a token part of the cause, so if with a little more research it’s possible I may throw $562 at it just to see how it plays out. Apparently one can transfer the subscription to another entity like a nonprofit if one moves. The utility should really work on the numbers a bit more it seems.
• Generic energy/utility stocks – not targeted enough for my purposes to qualify.
• Renewable Energy Financing – might be intriguing and fun to follow to throw $5000 or so towards a few of these things just to see what happens. Since there are very few bonds in my portfolios this would add some diversification, and could tolerate the money being tied up for five years or so, or even the possibility that these firms dissolve (such things happen). Worth some more due diligence on my part, but a possible experiment for 2018.

What’s important to you? What would you do?