Meanwhile, more than a dozen states already source over 10% of their electricity from clean energy (Iowa and South Dakota receive over 25% from wind), California is targeting 50% from renewables by 2030, and “Americans of all political stripes are firmly behind renewables,” says Pernick. “China is choking on its emissions and Japan is post-Fukushima,” he adds, referring to the nuclear disaster.

He is closely watching energy storage, an area with recent announcements from Tesla Motors, SolarCity and Greensmith Energy Management Systems. “It’s one of the last great frontiers,” he says. “We’ll see consolidation, prices coming down and breakthroughs in energy storage that really complete the distributed grid equation.”

Stu Dalheim, vice president of shareholder advocacy at Calvert Investments in Bethesda, Md., says improvements in the grid and the ability for grid operators to have greater control over transmission will help address the geographic limitations and intermittency of renewables.

For example, Southern Company, which is making big investments in its smart grid, plans to send the wind it generates in Oklahoma to its utilities in the southeast, he says.

Going Greener
Dalheim notes that more than 40% of Fortune 500 companies have set targets for emissions reductions, energy efficiency or renewable energy. He thinks the EPA’s Clean Power Plan, now being debated, will push states to invest more in energy efficiency and renewable energy.

Already, “Calvert is seeing a huge appetite from its client base and from the public for renewables,” he says. Rebecca Henson, a senior sustainability analyst at Calvert, says the firm offers exposure to renewable energy through its Global Energy Solutions Fund, Global Water Fund and Green Bond Fund.

Included among the bond fund’s holdings, she says, are TerraForm Power—a SunEdison subsidiary and yieldco—and solar bonds from SolarCity.
TerraForm operates solar farms and teamed up last year with SunEdison to acquire First Wind. SolarCity works in the residential, corporate, government and school markets.

Colm O’Connor, co-portfolio manager of the Calvert Global Energy Solutions Fund (CGAEX) through Dublin-based subadvisor Kleinwort Benson Investors (KBI), thinks solar offers the most interesting near-term opportunities in renewable energy. Its rapid decline in costs and stepped-up adoption rate are attractive. He also anticipates a strong rush by developers to install solar projects before the federal investment tax credits expire at the end of 2016.

He expects the tax credits, now 30%, will be reinstated somewhere between 10% and 30% rather than killed because the solar industry creates many jobs.  In addition, “We think the environment has never been better for financing,” he says.

O’Connor’s top pick in the portfolio is Canadian Solar, a leading maker of solar cells and modules. It also installs projects globally and is active in the U.S., China and Japan. The company plans to launch a yieldco. “We think that’s a very attractive catalyst that should unlock the value of Canadian Solar shares,” he says.

Other solar holdings in the portfolio, which he also expects will benefit from their recently announced yieldcos, include SunPower Corp. and First Solar.
O’Connor’s current favorite wind stock, Huaneng Renewables Corp., gets most of its growth from China and emerging markets. China’s central bank is reducing rates, which should help improve the debt on the company’s balance sheet, and the expected return to normalized wind conditions should help Huaneng’s cash flow, O’Connor says. He also likes Gamesa, a Spain-based wind turbine manufacturer with a leading position in Mexico, Brazil and India.

O’Connor monitors offshore wind opportunities, but cautions it’s a more difficult technology in a less scalable market. Saltwater is corrosive to offshore wind turbines, which are harder to repair and connect to the grid. The fund holds a small position in Toronto-based Northland Power. It is part of a consortium that is building a large offshore wind park in the North Sea.

He expects energy storage to become a bigger part of the energy mix, but says there are still only a few listed pure plays in this area. “If we were to fast-forward maybe 10 years’ time,” he says, “I think we’d be having a very different conversation.”

To help manage the volatility of the renewable energy sector, the Calvert Global Energy Solutions Fund has stepped up investments tied to energy efficiency.

O’Connor predicts the sector will become less volatile. “We would strongly argue this is just the beginning,” he says. “The technology is slowly becoming mainstream and much more accepted by the investment community and consumers.”

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