Intermittency

Intermittency is a term, borrowed from the world of engineering, that investors in the energy sector must understand. It describes an energy source that is not continuously available and cannot be turned on or off at will. The classic examples are solar power, which doesn't work at night, and wind power, which is useless on a calm day. This unpredictability is the core challenge of these renewable energy sources. Unlike dispatchable sources like natural gas or nuclear power plants that can generate electricity on demand, intermittent sources are hostage to the weather and time of day. For an investor, this isn't just a technical quirk; it's a fundamental risk factor that directly impacts a company's revenue, profitability, and long-term value. Understanding how a company manages, mitigates, or even profits from intermittency is key to separating the high-flyers from the eventual flameouts in the green energy transition.

At first glance, intermittency sounds like a deal-breaker. If a company can't guarantee its product is available, how can it be a good investment? While it presents real risks, it also creates massive opportunities for savvy investors who know where to look.

The primary risk is revenue volatility. A wind farm operator's revenue can swing wildly based on wind patterns, making financial forecasting difficult. This uncertainty can spook investors and lenders. Furthermore, a grid overloaded with intermittent sources becomes unstable. This can lead to governments imposing costly regulations or requiring producers to pay for expensive backup power, eating into profits. Many renewable projects are also propped up by government subsidies or favorable contracts; a change in political winds can be as damaging as a change in actual winds.

Here's where it gets exciting for the value investor. The problem of intermittency has created a whole new ecosystem of companies dedicated to solving it. These are the “picks and shovels” of the renewable energy gold rush. Investing in a company that makes intermittent power more reliable can be far more profitable and less risky than investing in the power producer itself. This is where you can find businesses with a strong competitive moat and durable pricing power.

Instead of just betting on a sunny day, a value investor should look at the companies that make sunshine profitable around the clock.

This is the most direct solution to intermittency. When the sun is shining or the wind is blowing, excess energy is stored; when it's dark or calm, that stored energy is released to the grid.

• Battery Dominance: Companies involved in utility-scale battery storage, especially those with superior lithium-ion batteries technology or a cost advantage in manufacturing, are at the forefront.
• Alternative Storage: Don't forget older and newer technologies. Pumped-hydro storage, which uses reservoirs as giant water batteries, is a proven method. Emerging fields like green hydrogen production and storage also offer long-term potential for investors with a higher risk tolerance.

A dumb grid can't handle smart energy. Intermittency requires a massive upgrade to our electrical infrastructure.

• The Smart Grid: This involves hardware and software that allows for two-way communication between the utility and its customers. Companies that produce the sensors, meters, and control systems for smart grids are essential.
• Brain Power: Software companies that use artificial intelligence to predict weather patterns, forecast energy demand, and optimize the flow of electricity are critical. These businesses are often high-margin and scalable, a classic value investor's dream.

Not all energy producers are created equal. The ones that intelligently manage intermittency will outperform.

• Geographic Diversification: A company with wind farms spread across a whole continent is far less intermittent than one with a single farm. The wind is always blowing somewhere. This diversification reduces volatility and creates a more reliable revenue stream.
• Hybrid Power Plants: Look for projects that combine intermittent renewables with a dispatchable source on-site, like a battery system or a small natural gas plant. This model provides reliability and can often secure more favorable energy contracts.

When analyzing a company in the renewable energy space, use this checklist to assess how it handles the challenge of intermittency.

1. What is the business model? Is this a pure-play energy producer at the mercy of the weather, or is it a solutions provider (storage, software, grid tech) that profits from the problem of intermittency itself?
2. How is revenue secured? Look for companies with long-term Power Purchase Agreement (PPA)s. These are contracts to sell electricity at a pre-defined price, which removes a huge amount of revenue uncertainty. A company without them is making a speculative bet on energy prices.
3. What is the technological edge? Does the company possess proprietary technology in battery chemistry, energy management software, or manufacturing processes? A real, defensible tech advantage is a powerful moat.
4. Scrutinize the debt. Building energy projects is expensive and often funded with a lot of debt. Ensure the company's balance sheet is strong enough to survive lean periods and that its cash flow can comfortably service its debt obligations.
5. Understand the regulatory tailwinds. How much of the company's success is dependent on temporary government subsidies or tax credits? A great business should be able to thrive even after the government support fades away.