The Clean Energy Initiative

In a presentation by one of RBSs leading investment analysts, Jeff Finkelstein, he points out that market attention in 2022 has focused almost exclusively on broad economic concerns such as inflation, interest rates, and recession risk. However, he says investors should also consider the imminent passage of the new US “Inflation Reduction Act” (IRA) of which one major component creates the largest clean energy policy and financial initiative in national history.

Clean energy projects (solar farms, offshore wind turbines, etc.) are massive and expensive projects which require a major upfront capital investment, that is paid back slowly over time as their energy flows to utilities.

Raising the initial funding is a limiting factor. For example, in Canada, start-up projects are awarded long-term (20–30 yearד) electricity purchase agreements, whose guaranteed revenues can be used to finance the capital project. In the US, start-up projects are awarded various attractive tax credits which can benefit the project developers directly or be resold to financial buyers.

Clean Energy Tax Credits

The IRA project is committing nearly $369 Billion in a variety of tax credits and direct investments intended to ensure energy security, reduce carbon emissions, and deploy low carbon technologies. Not only is the amount of tax credits increased, but the sector will also benefit from simplification of the tax credit calculations as well as confirmation of the availability of these benefits for 10 years (2023-2032). This more extended period of confirmed benefits is superior to the current practice of providing short-term (and politically vulnerable) tax extensions which did not build investor confidence for the long-life of the capital assets.

After Several Months of Disinterest –  The Clean Energy Sector Catching the Investors’ Attention

Increasing confidence that the clean energy initiatives will be approved is bringing vast new opportunities for the development in the sector regardless of prevailing economic conditions, and interest rates. The clean energy sector is now, after several months of disinterest, catching the attention of investors. Their PE valuations are now expanding, and their market prices are increasingly reflecting their intrinsic value.

Morgan Stanley in their “Wealth Management Insight” points out, that the signs of growing interest in clean energy are easy to spot, solar panels line rooftops, wind turbines dot open plains, and electric cars cruise our highways.

Less apparent, but equally important, are the economics at the center of this story: The costs to produce wind and solar energy have dropped markedly in the past decade, and demand has increased as electric utilities begin to phase out fossil fuels.

The costs to produce wind and solar energy have dropped markedly in the past decade, and demand has increased.

How Could Mix of Energy Sources Change Over Time? and How Can Investors Position Portfolios for a Global Shift Toward Renewables?

The Shift Toward Renewables Is Accelerating and may be the next investment opportunity. Innovation in the energy sector is nothing new—energy consumption has changed throughout history. Most recently in the US, that’s been demonstrated in the decline of coal consumption and muted oil demand, while renewable sources such as wind, solar, geothermal and hydropower have grown their shares of the pie.

Globally, Morgan Stanley strategists expect the shift toward renewables to accelerate in the years ahead, with renewable energy likely to represent over 28% of global consumption by 2050, up from 15% in 2018, based on U.S. Energy Information Administration (EIA) forecasts.

Meera Pundit from J P Morgan adds: “Investing in renewable energy is not just about solar and wind. Of equal importance is investing in storage, transport, and electrification, which is underway”. These are the investments we will focus on in the next few years.

Progress on mitigating climate change hinges on cleaner energy as 73% of global greenhouse gas emissions come from energy usage in industry, buildings, and transport. This means the continued expansion of renewable energy and investment in the ecosystem around clean energy which includes storage, transportation, and grid modernization.

Getting to Net Zero Carbon Emissions Targets – Require $100 Trillion in Clean Energy Investment

Currently about 5% of energy globally comes from solar and wind power. However, for the world to meet its ambitious net zero carbon emissions targets, that share needs to grow to 60% by 2050. Getting there over the next three decades could require $100 trillion in clean energy investment according to IRENA.

Although solar and wind power once felt like a pipe dream, subsidies, innovation, and investment have helped reduce breakeven costs by 90% and 72% respectively since 2009. These advances have made renewable energy not just about sustainability, but also increasingly about affordability, and most recently about reducing geopolitical vulnerability as well.