After a fabulously supportive year in 2020 for Clean Energy, 2021 may be best described as a whip lash. Looking into 2022, there are clearly the usual suspect headwinds. However, we also foresee multiple strong tailwinds from various directions…
After a fabulously supportive year in 2020 for Clean Energy, 2021 may be best described as a whip lash. The year began with a surge on expectations that the Biden administration would successfully pass a very favourable climate-friendly Build Back Better bill that never happened, then fell hard when bonds suddenly corrected, and with mixed quarterly reporting based on the ability of companies to offset or even benefit from inflationary raw materials and capacity constrained supply chains. Later, the COP26 brought both successes but also disappointments, and finally to the close of year, the situation continued to deteriorate, with a more hawkish Fed and the revelation of extremely unfriendly changes to business in the most solar equipped state in the US.
The usual suspects should bring some volatility in 2022
Looking into 2022, there are clearly the usual suspect headwinds: variants of Covid, inflationary costs, tight supply chains, and a faster than expected reversal of monetary policy. We would not be surprised to see continued volatility.
But strong tailwinds should bring unprecedented opportunities
However, we also foresee multiple strong tailwinds from various directions, namely:
- Good Q4 2021 results as we saw in the previous quarters, as the economy begins to accelerate
- Strong financial performance of selective developer/utilities in EU thanks to the benefit of higher energy prices, particularly early in the year as a consequence of 31.12.2021 closure by Germany of three of its remaining six nuclear power stations, particularly during a period of cyclical expansion
- The plethora of capital and the need to decarbonise will lead to continued M&A of clean energy farms by corporate buyers as we have seen over the past few years. We expect this trend to accelerate so long as energy prices remain high
- Possible recovery of battered solar companies from lows when, after public feedback, the decision is taken by the California Public Utilities Commission on 27 January 2022 to change net metering rules. While the outcome is uncertain, the new rules introduce such extreme consequences for California that they make little sense to us and leave us sceptical about their final adoption.
We are not surprised to read Tesla, SunRun and other companies actively petitioning their employees and customers to reverse the recent decision. It’s also meaningful that Hawaii adopted the same rule for slightly different reasons and then reversed it. If the rule is adopted, two curious events could happen: (1) a rush to buy rooftop solar in order to benefit from a grandfather clause is not inconceivable; (2) since consumers would have greater incentive to store power as exporting it would be less lucrative, we would expect a surge in battery acquisitions provided by these two companies
- Critical mineral companies will continue to see strong demand from accelerating EV rollout and development of other energy storage products at a faster clip
- Hydrogen technology companies that fared poorly in the market during 2021 after stellar performances in 2020, could appreciate with the greater policy support fuelling greater demand
- A more focused definition in the EU Taxonomy of what constitutes the ‘green’ investable universe, and the greater implementation of other sustainable investment regulations will enhance investor focus on the ‘greener’ companies that we target and also drive down their capital costs
- The secular growth trend driving Clean Energy has picked up pace since the COP26 but that pace is still too slow. Decarbonization is the only way forward. Significantly greater government support will lead to scaling and ever improving economics
- While expectations of success are low or nil, a vote on the US Build Back Better would certainly be a bonus for the sector performance in H1.
Even with its challenges, 2022 holds unprecedented opportunities for gains and favourable changes in Clean Energy market dynamics.