All things considered, the clean energy sector seems to be ready to enjoy a unique alignment of the stars. Indeed, never before have policy and regulation together driven clean energy forward with such force and with so much visibility.
As we have already noted since the start of the year, our investment universe is at the epicentre of 4 different positive trends:
- falling renewable energy costs when fossil power costs are soaring,
- attractive Power Purchase Agreements (PPAs) promising attractive ROIs for renewable energy farm developers,
- promising sustainable power solutions for corporates needing to meet more exacting shareholder demands or anticipating newly discussed SEC climate risk disclosure requirements,
- and most recently and perhaps more importantly, energy security.
Weaning ourselves off Russian gas
For the EU, the on-going war in Ukraine throws an especially harsh light on the need to wean the EU off Russian gas. This has led to ambitious policy responses announced in recent months, such as REPowerEU and policy suggestions in the International Energy Agency 10 point-plan for EU. But the worry about energy security is not only focused on the EU. The US and other countries elsewhere are trying to beef up storage and most recently even announced the release of strategic oil reserves.
The most striking event for a single country was the announcement of Germany’s plans to rapidly accelerate the expansion of wind and solar power, bringing forward a target to generate almost all the country’s electricity from renewable sources by 15 years, to 2035. The Economy Ministry, which also oversees energy and climate policy, proposed new legislation that will nearly triple the annual additions from onshore wind and solar facilities. Offshore wind capacity is set to more than double.
The Sun shines… specially on rooftops
Among sub-sectors, solar shone strongest in the month of March. This was due to strong underlying demand all along the solar value chain – from poly silicon prices up around +10.6% YTD, +13.3% QoQ, wafers +22.2% QoQ and YTD, and cell prices nearly +9% QoQ and YTD. This is leading to higher selling prices, a concern last year for solar demand but an advantage this year given the relatively lower cost versus soaring fossil energy options.
More consensus on the attractiveness of solar as the cheapest energy solution is accelerating corporate finance transactions of all types: Venture Capital, Private Equity, debt financing, or public equity raising. The trend was already buoyant in Q4 2021, when the highest number of solar M&A transactions ever was recorded in a single quarter. This trend is continuing at an even faster pace.
Interestingly, rooftop solar is proving to be a preferred asset by some of the giant power project developers that previously only invested in utility-scale. We have been optimistic and heavily invested in rooftop solar for years because of the energy autonomy it offers as grids face difficulties from climate events. Large developers put forth the argument for relatively more attractive returns thanks to more elastic pricing, greater opportunity to offer more services, create community power through aggregation thanks to new technologies.
Supply chain disruption hits battery storage
The worst performing subsector was battery storage, down around 0.5% and YTD down nearly 9%. This underperformance relates to ongoing supply chain disruption, exacerbated recently by the resurgence of Covid-19 and the Ukrainian conflict. Nevertheless, demand for Electric Vehicles (EVs) continues to exceed production. We do not expect inflationary raw material trends affecting power trains and batteries to impact EV demand, if only due to the low level of inventories. Rising gasoline prices will continue to increase the Total Cost of Ownership (TCO) advantages of EVs.
Battery demand is also picking up pace for electric grid resilience to prevent blackouts. In California, for example, batteries are fundamental in its next step towards full energy transformation. Battery back-up will be used to smooth distribution in the preparation for the closure of the state’s final nuclear power plant in 2025. Thus, we remain optimistic and will take advantage of any sharp sell-offs in the battery storage subsector.
Other clean energy subsectors enjoy tailwinds
Two other subsector performances worth noting are utility/developers +10.7% during March, and +6% YTD. Developers are benefitting from very strong trends as the decarbonisation of electrical network accelerates. M&A remains active and reflects the fact that publicly listed companies are undervalued, particularly in the current environment.
Wind gained +5% and remains -3.3% YTD, the drag explained by equipment companies unable to pass on higher costs of materials despite record high demand reflected in order books. Plans to change the terms of contract agreements, in addition to rollout plans in Europe and new tech in onshore and offshore wind should improve the situation.
Overall, we believe the outlook for clean energies is bright, driven by multiplying secular growth trends and our strategy will reflect these good trends going forward.