Renewed Interest in Renewable Energy
What happened last week?
Last week, the three major US equity indices saw losses with the S&P 500 -0.13%, the Dow Jones -0.02%, and the Nasdaq -0.70%.
This week, investors will focus on the Fed and their new “dot-plot” coming off the heels of some hot inflation readings. The market has now priced in three rate cuts in 2024 which is in line with the Fed's December dot plot.
3 Things to Know
It Will Get Easier Being Green
Government policy support is essential for a sustained recovery in renewables. Government policies create financial incentives that will power the growth of renewable energy.
These incentives take multiple forms, including subsidies, direct research and development funding, tax benefits associated with R&D, faster grid integrations and net metering (allowing customers to sell excess electricity back to the grid).
In developed markets for fiscal years 2016 through 2022, the Energy Information Administration (EIA), an independent agency of the U.S. Department of Energy, found that traditional fuels (coal, natural gas, oil and nuclear) received 15% of all subsidies, while renewables, conservation and end use received 85%.
Policies including the US Inflation Reduction Act (IRA) and EU Green Deal have also increased the rate of adoption of renewable energy.
In addition, Power Purchase Agreements (PPAs) can boost renewable energy deployment by providing renewable energy producers with a predictable revenue stream by securing a pre agreed price for the consumer.
In response to the market impact of higher interest rates, interest rate guarantees and subsidies may be added to the list of renewable policies. Giving manufacturers and producers access to lower cost financing can create wide benefits relative to direct subsidies.
Solar Powers Ahead
Over the last 10 years, solar power production has grown at a 30% annual rate, while wind has grown at a 15% rate.
While the increases in renewable capacity in Europe, the United States and Brazil reached record levels, China added as much new solar PV in 2023 as the entire world did in 2022, while its wind capacity grew by 66% year-on-year.
For investors to potentially benefit from the exponential growth of renewables, they need to stay invested.
This requires that the growth story be understood. Every year, the International Energy Agency (IEA) makes a forecast for the growth rate of new annual solar photovoltaic (PV) additions, and they typically assume linear growth from the prior year.
Yet, the actual history of additions has shown exponential growth. And this puts the world’s targets for renewable electricity within reach.
Renewables Could Threaten Fossil Fuels in the Decade Ahead
The renewables sector is experiencing exponential growth in size as the world’s electricity system is undergoing an accelerated rate of transformation.
While PV power accounted for 56% of new global electricity installations, it still only accounted for 5% of total power production in 2023. Demand for energy is on the rise, too.
Greater onshoring of manufacturing capacity and Artificial Intelligence server farms, coupled with the electrification of heat and transportation, have dramatically increased forecasts for electricity demand in the developed world after years of stagnation.
While the greening of the global electricity grid continues to be an unstoppable trend, brutal competition and rate sensitivity have weighed on renewable energy shares.
We see value being restored in this sector. We continue to see output growth for this sector beyond what is typical in the rest of the market, with solar installations having grown for example at 30% annually on average for the last 10 years.
If we are right, renewables may become a more attractive way to exploit a turn in rates than other classic “bond proxy” sectors, as the growth rate of the segment should drive long term equity gains even as fierce competition keeps EBITDA margins constrained.
See our weekly CIO Strategy Bulletin for more details