The Renewable Energy Investment Landscape

It would be an understatement to say that investors in the renewable energy space have been frustrated.  After a strong run in 2020, shares in renewable energy companies have been in a steep bear market. To illustrate, the Invesco Solar ETF (symbol: TAN) was down 25% in 2021 and was down another 25% to the low of May 12, 2022.

The Renewable Energy Investment Landscape

Russian Invasion of Ukraine and Renewable Solar, Wind Stocks

It has been surprising that the Russian invasion of Ukraine did not, at least initially, provide a catalyst for solar and wind stocks.  With embargoes on Russian oil and retaliatory reductions in natural gas flows from Russia to Europe, energy prices have soared.  Higher prices for traditional energy, all other things being equal, should encourage consumers, utilities, and governments to look to alternative sources of energy.

Boost in UK Solar Demand

With solar and wind stocks down, the stock market might not have noticed but there actually has been a boost in demand for these alternatives. The Financial Times reported that in the UK, residential solar panel installation has increased.  In the first half of 2022, UK consumers, desperate to lower their power costs, have put on their roofs about 106 megawatts of power generation.  This is more than was installed in all of 2021.

More Residential Solar Panels Installed in US and Germany

A boost in demand is not just happening in the UK. 

In the first quarter of 2022, US residential solar panel installation, according to the Solar Energy Industries Association, was 30% higher year-over-year.  In Germany, Renewables Now reports that approximately 200,000 new home solar systems will be put in place in 2022, this compares to 155,000 in 2021.  As the conflict in Ukraine drags on, demand for alternative energy should remain strong.

Clean Energy Incentives in the US Inflation Reduction Act (IRA)

While Russia is an immediate argument for renewables, the industry received a second boost from the passage of the US Inflation Reduction Act (IRA).  In this bill, there are all sorts of incentives for clean renewable energy. There are rebates and /or tax credits for:

  1. Energy-efficient appliances
  2. Heat pumps, rooftop solar, electric HVAC, and water heaters
  3. New or used electric vehicles that meet certain requirements.

In addition to the consumer side, the IRA includes generous incentives for renewable industries.  Funding includes:

  1. Production tax credits for US manufacturers to make solar panels, wind turbines, batteries, and extraction of essential minerals
  2. $10 billion in investment tax credits for companies to build factories to make EVs turbines, solar panels, and other clean tech.
  3. $500 million to increase the manufacture of energy-efficient appliances and heating/cooling and to increase mining.
  4. $2 billion in grants to help automakers transition their product lines to electric
  5. $20 billion in loans to build EV vehicles.

IRA Boosts Renewable Energy Stocks

There will also be funds to assist companies who are working on carbon capture.  In total, the IRA puts a lot of money into the renewable energy sector.  With increased production, adoption, and deployment, the costs of producing clean energy should continue to decline.

Since the IRA came into focus in July, renewable energy stocks have seen a lift off their lows.  TAN is now positive for the year.  A welcome move for investors.

Renewable Energy Now Cheaper Than Coal or Natural Gas

Even without the money from government support, the cost to produce energy from wind and solar has declined dramatically.  What gets lost in most conversations around the deployment of wind and solar is that, according to multiple sources such as the EIA and the World Economic Forum, these two power generation sources are now cheaper than coal or natural gas

Plus, costs for wind and solar are still falling.

Broad Renewable Energy Landscape for Investors to Research

From the various components of the Inflation Reduction Act, we can see that the renewable energy landscape is broad.  Investors can look at:

  1. Power generation – wind, solar, nuclear, hydrogen, utilities, developers, and others
  2. Power transmission – the grid, EV charging stations, etc.
  3. Energy efficiency – appliances, heating, and cooling
  4. Transportation – electric cars, trucks, and public transit
  5. Materials – lithium and rare earth mining and low-carbon products

While wind and solar get most of the attention, the investing landscape is considerable.  Many industries and companies will benefit from higher demand for alternative energy and related products and services.  Companies that work on the grid, build auto plants, produce equipment for production, develop software used for production and energy efficiency, finance renewable projects, and make appliances will all benefit.

Investing in the Renewable Energy Landscape

Of course, investors need to be careful and do their homework, especially when investing in new technologies.  If you aren’t comfortable managing the process on your own, consider speaking with a financial advisor.

Not every company will be a winner. Not every technology will be adopted.  Valuation matters as do all the traditional metrics serious investors consider before making an investment.

Pendragon Capital Management pays a great deal of attention to this space given its focus on the Climate Impact Portfolio. We believe in the transition from fossil fuels to green, renewable energy and we’re here to help you participate.

Thank you for reading.

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Investing involves risk.

Image Credit: Windmills in Holland, 1867, Johan Barthold Jongkind (Dutch, 1819-1891), Netherlands, 19th century, Etching, Cleveland Art Museum