What are the reasons for clean energy’s weakness and what is the catalyst for a reversal in fortunes?

Key points

• Clean energy stocks are trading at depressed levels.
• This is not reflective of their attractive fundamentals and bright outlook.
• The recent challenge to clean energy stocks has been their high sensitivity to interest rates.
• The key industry fundamentals remain strong.
• A reversal in the trajectory of interest rates (a ‘Fed pivot’) is likely to be the key catalyst for the clean energy sector to re-rate. This would make the present an attractive entry point.

What is ‘clean energy’?

T8 generally defines ‘clean energy’ as:

• Renewable energy (e.g. solar, wind, biomass and nuclear);
• Energy storage (e.g. batteries and hydrogen);
• Electrification (e.g. equipment which consumes electricity rather than conventional hydrocarbons and/or improves energy efficiency); and
• Supply chains which support and enable these industries.

How have clean energy stocks performed?

Notwithstanding global acceptance as ‘the next big thing’, clean energy stocks have been crushed since their highs of early 2021:

• Clean Energy Index -70%
• Utilities -60%
• Technology -85%

(as of 29 February 2024)

Why?

In broad terms, clean energy stocks have been under pressure as a result of rising interest rates combined with temporary cyclical and industry-specific fundamental factors (discussed below).

Clean energy is complicated by a range of basic misconceptions (discussed below) and technical complexity which creates temporary inefficiency in company stock prices.

Clean energy’s recent challenges

Our research indicates that all of the following are temporary or cyclical factors. In most cases the factor has either reversed or is beginning to reverse:

• Rising interest rates
• Low market risk appetite
• Uncertain cost of capital
• Evolving regulatory environment (e.g. NEM 3.0)
• Geopolitical trade barriers (e.g. United States/China import tariffs)
• Supply chain issues (e.g. post-pandemic logjam, Red Sea disruptions, Panama Canal disruptions)
• Significant hedge fund shorting of clean energy stocks and indices
• Outflows from ‘ESG’ and sustainability focused funds
• Funding under the Inflation Reduction Act is not yet having a positive impact on company revenues

Basic misconceptions about clean energy

Our research indicates that the truth about clean energy is obscured by a number of fallacies. In fact:

• Renewables do not need zero interest rates in order to be economically viable
• Climate change mitigation is not the only, nor the main reason wind and solar is proliferating
• Investing in clean energy is attractive from a fundamental perspective and for ‘ESG’ reasons
• The ‘energy transition’ will be disruptive and will take time (we have written about this previously on our website)
• Secular growth thematics are not immune from cyclical forces

What is happening in the key industries within clean energy?

Despite challenging stock prices and mixed sentiment, our research indicates that the key clean energy industries are in good shape and expected to continue growing at rapid rates in the short, medium and long-term. Renewable energy generation capacity is on track to be at least 3-4x larger by 2030 relative to today. Annual electric vehicle sales by 4-5x and installed stationary energy storage 10-20x. These growth rates are multiple times the rate at which global GDP (gross domestic product) is growing.

These data points emphasise the a clear disconnect between perception and reality.

Renewables

Solar

Solar installations increased 64% year-over-year in 2023 propelled by a 50% drop in prices for solar modules (following the ramp up of new manufacturing capacity in China). This continues a longer-term downward trend. Chinese demand dwarfed the remainder of the world, accounting for approximately 50% of global solar installations for the year and increasing annual installations by 148% year-over-year. This exceeded consensus forecasts entering the year by around 10%. Europe and the United States accounted for 13% and 7% of global installations installation respectively, increasing the annual rate of installation by 47% and 51% year-over-year respectively.

We forecast 25% growth in 2024 which is a trend rate we expect to be more or less sustained to the end of the decade and result in installed global capacity of approximately 6 terawatts by 2030 (or more than 4x global installed capacity at the end of 2023 – in 2023 solar generated approximately 4% of global electricity). Solar remains a bright spot in the energy transition. Its present trajectory places it ahead of where it needs to be for the world to achieve 2050 renewable energy targets.

Wind

At headline level, growth in wind investment was negligible relative to other clean energy industries, increasing only 2% year-over-year. Behind the headline the onshore and offshore segments are experiencing divergent fortunes with investment in the offshore segment (roughly one third of the industry by annual investment and less than 15% by electricity generation) growing nearly 80% year-over-year (notwithstanding numerous headlines about cancelled projects in the United States and Europe). While the onshore segment declined nearly 20% year-over-year driven by grid connection bottlenecks.

While we see the headwinds to growth easing (such as rising interest rates, uncertainty around cost of capital and elevated logistics costs driven by supply chain issues) we forecast only relatively modest growth for the industry in 2024. We expect growth in investment to remain skewed to the offshore segment.

Energy storage

Stationary battery storage installations increased by 183% year-over-year to 99GWh (this industry has extraordinary growth potential however at this stage remains small in aggregate – in 2023, total battery energy storage globally is equivalent to the daily consumption of roughly 3.3 million typical households in the United States, which is not significant).

We forecast installations to increase 40% year-over-year in 2024 with scope for annual installations to expand to 350-400GWh (or 3.5-4x the 2023 level) by the end of the decade.

Electric vehicles

In 2023 electric vehicle sales increased 35% year-over-year (comprising 9.5 million pure electric and 4.2 million plug-in hybrids). Pure electric vehicles increased 30% year-over-year and in China accounted for over 20% of total vehicle sales. Europe and the United States continue to lag at 15% and 8% of total vehicle sales, respectively.

The global economy is slowing, and electric vehicles sales will not be immune to this. Headlines including production cuts and delays from major established automakers (such as Ford, General Motors, Mercedez-Benz, and Volkswagen) and rental company Hertz choosing to sell 20,000 electric vehicles from its fleet have captured much attention. Notwithstanding these factors, the fundamentals indicate electric vehicle production and sales will increase materially in 2024. We forecast global electric vehicle sales will grow by approximately 20% in 2024 to 17 million units and account for 18% of total global vehicle sales.

What about the stocks?

Not all business models have survived in the current environment, and this underscores the importance of active research, expert insights, and portfolio management.

The following stock case studies provide examples of investee companies in our T8 Energy Vision portfolio (which is focused on ‘best ideas’ within clean energy). We define ‘best ideas’ as companies with all of our target characteristics (industry leadership, strong fundamentals, staying power and competitive advantage) combined with compelling upside potential (based on fundamental valuation) relative to the risk profile and a unique thesis with obvious positive catalysts.

We have provided this information for informational purposes only and it should not be construed as investment advice. The specific stocks mentioned have been provided for illustrative purposes only and this does not constitute a recommendation to buy, sell, or hold any particular investment.

Investing in stocks involves risk, including the potential loss of capital. Past performance is not indicative of future results. Individuals should consult with a qualified financial advisor or investment professional before making any investment decisions.

Enphase Energy (ENPH US)

Enphase is a world leader in residential/commercial scale power inverters with 20% market share in the United States. The general perception is that it is just part of solar supply chain – the reality is that inverters are critical to various clean energy industry segments beyond solar such as energy storage, electric vehicle charging and smart energy usage/energy efficiency.

Key points

• Enphase is making free cash margins of 20-30% while growing sales at 20% per annum (2x the Nasdaq 100)
• Competitive advantage through technology leadership (defended by R&D investment at 8% of sales)
• Net cash balance sheet (1x EBITDA)
• Stock price down 70% from 2022 highs
• Trading on 11x 2025 earnings and free cashflow
• 2-3x upside on a 12-month view
• US$16 billion market cap makes it a small cap and off the radar for most investors

ChargePoint (CHPT US)

ChargePoint is the United States leader in electric vehicle charging infrastructure with 70% market share. Presently the United States has roughly 130k public charging points and around 30k private relative to forecast requirements for 1.5-2.5 million public (10-20x) and 30 million private (1000x) by 2030. ChargePoint’s competitive advantage is driven by its market share in the best locations (it was a first mover).

Key points

• Stock price down 95% since highs of early 2021 and presently has roughly 25% short interest
• We forecast profitability to be achieved later this year
• Net cash balance sheet
• The stock is trading at less than $2.00/share relative to our 12-month valuation of $5.00, and longer-term valuation for 4-5x upside on a 5-year view.
• US$1 billion market capitalisation makes it a small cap and off the radar for most investors

Pan American Silver (PAAS US)

Pan American Silver is a global leader in silver mining with operations in Central and South America.

Silver is a critical mineral in energy transition. Roughly 10% of the cost of a solar module is silver and the silver intensity of solar technology is increasing (silver use in solar is increasing by roughly 30% and 100% in the move to TOPCon and Heterojunction cell technology, respectively – we forecast TOPCon to account for as much as 60% of solar cells sold in 2024). Electric vehicles contain 2-3x more silver than the equivalent vehicle with an internal combustion engine.

Solar accounts for approximately 10-15% of industrial silver demand and electric vehicles around 5-10%, both growing at over 20% per annum.

Key points

• 20Moz/year silver production with 10% growth in 2024
• 25-year production life (including 15 years of reserves)
• Un-levered balance sheet
• Trading on 10x P/FCF with a 3% dividend yield
• Implies 50-100% upside at current metal prices
• US$5 billion market cap makes it a true small cap and off the radar for most investors

What is the catalyst to see clean energy rebound decisively?

A ‘pivot’ from the United States Federal Reserve (when rate cuts finally materialise) would be a catalyst for an upward shift in risk appetite and the formation of macroeconomic tailwinds for interest rate sensitive industries such as clean energy.