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Investors in renewable energy and decarbonization have faced many false starts ending in bubbles bursting in the past. However, as we have discussed in previous monthly reports, the long-term structural growth in these areas is virtually assured. The energy transition has evolved from merely combating climate change to safeguarding energy security and ensuring resilient supply chains. Consequently, we have entered a more potent and transformative phase of investments in alternative energy and decarbonisation. This is particularly evident in the Western world where the transition is accelerated by legislative acts such as the Inflation Reduction Act (IRA) in the US and RePowerEU and the Net Zero Industrial Act (NZIA) in Europe.
Despite these positive developments, stocks in the sector have not performed that well in recent times. However, we believe this is about to change and we foresee a positive shift in renewable and clean technology stocks in the short, medium, and long term.
The long-term case is well-established as we outlined above and specifically in our February monthly letter. In the medium term, into 2024 and 2025, we anticipate an improvement as inflation and interest rates normalize resulting in increased valuation of long-duration assets, which form a substantial portion of the renewable stock universe.
Furthermore, progress is being made on the NZIA, the European version of the IRA. Germany is preparing to announce a series of legislative measures, including the introduction of a "German IRA." This involves classifying renewable energy sources as "assets of national and strategic interest," a crucial designation that effectively protects renewable energy developers from legal challenges brought by municipalities or households citing concerns such as wind parks being too close to residential areas or endangering certain bird species. This change is crucial for reducing delays in the development of renewable energy and it is expected to unleash significant investments in the sector. Goldman Sachs predicts a potential of up to 250 billion euros in Germany alone.
Many European countries are likely to follow Germany's example, leading some to believe that the European IRA will mobilize greater investments than its American counterpart. Given that the US IRA is not capped like the NZIA in Europe, we are not convinced. Nonetheless, it is undeniable that both legislative packages will trigger investments in the trillions.
There are also some important developments worth noting in the short term. First, US clean technology stocks significantly underperformed in April and May as investors were on a “buyers’ strike”. As we discussed in last month’s letter, investors feared that the IRA would be entangled in discussions regarding the US debt ceiling. Fortunately, this did not transpire. Second, the specific guidelines for the IRA tax credits are currently being released, which means that investments will start to flow to projects and equipment, benefiting the involved companies. Third, permitting bottlenecks are about to be removed on both sides of the Atlantic. There are still four times more wind projects waiting for permitting than under construction, which should indicate the importance of streamlining the process.
To sum up, while our optimism initially revolved primarily around the longer-term prospects, we are increasingly becoming more optimistic about the investment opportunities in renewable energy across the long, medium and the short term.
Joel Etzler is Portfolio Manager and Founder of the Coeli Renewable Opportunities fund and has more than 13 years in the industry, with investment experience from both the public and private equity side. Etzler joined Kalvoy at Horizon Asset in London in 2012 and spent five years before that within Private Equity at Morgan Stanley. Etzler started his investment career within the technology sector at Swedbank Robur in Stockholm, 2006.
Vidar Kalvoy is the lead Portfolio Manager and Founder of Coeli Renewable Opportunities. He has 25 years of experience from portfolio management and equity research. For nine years he was responsible for the energy investments at Horizon Asset in London, a market neutral hedge fund. Kalvoy also did energy investments at MKM Longboat, another hedge fund in London. He started his financial career as a sell side equity research analyst focusing on the technology and telecom sector, working six years in Oslo and Frankfurt. Prior to working in finance, he was a second lieutenant in the Norwegian Navy.