After a stellar 2020, investments in renewable energy have become more volatile and are trading well below the overall market.

Several factors explain this trend, including geopolitical tensions, concerns about supply chain-induced shortages, uncertainty surrounding Biden's fiscal plan, and some pressure on valuations due to rising interest rates.

• Of all these factors, supply chain disruption and geopolitics remain a central issue for investors in the short term.  The impact of supply chain disruption varies greatly by company and market. However, studies suggest that most existing utility-scale projects are still on track, while some new project decisions are being pushed into fiscal year 2022. In the residential market, price increases are being passed on to customers and demand remains strong.
• Demand remains strong within the U.S. residential market, although some new utility-scale projects may be delayed due to cost increases and logistical challenges. Existing utility-scale projects appear to be progressing on schedule.
• Supply chain challenges appear to be stable, not deteriorating.Shipping and logistics remain the common headwind across the industry. For now, panels are allowed into the US with the exception of one Chinese supplier, and large installers appear to be able to meet demand for new shipments, in addition to the visibility offered by strategically high inventory.

An industry with great potential

The U.S. Department of Energy recently published a Solar Futures Study, assessing the potential role of solar energy in decarbonization. The study includes a baseline scenario that generally aligns with BNEF (Bloomberg New Energy Finance) forecasts and estimates that emissions from the energy sector will decline by 45% from 2005 levels by 2035. However, two other "decarbonization" scenarios, which assume that emissions from the energy sector will decrease by 95% from 2005 levels by 2035, point to the need for solar deployments to reach up to 40% of electricity supply by 2035, compared to the current ~4%. The decarbonization scenarios would require solar energy to grow by an average of 30 GW annually through 2025 and increase to 60 GW annually between 2025 and 2030 (deployments in 2020 were ~19 GW). We believe these studies could prove instrumental in policy decision-making for the potential U.S. budget reconciliation bill, as well as for U.S. commitments to the upcoming UN COP26 conference in November.

Potential positive catalysts on the horizon

• In addition to company-specific catalysts (with Q3 2021 corporate results from the sector's most representative companies far exceeding estimates), investors are very focused on potential positive catalysts for the industry as a whole, mainly from government regulation/incentives, which could make the strong secular tailwinds even better. We believe that governments could present more detailed plans, including short- and medium-term targets, for the long-term decarbonization goals that have already been provided for the UN COP26 meeting in early November.
• In a recent study by J.P. Morgan, market participants appear optimistic about the potential for incremental government incentives, whether as part of the budget reconciliation bill or otherwise.The extension and expansion of ITCs to include standalone storage, as well as the direct payment option, are seen as important drivers of industry growth. There is also some optimism that incentives for domestic manufacturing could be forthcoming, which would be less detrimental to the U.S. government's climate change goals while diversifying the global supply chain. That said, uncertainty remains about the possible expansion of import restrictions, as well as the possible expansion of anti-dumping/countervailing duties on panels manufactured in Southeast Asia.

Biden's Fiscal Plan

Although the market has become more skeptical that the US budget reconciliation bill will be approved in its current form, the part related to clean energy would not be at risk.

Furthermore, we note that many major companies in the sector are trading at a discount to their average multiple immediately prior to the 2020 U.S. elections, so even the passage of a scaled-back version of the bill would likely be viewed favorably.

Biden's new fiscal plan framework includes $555 billion for clean energy, focused on incentives.

• The expenditure would represent the largest climate investment in US history.
• The expenditure targets emission reduction technologies in buildings, transportation, industry, electricity, and agriculture.
• The initiatives will begin reducing pollution now, with more than one gigaton of greenhouse gas emissions reduced by 2030, according to the plan's framework. This will put the U.S. on a path to reduce emissions by 50% to 52% below 2005 levels by 2030.
• The plan includes a 10-year extension of tax credits for residential and utility-scale clean energy, transmission, storage, electric vehicles, and clean energy manufacturing. More than $100 billion is set aside for investments in resilience as extreme weather events, including wildfires fueled by climate change, batter the U.S.
• The plan also seeks to boost domestic manufacturing around clean energy. Biden has said this will create hundreds of thousands of new jobs.

Some market commentary and investment opportunities  

• Some market trends may seem contradictory to some. Over the last 12 months, gas prices have risen by 450%, coal prices have almost quadrupled, and as a result, future energy prices have more than doubled. This has led to an increase of between 35% and 50% in energy bills for end users across Europe (where the effect of rising gas prices is most keenly felt).
• Many of these trends are associated with supply issues, a lack of visibility for investments in traditional energy sectors, and stronger demand as pandemic-related restrictions begin to ease. However, we believe that this should also accelerate decision-making to promote low-cost clean energy. 
• So far this year, due to rising oil prices, the US energy sector has yielded 58%, while renewable benchmarks such as the ICLN (SHARES GLOBAL CLEAN ENERGY ETF) and the benchmark for solar companies, TAN (INVESCO SOLAR ETF), have fallen by 10% and 5% respectively. Over a 12-month period, the differences remain, with the XLE energy sector yielding 119% and the renewable benchmarks ICLN and TAN yielding only 32% and 42% respectively, which, incidentally, is a very good performance, but it is striking how far behind it is compared to traditional energies.
• That said, things began to change in October, aided by positive corporate results in the last week. So far in October, the clean energy ETF (ICLN) has yielded 15.5% in 30 days, while the benchmark for solar companies (TAN) has yielded +22.5% in the same period. This compares favorably with +9.38% for the traditional energy sector (XLE) and +5.7% for the overall market (S&P 500).
• Otherwise, investors seem to be returning more decisively to renewable sectors, as evidenced by the strong creation of shares in the sector's ETFs in recent weeks.
• Finally, we believe that there are more advantages ahead and see great potential in clean energy, which is well worth including in an international equity portfolio with a long-term outlook, or as a tactical opportunity for transactional profiles.

Investment decline

• iShares Global Clean Energy ETF (ICLN)

• INVESCO SOLAR ETF (TAN)

Humberto Mora 

Strategy and Investments