Clean energy still has spark
It is important to remember that investing is for the long-term and while short-term events may affect how we feel, investors need to be comfortable with the risks involved in investing. We are all human, so we all respond differently because of our different frames of reference and our different goals and risk tolerances. We have talked the behaviour of investors during periods of market volatility in the past here & here.
There is no doubt that over the past few years there has been an increase in interest in clean energy as a result of a change in investors’ priorities and increased alarm about climate change amid devastating heat waves, storms and fires.
According to Morningstar, through the third quarter of 2021, US$56.3 billion flowed into sustainable funds, up from US$51.2 billion for all of 2020 and just US$5.5 billion in 2018. Locally, we launched the VanEck Global Clean Energy ETF (CLNE), which tracks the S&P Global Clean Energy Select Index (CLNE Index). Over the three years to the end of 31 January 2022, the CLNE Index has returned 24.6% p.a. despite falling 37.1% over the twelve months to that date.
There are a number of factors contributing to the poor performance last year and these headwinds have continued to adversely affect the price of these companies in the volatile 2022 market.
The near-term failure of President Biden’s Build Back Better plan, which included more than US$500 billion allocated toward climate projects, has weighed on the sector. During a press conference in mid-January, Mr. Biden vowed to push Congress to pass parts of the plan and said the climate components of the package were a priority but the market is sceptical.
Smaller, more speculative clean-technology companies have also taken a beating amid expectations that the Federal Reserve will raise interest rates. A recent Wall Street Journal Article sited battery startup QuantumScape Corp. as having lost 90% since surging in late 2020.
While the larger companies that make up CLNE have not fallen as far they do however still face headwinds into 2022.
A review of the companies that have detracted from CLNE’s performance since its inception highlight the different headwinds these companies face (all figures as at 31 January 2022, source Factset). These include the rotation from growth to value, supply chain issues and low wind. Below we go through an example of each of these.
Plug Power (4.3% of CLNE. Down 37.5% since CLNE launched) – Plug Power manufactures hydrogen fuel cells and although not specifically a technology company it is listed on NASDAQ and is seen to be similar to the information technology companies that have been hardest hit this month (Plug Power is down 37% so far this year). As a ‘growth’ stock Plug Power and has been hard hit by the rotation to ‘value’.
Vestas (4.6% of CLNE. Down 17.9% since CLNE launched) – Wind turbine maker Vestas, announcing its 2021 results told investors it is expecting “the near future and at least 2022 to be heavily impacted by cost inflation.” In addition, “the emergence of an energy crisis caused by geopolitics and fossil fuel volatility has also resulted in dramatic increases in energy prices,” Vestas said. These issues have affected turbine makers across the board as energy is a significant cost of their operations. Vestas also said to investors, “supply chain instability caused by the pandemic and leading to increasing transportation and logistics costs, is expected to continue to impact the wind power industry throughout 2022.”
Siemens Gamesa Renewable Energy (4.7% of CLNE. Down 28.8% since CLNE launched), also involved in wind energy, announced on 21 January 2022 that it swung to a loss making position. The operating loss was largely a result of cost-estimate deviations and cost inflation affecting the wind-turbine division and has also suffered delays exacerbated by supply bottlenecks. Weaker winds in the second half of the year affected energy production further weighing on Siemens.
There is no doubt it has been a tough time for clean energy stocks, however we still believe the growth of clean energy is a trend, not a fad. It reflects a long-term structural dynamic and is supported by four long term drivers:
- Regulatory: Governments remain committed to the Paris Accord. While Biden’s plans have been blocked so far, we expect governments to continue to support green energy initiatives.
- Societal: Attitudes toward the environment are changing. In the US 80% of consumers aged 18-34 are willing to pay more for electric vehicles (EV)/hybrids. Globally, it is these consumers that are demanding a shift in the way the world consumes energy.
- Economic: The cost of renewable energy has been declining rapidly over the past 10 years. Since 2010, utility-scale solar photovoltaic power has shown the sharpest cost decline at 82%, followed by concentrating solar power at 47%, onshore wind at 39% and offshore wind at 29%.
- Inevitability: Fossil fuels are finite, they will run out. Royal Dutch Shell and BP have both indicated that they have passed peak oil production. Alternate energy sources are infinite.