The beginning of the year saw green stocks, noticeably Tesla, sell off. While we do need catalysts to give impetus to the companies at the forefront of decarbonization, the advancements of 2023 show that there are a lot of positive trends that are being discounted. 

Green strategy red again: The green shift will continue, but the segment faced sales pressures in the first month of the year as the expectation of interest rate cuts that would have benefitted growth names and equipment financing companies were challenged. Only investors with a severe fear of missing out may feel compelled to “buy the green dip” at this point. The fourth quarter results have just started, with Tesla announcing lacklustre numbers, at a 5% year-over-year increase in automotive revenues. Green companies are not immune to higher interest rates and very positive catalysts are needed for a change in the narrative to take place. Markets are not yet seeing decarbonizing companies as those poised for so much value creation and some names (like Jinko Solar, more on that below) continue to trade at very discounted multiples.

In Mega Tech we trust: At the peak of ESG interest, in late 2020 and early 2021, most ESG strategies had good corporate citizens' mega tech names and Microsoft, Google and Amazon were capturing investors' interest from the perspective of sustainability (which ended up being seen as greenwashing in many instances). Now the same names capture the investor's imagination in the AI hype. What the 4Q23 results are starting to show is that even the mega tech names will have to invest heavily, so margins may go down and revenue increases have not yet been seen. Nonetheless, this “close your eyes and imagine the impact of AI, it will change everything” is accepted as logical when it comes to AI, but not prudent when it comes to Net Zero investments that are already close to a $2 trillion p.a. capex level.

Headwinds are real but will subside in the next 12 months

The long-term trend is clear in that the solutions that decarbonize the planet benefit from tailwinds across the planet, from the 3x in renewable energy installation as per the pledge signed at COP28 by over 180 countries, to the deflationary curve solar PV and batteries continue to experience. While the climate change mitigation supercycle story remains intact, the snapshot picture, reflecting current challenges, paints a different story in the short term.

Near-death experiences working on survival will revise strategies: Companies with no clear path to profitability and high capex needs received the force of investors’ scepticism last year. Li Cycle, ChargePoint, PlugPower (that issued an ongoing concern warning in 4Q23) are examples of that. EV charging network companies are suffering from both an expectation of a slowdown in EV sales (although in the US sales passed the 1.2 million level for the first time and were up more than 50% YoY), and the consequences of Tesla opening up its network of over 50,000 superchargers in the USA to other brands, consolidating its proprietary charging (now called North America Charging Standard, NACS) technology. Until the EV network developers (e.g. Blink, EVGo, Chargepoint) have written off equipment inventory of non-Tesla chargers and have a clear path to profitability, it is unlikely that they will receive confidence from a broad investor base.

Election talks that will intensify and make green solutions adoption more political: SunRun, Sunpower, Sunnova, and Tesla itself are not only facing the pressure of higher interest rates on the affordability of their solutions (given their products are mostly financed by consumers), but are also facing volatility from political discourse in America. In an election year, climate and climate policies are at the forefront of the presidential debate, and Biden’s stance on green policies is under attack. The decision to buy an EV or install solar panels in America seems to be – this year – not only an economical one but also a political one. As we get closer to November, it is likely that the political aspect of what should not be a political purchase will intensify. Higher natural gas prices, lower interest rates, and clarity on the election outcome in the US would be important catalysts for these companies.

Green Chinese dragon is awake and prosperous, but valuations say otherwise: Bashing China wins bipartisan applause in the US, despite Xi’s visit to California in 4Q23 and the closer flow of communication between the Biden administration and the Chinese government. The commitment of the Chinese government towards clean energy solutions is not in question (more on that in my next article) but valuations of Chinese companies (Jinko Solar is a great example) will likely improve only when we see better GDP growth figures in China, the consequence of a stronger stimulus package, and less concerns of a geopolitical nature. 

The bullwhip effect will continue to haunt solar equipment names in the quarter: Enphase and SolarEdge are closely tied to the growth in solar energy generation. However, both names saw their shares implode last year on the basis of revenue decline and lower guidance. Both companies sell their equipment (inverters, batteries and all solutions for behind-the-meter solar system installations) via a distribution network, on a B2B model. The change in inventory levels by distributors tends to be more volatile than the change in end-demand itself, a phenomenon referred to as a “bullwhip effect.” 

Lithium prices and the mining conundrum of this key transition mineral: Prices of the energy transition’s much talked about commodity collapsed in 2023.  From November 2022 to November 2023, the average price of battery-grade lithium carbonate in China dropped from $84,500/ton to $18,630/ton. This 78% drop is attributed to a reduction in the pace of EV sales and a consequent increase in inventory levels. The cyclical aspect of this industry is not new and puts pressure on higher-cost lithium producers, but is potentially good news for consumers of BEVs. They will see the main cost component of electric vehicles go down further (continuing the deflationary curve), which will itself help further accelerate adoption, increasing demand and continuing the positive spiral in the battery space. 

Tailwinds are very strong as evidenced by several milestones

Tesla is the best-sold car in 2023: No, I am not referring to the best EV sold last year. This is an absolute statement as the best-selling vehicle in the world in 2023 was the entry-level, crossover, Tesla Model Y. This model, which started production only four years ago, was also the best-selling car in both Europe and China and put Toyota’s two previously most popular models in second and third position. Tesla’s Model Y sold 1.23 million units, followed by the Toyota RAV4 (an ICE) at 1.07 million and the Toyota Corolla (also an ICE) at 1.01 million. 

US solar to grow 75% by 2025: The US Energy Information Administration (EIA) expects solar generation in America to go from 163 TWh to 286 TWh by 2025, a 75% growth rate in two years. Solar still accounts for a single-digit share of the country’s overall electricity production, at ca. 5.8% in October 2023. The EIA anticipates that 45 GW of utility-scale solar projects above 1 MW in size will be added to the US grid in 2024, and 53 GW in 2025. 

Germany is not letting an (energy) crisis go to waste: The country added 14.28 GW of new solar capacity in 2023 therefore reaching a total solar capacity of 81.3 GW by year end. In 2022 the solar capacity added was 7.2 GW, while in 2021 the sum added was 5.26 GW. Prompted by the invasion of Ukraine in February 2022 and consequent NatGas volatility and supply constraints, Germany has been accelerating renewable energy additions, and the almost 100% growth in solar PV installations in 2023 over 2022 is a positive development.

Global clean energy investments reach $1.8 trillion in 2023: According to BloombergNEF global investments towards clean energy grew by 17% vis-à-vis 2022, with China leading with $676 billion (38% of the total investment). Another notable figure is that green transportation is now the largest segment receiving inflows ($634 billion), up by 36% YoY. Renewable energy received $623 billion, up 8%. Following in third place at $310 billion were investments into the power grid. The solutions with the deepest acceleration of investment inflows were hydrogen (reaching $10.4 billion, inflows tripled YoY), carbon capture & storage (reaching $11.1 billion, double) and energy storage (reaching $36 billion, up 76%). The effects of the Inflation Reduction Act (IRA) started to be observed, and the overall investment towards green solutions reached $303 billion, up 22% YoY. In the words of Albert Cheung, Deputy CEO of BNEF “Our report shows just how quickly the clean energy opportunity is growing, and yet how far off track we still are.” BNEF estimates annual investment needs from 2024 to 2030 of ca. $4.8 trillion p.a. to be in line with the Net Zero goals. Particularly interestingly, BNEF estimates that investments in clean energy supply chains are on track to deliver a Net Zero world. The decrease in prices of polysilicon and lithium (more on that below) is a consequence of companies that are investing in capacity for a demand that is to triple. One would jump in and invest in Jinko Solar, for example, if he or she believes that indeed China and Asia will triple investments into renewable energy in the next three years.

EV sales continue to grow at a fast pace, but not at the same level: In 2023 the global sale of fully Battery Electric Vehicles (BEVs) reached 9.5 million, with PlugIn Hybrid EVs (PHEV) selling 4.1 million units (so both forms of EVs sold 13.1 million units). BEV sales were up 50% in the U.S. and Canada (still quite behind the EU and China, but now above the 1.2 million level), and were up 27% in the EU and 15% in the more mature Chinese market. Global sales of BEVs + PHEVs in 2023 rose 31% over that of 2022, and that was a material reduction over the 60% increase between 2022 and 2021. 

In conclusion, markets need a narrative and currently investors found excitement in AI-related growth to be delivered by the large tech names. When interest rates come down, when we know the outcome of the US presidential election, when China grows at a faster pace (because Chinese economic growth is green) and when the benefits of the Inflation Reduction Act flow through the key companies in terms of revenue growth and better margins, we will have strong catalysts for a green rally.

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