Bill Farren-Price and Morgan Kwan, hosts of Energy Levelized, sit down with Ryan Luther, senior vice president of Enverus’ Power & Renewables Intelligence research team. The energy transition is gaining investment momentum in some areas more than others, and the hosts chat with Ryan about the impacts of “greenflation” and the investment opportunities in this growing sector.
Green energy is considered a vital part of driving, or accelerating, the transition toward net-zero over the next few years. There is, however, some uncertainty in delivering these targets and maintaining momentum on the pathway towards carbon mitigation. Luther believes green energy will inevitably play a significant role, particularly when discussing wind and solar.
“There have been significant commitments worldwide within both industries, but intermittency remains a challenge and it’s unlikely we can reach this net-zero goal by relying on wind and solar alone,” explains Luther.
Other energy sources like nuclear and storage will be critical in following the pathway to eliminating carbon emissions. According to Luther, we have recently experienced an attitude shift in moving away from high carbon-intensive industries toward renewable energy. With the current energy crisis in Europe, we are beginning to experience a radical change, with a decline in dependency on sectors like natural gas. There has been a notable change in the nuclear industry, too. Germany put a halt to nuclear energy after the events in Fukushima, which created a considerable shift in the tone. We are, however, beginning to see a more positive response to nuclear as a carbon-free alternative.
Intermittency, however, continues to be a challenge in the renewables industry. In the discussion, Kwan asks whether we may move closer to a storage solution for green technologies capable of resolving the intermittency issue and enabling us to store some of the power from the energy mix. According to Luther, planned projects in the U.S. could allow some higher carbon energy sources to be retired. Luther believes that we will have to rely on storage more in the future, but this is very dependent on driving down costs. Businesses are continuously exploring new technology and developing batteries capable of reducing prices.
From an investment perspective, Farren-Price questions whether Enverus has noticed a shift in the flow of investments toward green energy and if inflation is impacting investment decisions within the green energy space.
According to Luther, there have been significant changes, especially in the private equity scene. There has been a notable shift in investments toward renewable energy and fuels. The inflation impact has had a significant effect on green energy. The returns on these projects are relatively small and require leveraged finance and a low interest rate to enable better returns on investment in green technologies.
“Low interest rates will inevitably drive investment into this market, but, as pointed out, these rates are continuing to rise. The negative implications of this increase are offset to some extent by the commitment to increase spending and transforming policies to enable further investment and higher returns,” explains Luther.
Governments continue to introduce fiscal policies that enable additional green technology to be created but can cause other assets to be retired before reaching their end of life. When this happens, the companies with retired assets still need to get value. Retired assets then translate into increased costs for the power customer. This process represents one part of the inflation challenge. The other side, which has an equal impact, is the volume of materials required to develop the infrastructure — and this includes battery technology. Transmission is one way to support the storage or intermittency factor, but transmission requires significant quantities of copper.
Wind turbines, for example, require considerable amounts of copper, while solar panels need rare earth minerals obtained via mining activities. “There is a major movement toward green technologies in western economies with plans to expand considerably. The electric vehicle market is a fine example of an accelerated green market, but this rate of progress is adding massive pressure on raw materials,” explains Luther.
The shortages of rare minerals have been part of the supply chain headwinds experienced during the pandemic recovery period of the economy. Inflation has created several headwinds, and the question now is whether the government is prepared to facilitate the investment needed for the industry and whether we will see more subsidies within the green technology market.
Luther believes we will experience growth in areas that currently lack subsidies. Subsidies in the U.S. are being pulled back in some cases as these technologies become more cost competitive. Many countries, however, have a ways to go before transitioning and reaching a point where subsidies are applied to make that investment happen. In terms of the oil and gas industry, inflation doesn’t necessarily impact the cost to the producer, especially bearing in mind the oil and gas prices we have today. Lots of steel is used for drilling wells but the margins on those businesses are based on existing prices being much higher than renewable energy. There has been a big trend toward reducing these costs and forcing margins to be relatively minimal.
During their discussion, Farren-Price asks about the new energy space and the range of different renewable and power projects opening up to the investment sector. He questions whether there is an area that is particularly exciting to Luther and how he would intend to invest today. Luther explains that they are exploring the transition of the green economy and believes there are exciting areas for investment. There are areas with additional new data sets that he believes are yet to be taken advantage of. He mentions the work done on the power generation and storage industry, highlighting the specific research on electric vehicle charging infrastructure and the abundance of unique data to explore market variations.
Green hydrogen — an overhyped Industry?
Farren-Price explains that some industries may be somewhat overhyped. For example, a year or so ago, hydrogen received lots of attention but has since quieted down. He queries whether this is because of a lack of available technology, or a challenge of higher costs compared to other technologies.
“From a share price return, many of these new energy growth sectors like hydrogen, storage or residential solar installation have been affected, but it’s not necessarily that the technology isn’t playing out as expected,” explains Luther. “It has more to do with asset prices creating higher discount rates and very long-dated growth assets.”
Luther refers to some of the work at their conference exploring market expectations, growth rates and the whole total addressable market and how they expect this to grow. In December, the stock prices for many of these sectors were not high enough to reflect that kind of growth. He anticipates a lot of growth over the next 10 to 15 years and believes that growth remains underappreciated within these sectors. In terms of hydrogen, Luther agrees that it may be a little overhyped. Significant policy changes, particularly in Europe, will influence the demand for emerging energy resources. While it may not necessarily be as cost competitive as something like electric vehicles, it is something that will continue developing in the future.
The rise of electric vehicles
Kwan concludes the discussion by asking about the existing technologies on the market and which one stands out. Exploring the currently available technologies and mass adoption, Luther highlights electric vehicles as a prominent industry, particularly new models with lower maintenance and higher ranges, making them very competitive compared to conventionally powered models. Luther stresses the challenge with batteries and the inflation of materials that will create higher costs for the customer. The scale of innovation and investment can enable businesses to overcome these challenges and accelerate further within the electric vehicle manufacturing and charging space. The transition to green energy will be significant for the wind and solar industries but be slightly more challenging to get high returns as these areas are more utility focused.
Information contained in this blog is based on a podcast recording and is provided for information purposes only and is not to be used or considered as investment advice or a recommendation or offer to buy or sell any securities or other financial instruments.