The rush to renewable energy is on

The clean energy and electric vehicle (EV) industries have received a major boost after Joe Biden signed into law a United States climate and tax package that unlocks US$369 billion in funding for renewable energy projects1.

The package, which is part of the Inflation Reduction Act of 2022, contains a number of funding provisions and support designed to spur innovation in, and adoption of, renewable energy in the United States, often viewed as a laggard on climate change. They include:

  • Funding for renewable energy manufacturing – US$60 billion will go towards incentives and financing for boosting domestic manufacturing of renewable energy technologies including solar panels, wind turbines and batteries, and to help build electric vehicle-manufacturing and critical minerals processing facilities.2
  • Creation of green banks – US$27 billion is expected to be allocated to green banks, quasi-public entities that aim to attract private investment into small green energy projects such as residential solar installations.3
  • Tax breaks for electric vehicles and rebates for energy efficiency upgrades – Consumers will have access to up to US$7,500 in tax breaks for buying brand new eligible EVs, and about US$4,000 for used EVs. Furthermore, American families will receive US$14,000 in direct rebates to buy heat pumps or other energy efficient home appliances.4
  • Incentives for energy efficiency in heavy industry –Billions of dollars in grants will be provided to incentivise operators of heavy industry plants to improve their energy efficiency and cut their carbon footprint at manufacturing facilities.5

Why is this announcement significant for investors?

The Biden Administration’s success in passing the Inflation Reduction Act of 2022 is seen as a game-changer in the fight against climate change, and could help to spur a brighter outlook for stocks of companies in the business of decarbonisation. This in turn may provide attractive opportunities for investors seeking exposure to the renewable energy sector.

The announcement also builds on a number of other significant climate-positive developments in recent times:

  • In August 2022, the Albanese Government’s Climate Change Bill 2022 passed the House of Representatives, enshrining into law an emissions reduction target of 43% from 2005 levels by 2030.6
  • In April 2022, US President Joe Biden announced a 50-52% reduction in greenhouse gas pollution by 2030 compared with 2005 levels7 (the passage of the Inflation Reduction Act of 2022 is designed to help achieve this goal).
  • In 2020 and 2021, the European Union,8 United Kingdom,9 Japan, and South Korea10 either pledged or enacted new laws to achieve net-zero emissions by 2050.

As these climate targets come into force, renewable energy sources are becoming increasingly popular. Solar, wind, hydroelectric and geothermal energy are receiving more public funding for research and development. Meanwhile, polluters are being incentivised to shift away from traditional sources of energy.

Given reliance on fossil fuels continues to be scrutinised and reduced, the renewable energy sector has the potential to grow significantly, providing an attractive opportunity for investors attracted to megatrends.

What is the renewable energy outlook?

The renewable energy market is expected to continue to grow strongly, with one projection forecasting an annual growth rate of 8.4% over the period from 2021 to 2030.11 Concerns about climate change and support for environmental, social and governance (ESG) considerations are expected to increase demand for renewable energy investments.

Getting to net-zero over the next three decades requires approximately US$130 trillion in clean energy investment from now until 2050, according to the International Renewable Energy Agency (IRENA).

Furthermore, the Russo-Ukraine war has highlighted the need for Europe to wean itself off Russian oil and gas and accelerate the continent’s transition to renewable energies, with Germany bringing forward its goal of 100% renewable power by 15 years to 2035.

What companies are investing in renewable energy?

Behind the scenes in the fight against climate change, a growing crop of industry leaders are racing to decarbonise the global economy:

  • Enphase Energy – With a market value of around $58 billion – comparable to Woodside Energy – California-based Enphase Energy supplies microinverter-based solar and battery systems that enable households to harness the sun to make, use, save, and sell their own solar power. The company has delivered more than 48 million microinverters on approximately 2.5 million systems deployed in over 140 countries.12 Enphase generated US$1.74 billion in revenue during the 12 months to June 2022, up 64% year-on-year.
  • Tesla – Also based in the US, Tesla is best-known for its namesake brand of EVs and eccentric leader in Elon Musk. But in addition to replacing gas guzzlers on the road, Tesla also manufactures battery and solar products. Tesla made US$67.16 billion in revenue over the 12 months ending June 2022,13 up 60% year-on-year.
  • Vestas Wind Systems – Danish company Vestas is a leading manufacturer of wind turbines with the highest installed capacity under service both in Australia and overseas. It recently commenced a major project to install the Crookwell 3 Wind Farm in New South Wales.14 The share price has gained 70% over the past five years (to 26 August 2022) and is forecasting revenue of €14.5-16 billion in 2022.15

How can investors access renewable energy stocks?

The White House forecasts another 950 million solar panels, 120,000 wind turbines and 2,300 grid-scale battery plants will be installed in the US alone by 2030 as a result of the Inflation Reduction Act of 2022.

Australian investors can access companies such as Enphase, Tesla, Vesta and more through the BetaShares Climate Change Innovation ETF (ASX: ERTH). The fund provides exposure to 100 global companies that derive at least 50% of their revenues from products and services that help to address climate change and other environmental problems, through the reduction or avoidance of CO2 emissions.

ERTH, along with additional insights on investing in the decarbonisation thematic from BetaShares’ Head of Distribution & Capital Markets, Peter Harper, is showcased on the Livewire 2022 Decarbonisation Megatrend Series. Check it out here.

There are risks associated with investment in ERTH, including market risk, international investment risk, sector risk and non-traditional index methodology risk. ERTH’s returns can be expected to be more volatile (i.e. vary up and down) than a broad global shares exposure, given its concentrated sector exposure. ERTH should only be considered as a component of a diversified portfolio. For more information on risks and other features of ERTH please see the Product Disclosure Statement available at www.betashares.com.au.

 

1. Refer to line item “Energy Security and Climate Change” – https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf
2. Refer to sub-heading “Investments in American Clean Energy Manufacturing” –
https://www.forbes.com/sites/rrapier/2022/08/14/energy-provisions-in-the-inflation-reduction-act/?sh=1b276a523422
3. https://www.cbc.ca/news/business/green-banks-biden-1.6543616
4.Refer to sub-heading “Clean Energy” -> “Lowering Energy Costs” –
https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/15/by-the-numbers-the-inflation-reduction-act/
5. Refer to sub-heading “Reducing Carbon Emissions” –
https://www.forbes.com/sites/rrapier/2022/08/14/energy-provisions-in-the-inflation-reduction-act/?sh=5f6c4dd33422
6.https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/
Environment_and_Communications/ClimateChangeBills2022
7.https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/22/fact-sheet-
president-biden-sets-2030-greenhouse-gas-pollution-reduction-target-aimed-at-creating-good-paying-union-jobs-and-securing-u-s-leadership-on-clean-energy-technologies/
8. Contained in legal text under Article 2 Climate-neutrality objective –
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32021R1119
9. https://www.gov.uk/government/news/uk-enshrines-new-target-in-law-to-slash-emissions-by-78-by 2035.
10. https://asia.nikkei.com/Spotlight/Environment/Climate-Change/South-Korea-joins-Japan-in-making-2050-carbon-neutral-pledge
11. https://www.alliedmarketresearch.com/renewable-energy-market. Projections and other forward-looking statements are subject to various risks and uncertainties and may be based on assumptions that may not be correct. Actual events or results may differ materially. Forward-looking statements are based on certain assumptions which may not be correct.
12. Refer to “Our Purpose” and “Enphase Culture Playbook” sections – https://enphase.com/about-us
13. https://www.macrotrends.net/stocks/charts/TSLA/tesla/revenue
14. https://www.vestas.com/en/media/company-news/2021/vestas-wins-58-mw-order-for-wind-project-in-australia-c3391331
15. https://www.vestas.com/en/investor/reports-and-presentations/financial#:~:text=Revenue%20for%20full%20year%202022,23%20percent.

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Patrick Poke

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Formerly Managing Editor at Livewire Markets. Passionate about investments, markets, and economics.

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