Why Invest in Climate Technology?

Adam Johnson

Why invest in climate technology in 2023?

Last year’s Inflation Reduction Act (IRA) is arguably the most momentous piece of climate legislation in U.S. history. It comprises $369 billion of funding for the energy transition, making the United State the best place in the world for investments like building a renewable project or producing green hydrogen.

It also started a new era of competition over clean technology. The IRA is not just about stimulating demand for green technologies like renewables and electric vehicles (EVs), but about encouraging companies to make those products in the United States by offering generous government subsidies.

Europe, long a global leader in climate policy, now risks seeing investment capital and talent flow towards the more attractive jurisdiction, potentially jeopardizing its own energy transition plans. Last month, Europe presented its answer to the IRA, with European Commission President Ursula von der Leyen saying that “Europe is determined to lead the clean tech revolution.”

Why Invest in Climate Technology? What is changing in Europe? 

  • The European Green Deal brought in the 2050 net zero goal, a target to reduce emissions by 55% by 2030 vs a 1990 baseline), plus a number of industry specific initiatives and targets designed to pave the way to net zero emissions.
  • NextGenerationEU was a direct response to the economic damage caused by COVID-19, and included the ‘Recovery and Resilience Fund’ which designated €250 billion for green investments.
  • RePowerEU was a response to Russia’s invasion of Ukraine and the ensuing energy crisis, increasing the 2030 renewable deployment targets and launching a plan to eliminate dependence on Russia’s gas. It came with a headline funding number of €288 billion.

The new Green Deal Industrial Plan (GDIP) builds on the above and has four key pillars: regulation, finance, trade and skills. It is an acknowledgement that Europe needs to use industrial policy to make sure the European Union (EU) has the industrial capacity to make net zero happen.

It also aims to support key industries that may be at risk of flight to the United States by allowing member states to match the financial aid offered elsewhere. It wants to scale back the role of China in the supply chain by reshoring clean tech materials processing to within the bloc, via a Critical Raw Materials Act.

Crucially, the plan recognizes that progress has been too slow so far, and aims to address some of the causes, like troublesome permitting processes for renewables, and skills shortages. It takes almost six years to complete a wind project in Germany; addressing hurdles such as these could be very powerful.

Why Invest in Climate Technology? Why this matters to investors

Why Invest in Climate Technology? Promising Targets: Both the EU and the United States have 2050 net zero targets. Europe’s 2030 renewable energy target is 70%, compared to 37% today, whereas President Biden has announced an 80% 2030 renewable target, from 20% today. Both targets imply a rapid pace of deployment. Both regions aim to produce 10 million tons of green hydrogen per year by 2030.

Why Invest in Climate Technology? A win-win scenario: From an investment perspective, this is not about U.S. companies vs European companies. Many of the key companies set to benefit from the IRA are global. Consider the Danish wind turbine producer Vestas (OTCMKTS: VWDRY) for whom the United States is already its largest market, or the large French electrical equipment company Schneider (NYSE: SNDR), which already makes almost a third of its revenue in North America. These are the same companies that will benefit from an acceleration of the energy transition in Europe. For them, the regulatory competition is a win-win.

Why Invest in Climate Technology? An open question for nascent technologies: The situation is more fluid for nascent technologies where dominance is still up for grabs. Take green hydrogen, for example, which has been identified by all the major economic blocs as essential for achieving net zero goals.

Today is an almost negligible market, but the next 10 years will be critical for scaling the industry. As things stand, the level of subsidy offered through the IRA for green hydrogen production is irresistible.

Why Invest in Climate Technology? The impact of supply chain fragmentations: Geopolitical concerns have been an important accelerant for the energy transition over the last 12 months (on both sides of the Atlantic), but is ‘reshoring’ a long-term positive for the effort to tackle climate change? Where technologies and supply chains are already well established, is it actually an efficient use of capital to recreate capacity in different regions? An ultimate consequence could be more volatile supply/demand relationships, and perhaps even higher cost technologies. Investors will have to keep a close eye on regional dynamics.

Why Invest in Climate Technology? The risk of subsidy reliance: On a related point, companies that build assets that are only competitive because of a government subsidy may become reliant on those incentives. As an investor, seek the companies with strong business models and durable competitive advantages, not just those that are benefiting from near-term subsidies.

Why Invest in Climate Technology? Some protection from Chinese competitions? The elephant in the room is that China is already incredibly dominant in a number of key technologies and materials required for the energy transition. For example, more than 90% of solar panels are produced by Chinese companies in Asia, and around 60% of lithium is processed in China. Both the IRA and Europe’s new policies are aimed at reducing China’s role in the clean technology supply chain. This could offer Western companies some respite from relentless Chinese competition.

Why Invest in Climate Technology? Climate Technology Stocks to Invest In

Stem, Inc. (NYSE: STEM)

Stem, Inc combines renewable power and energy storage with artificial intelligence. It offers a product line of smart battery systems and an AI-powered platform to optimize the connections between on-site power generation, grind power and stored power. The company’s customers can leverage the system and potentially save between 10% and 30% on their energy utility bills.

Stem’s Athena platform is billed as the most utilized system in its class. The AI has been ‘trained’ through tens of millions of runtime hours, making it the most effective software of its kind. Stem’s platform is available around the world, and the company’s footprint extends across 75 jurisdictions globally, and Athena is in use with more than 200,000 solar sites, managing over 25 gigawatts of solar assets. Stem estimates that its addressable market can grow to $1.2 trillion by 2050.

Stem is already showing growth, and in 2022 the company recorded a total of $363 million in revenue, up 186% year-over-year and a company record. At the quarterly level, the company’s $156 million top line was up 194% year-over-year. However, Morgan Stanley equity analyst Andrew Percoco had predicted $166 million in revenues for the quarter, and gave 2023 full-year guidance that revenue would range between $550 million and $650 million. The latter forecast compared to $647 million as the midpoint of the consensus analysts’ forecast..

Although shares of Stem are down 53% over the last 12 months, its software-focused strategy is a favorable way to play the energy storage market as a long-term growth driver that is greatly underappreciated. Stem is a key beneficiary of an improving battery supply chain and can be seen as an attractive investment opportunity.

Bloom Energy Corp. (NYSE:BE)

Green hydrogen is made with renewable generated electricity used to separate water into hydrogen and oxygen using a tool called an electrolyzer. Fuel cells essentially perform the reverse operation to convert hydrogen into electricity to power vehicles or the grid.

Bloom makes both fuel cells and electrolyzers. Headquartered in San Jose, California, Bloom creates fuel cell power generation systems that can run on hydrogen, biogas and natural gas, and can be adopted for utilities and the transportation industry.

In 2021, Bloom unveiled an electrolyzer that relies on the same technology as its power generation technology. The company announced that its electrolyzer technology can use the excess heat from heavy industries, such as steel and cement manufacturing, to produce hydrogen with less electricity. That hydrogen can be used to power high-temperature furnaces used in manufacturing processes.

The estimated size of the green hydrogen market is several billion dollars per year. This would make it entirely realistic for a dozen players to reach substantial scale in the manufacturing part of the value chain.

Why Invest in Climate Technology? The Bottom Line

Right now, we are at the cusp of a world-changing shift in the green energy economy, as both social and political sides will have come together to promote a switch from traditional fossil fuels to sustainable and environmentally friendly energy sources. For investors, this shift can open up a plethora of profitable opportunities.

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