Green Energy and Technology Predictions for 2023 and Beyond

GreenTech ready for primetime, but not until the end of summer

The best thing to solve high fossil fuel prices are high fossil fuel prices, as the demand destruction caused by high NatGas, oil and coal prices is a huge economic motivation for consumers of hydrocarbons to replace existing boilers, ICE cars, and coal fired power plants for lower emission solutions. Potential Avoided Emissions, the megatons of CO2e not emitted into the atmosphere because a more sustainable alternative replaces BAU, is a positive externality of the energy crisis.

When looking at the share performance of the iClima Global Decarbonization Enablers Index, representing 170 listed companies with products and services that move us away from the unsustainably high-emission way we run our economies, the conclusion is that markets are pricing a “no transition” or a “slow transition.” Analysts are mistakenly interpreting an increase in consumption of coal and a surge in demand for liquified natural gas (LNG) as the world not having alternatives and therefore needing to continue consuming fossil fuels.

However, acceleration in adoption of green alternatives is real. Therefore, our view is that the most relevant, sizable, and impactful investment opportunity of our lifetime will stop being discounted in 2023. The total market cap sum of the 170 companies in the iClima Decarbonization Enablers Index ended the year at ca. $2.6 trillion (roughly the same as the sum of current market capitalization of Saudi Aramco, Exxon, and Chevron). We estimate that by 2030, the value of the true green companies could jump to $40 trillion, a 15x increase prompted by annual investments of $3 trillion towards the energy transition and decarbonization. The two main triggers of the shift from brown value to green growth in 2023 will be the acceleration of the energy transition in Germany and the impact of the IRA in the U.S.

Less pain but no stock gains in the beginning of 2023

There was extreme pessimism in the markets in 2022, and reasons for hope (of a sustainable future) were deeply discounted. We close the year with uncertainty on how much the U.S. Fed will continue to increase interest rates, when inflation will be contained, and if unemployment rates will rise. Markets will continue to second guess the Fed while waiting for more data to show us when the U.S. will enter into a recession and how deep and prolonged it will be.

Meanwhile in Europe, countries will attempt to replenish NatGas inventories without imports from Russia, which can bring back volatility and price increases to energy markets. China’s long awaited reopening post-Covid, if successful, would positively impact its growth. Growth companies will not hit bottom in valuations until the macro scenario is clearer.

Having said that, we expect material further acceleration of top line growth in several companies benefiting from demand destruction of fossil fuels combined with the IRA stimulus. In a “risk-off market,” investors will want hard evidence of not only revenue acceleration but also a path to profitability. Therefore, our prediction is that it will take 1Q23 and 2Q23 earning releases for investors to then price in the green cash flow. Investors will however be discerning; the era of the rising tide from quantitative easing raising all boats irrespectively has ended. Hypergrowth is great, but profitability is better and the green companies with both are likely to rally first (that is why Enphase continues to demonstrate solid share performance).

The Inflation Reduction Act (IRA) kicks in and changes everything

GreenTech can save us from climate change, with a little help from Uncle Sam. The IRA bill was able to leverage successful policies in European countries. Research shows that "not all subsidies are equal," as consumers have a strong preference for point-of-sale discounts as opposed to fiscal stimulus via annual tax return filings. The IRA earmarks a total of $369 billion of investments into energy security and climate change as follows:

• $161 billion as fiscal stimulus for clean electricity
• $100 billion to make clean technology and solutions more affordable
• $75 billion for environmental conservation
• $33 billion to support U.S.-based clean-tech supply chain development

The full impact of the bill will be seen in the next year. Some of the key incentives for clean vehicles benefiting lower or middle-income individuals are up to $4,000 in consumer tax credits to buy used clean vehicles, and up to $7,500 in tax credits to buy new clean vehicles in 2023, with a direct upfront discount starting in 2024. For residential clean energy, the credit applies to American homeowners and renters for the next 10 years, with a 30% tax credit towards rooftop solar, geothermal heating and battery storage.

The IRA will transform the U.S. buildings sector, as retrofits and new developments will converge energy efficiency, mobile and stationary clean energy storage, and vehicle electrification. It will also change green financing processes, as previous legislation had the Investment Tax Credit (ITC) and Production Tax Credit (PTC) used by the asset owners only, which gave rise to complex “tax equity” investment structures. The IRA introduces a credit transfer provision so that taxpayers that invest into one of the solutions can transfer their tax credits to an unrelated person for cash.

In 2023, the new language is likely to accelerate and create flexibility in project financing. In terms of consumers, the IRA puts individuals at center stage in adoption of the solutions and targets immediate savings as the main driver prompting the transition to lower emission alternatives, adding to fossil fuel demand destruction. Lastly, the bill turbocharges green H2, giving a $3/Kg production tax credit that will immediately bring green H2 to parity with blue H2.

FID will be a key acronym

Reaching Final Investment Decision (FID) will be critical in 2023. Lending in 2022 continued despite interest rate increases as banks that lend to infrastructure projects did not stop underwriting investments, but public market issuances came to a stop during this period of increased hawkishness. Developing renewable energy projects under project financing structures requires many elements to be successfully in place before the financial commitment to move forward with a project is secured. Negotiating land agreements, sourcing equipment and construction (Engineering, Procurement & Construction, or EPC, contracts), obtaining grid connection, getting full permits, and sourcing financing are the required conditions for developers of utility scale renewable projects to reach FID.

In 2022, inflation, supply chain issues and rising base interest rates precluded many developers from achieving targeted Internal Rates of Return (IRR). More expensive equipment and higher costs of capital, when renewable energy tariffs are expected to remain flat or keep going down, did not equate to FID in many cases. However, in 2023 we expect EU and U.S. regulators to alleviate bottlenecks to the permitting process, supply chain issues to improve, and cost of capital to stabilize, translating into a positive environment for the 2,400 GW of renewable energy projects to be developed by 2027.

Back to a (green) future, with security as a goal

Our objective interpretation of available data is that persistently high energy costs combined with fiscal policies promoting green solutions are already encouraging an energy transition (the increase in uninvestable fossil fuel E&P is a risk, but with a good chance of not materializing). This new economic phase requires a completely different investing mind-set, where “the best defense is offense” adage holds. Allocating to broad portfolios aligned with green growth through companies that have relevant solutions, while being aware of all the risks involved with overexposure to industries marked for obsolescence (like oil drilling and coal mining) is key.

We see investment opportunities in i) clean energy production and storage, with an emphasis on distributed behind-the-meter solutions; ii) food waste reduction & water security; iii) reuse & recycling; iv) energy efficiency and v) electric transportation as some of the key solutions poised for hypergrowth in 2023. The common denominator that will make companies overdeliver on growth and margins next year is cost. The need for security and predictability of expenses will prompt buyers to embrace efficient use of electricity, water, food, materials and transportation.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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