The fast increase in interest rates (in a little over a year jumping from 0.25% to 5.25%) and the tightening of lending by regional banks is already having negative consequences in the U.S. Electric Vehicle (EV) car sales as well as adoption by households of decarbonizing solutions like heat pumps, rooftop solar panels and stationary batteries are interest rate sensitive. These hard assets and equipment with long useful lives are mostly acquired using leverage. Despite all these key technologies being eligible for fiscal stimulus from the Inflation Reduction Act (IRA), complexities in getting the rebates from the government are being ironed out, but it now clear that it will take time until U.S. consumers can benefit from these cash rebates.
While the IRA rebates for homeowners took effect on January 1, the US Department of Energy (DOE) notes that rebates may not be available to buyers until the end of the year and perhaps only in 2024. The cause of the delay is that the $4.3 billion in home electrification rebates will be processed through the state energy offices of the different 50 states. Each state program needs to be designed to enforce the IRA rules on income eligibility, specific technology and reporting requirements.
Biden announces his intention to run for re-election and proposes three impactful decarbonization regulations, but political uncertainty may hurt his ability to execute on them
The U.S. Environmental Protection Agency (EPA) is proposing new rules that would limit GHG emissions for the over 3,400 coal and gas fired power plants in the U.S. (as well as future plants), that last year produced ca. 60% of all the electricity produced in the US. All fossil fuel burning plants would have to capture or cut all their CO2 emissions by 2040. The additional two plans call for a sharp rise in EVs, as well as a control of methane leaks in oil and gas wells.
The EPA also in April proposed extensive emissions cuts for new cars and trucks through 2032, which could accelerate the electrification of new vehicles, to over 2/3rds of all new ones being EVs within the next 10 years. The third rule was announced by the EPA in March, designed to force oil & gas E&P companies to find and stop methane leaks at new and in operation wells, pipelines and stations. The agency would also fine emitters $1,500/ tonne which would be effectively the first U.S. greenhouse gas tax. There will be material political pushback from Republicans; environmentalists are emphasizing the need for the administration to move fast so it can finalize the new rules by early 2024, to minimize the risk of a future Congress or president to be able to revoke these green regulations.
Enphase and the trilemma for the U.S. behind the meter solar acceleration
The producer of microinverters, a key technology that goes together with solar panel installations, is a company well rated by many analysts. Solid management, healthy capital structure, well positioned in a fast growing space and with solid IP and technologies. On April 25th Enphase reported 1Q23 results and brought the solar market down with it, with its shares dropping ca 25% after results were released. Enphase’s revenue went from $441 million in 1Q22 to $726 million in 1Q23, but a deeper look shows disappointing figures for the U.S. market.
In America their top line decreased by 9% in the quarter. A change in rules in California, where ca. 38% of all solar rooftop panels have been installed in the U.S., is the culprit. In December last year, California passed a new rule, referred to as NEM 3.0 that replaced on April 14 the previous net metering system. Net Energy Metering (NEM) is the rate that solar panel owners earn on the excess energy they supply back to the three California utilities. Under the previous rule, NEM 2.0 homeowners would get 30 cents/kWh, and the race was now reduced by 75%, to 8 cents/kWh.
The new rules may promote sales of solar + battery installations, as buyers would be better off becoming more self-sufficient than relying on the grid for their simpler panels-only systems. Although some analysts thought the imminent change in NEM would prompt buyers in California to rush and get solar panels under NEM 2.0, the increase in interest rates and the absence of IRA benefits seems to have not prompted buyers to move faster and the success of the previous net metering rules that helped 1.6 million buildings to add solar rooftops under the previous more benign rules is certainly challenged now.
Under the new policy by adding batteries a payback time could be reduced by 2 to 4 years, off the 9 year payback time under NEM 3.0. But how to accelerate solar rooftop + battery adoption in an environment of higher interest rates, in the absence of IRA cheques and with NEM 3.0 in place?
There is robust green growth beyond the troubled U.S. market
Investors seem to be ignoring the energy transition acceleration beyond the U.S. (more on that below) and not pricing in the top line growth of the key deep green companies, we are observing the deepening of a great green mispricing. The not for profit energy think tank RMI recently posted a short but very powerful article, "The Energy Transition in Five Charts and Not Too Many Numbers." Mitigating climate change, adapting to a warmer planet, bending our linear economies, solving renewable energy intermittency, reshaping buildings & energy & transportation is taking place in Europe and China.
Our view is that a sustainable future is equivalent to the biggest investment opportunity of our lifetime. If that premise holds, we may be in the most inefficient pricing period, a complex one where investors are just failing to see these S-shape curves that RMI refers to unfolding. That means incredible investment opportunities for those with long term horizon, focusing on the right decarbonizing solutions and companies. Further milestones in April showcase the robust prospects for global green growth.
The G7 group met on April 16 and agreed to achieving a "predominantly decarbonized power sector by 2035"
A 36 page document was signed after two days of discussions at a summit in Northern Japan and parties agreed to phasing out unabated coal power generation. Japan’s commitment is relevant as the country still relies on coal for nearly one third of its power generation. The G7 also committed at this event to ending fossil fuel subsidies by 2025.
The "Declaration of Ostend" was signed by a coalition of nine countries in the North Sea
On April 24, by invitation of Belgium, a group of countries including France, Germany, Netherlands and Denmark committed to develop the North Sea into the “world’s largest green energy power plant.” The countries plan to further develop offshore renewables from the North Seas, including offshore wind and green H2. Their collective target is to develop over 120 GW of offshore wind by 2030 and increase the figure to 300 GW by 2050.
The International Energy Agency (IEA) published its Global EV Outlook
The agency referred to demand for EVs as “booming." The IEA forecasts that because of the acceleration of EV adoption, by 2030 ca. 5 MMBD of demand for crude oil would be avoided. More than 10 million EVs were sold in 2022, a figure expected to grow to 14 million by the end of this year. China is where half of all EVs is, also with 60% of all units sold last year but in the U.S., demand for EVs grew 55% last year (even before the IRA kicked in). The adoption is not only in matured economies, as IEA points out the sale of EVs is growing significantly in India, Indonesia and Thailand. Countries with poor air quality are also embracing electric transportation as a way to reduce the toxic tailpipe emissions from internal combustion engines.
Australia’s grid operator released its report on first quarter numbers, with record figures for renewable energy
On April 28, the Australian Energy Market Operator (AEMO) confirmed that renewable sources surged in the quarter to 66% (ca. 4.4% from previous high). The record figures were achieved one year after the new Labour government took power, promising to modernize and decarbonize the grid, cutting emissions by 43% by 2030. In their words, “Australia's renewable energy output surged in the quarter ended March, pushing down energy costs, driving carbon emissions to record lows and helping replace power generated from coal and gas.” In the quarter, wholesale spot prices averaged A$83/MWh, down from A$93/MWh and A$216/MWh from the quarters through December and September, respectively. The report was released the same day that 50-year-old Liddell coal fired power plant was shut down (the site will be used to host a 500 MW in front of the meter battery installation).
Europe shows how fast and steep demand destruction for hydrocarbons can be
The IEA reported the magnitude of the fast drop in demand for NatGas in the continent last year. As the invasion of Ukraine deepened the energy crisis in Europe and caused a spike in NatGas prices, an effort to reduce consumption was seen across the block. Demand for NatGas in the EU fell in 2022 by 55 bcm (or 13%). EU electricity demand fell by around 3% last year (avoiding ca. 14 bcm of gas demand) The IEA points to change in consumption patterns as high prices of the commodity prompted consumers to embrace energy efficiency measures. A mild winter was also pointed out as a reason for the successful reduction in NatGas use.
Carbon Tracker and Ember released a joint paper predicting the end of fossil fuel age
With the gripping title "The Sky's the Limit," the authors share their projection that at current annual growth rates for solar + wind between 15% to 20%, fossil fuels will not be used by the electricity sector by mid-2030, and will not be part of the total energy supply by 2050. In the report several misconceptions are rebuked, including that of energy density and therefore the amount of land needed by a purely renewable energy system. Here is the compelling data on that: “Building enough solar panels to meet global energy demand would take up just 0.3% of land, less than the area occupied by fossil fuels. The world’s largest oilfield, Ghawar in Saudi Arabia, which occupies 8,400 square kilometres, produces the equivalent of 0.9 PWh each year. Building solar panels over the same area would generate 1.2 PWh a year on average globally and 1.6 PWh in Saudi Arabia which is sunnier than average.”
In conclusion, while the acceleration of the energy transition may be facing some short-term headwinds, particularly in the U.S., the direction of travel for all economies is clear. We are building momentum in the acceleration of the electrification of heating and transportation, and renewable energy will successfully reshape the electricity sector. Europe and China are leading the way.
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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Gabriela Herculano
Gabriela (Gaby) Herculano has over 25 years’ experience in finance and in energy. She grew up in Brazil, is also a proud citizen of Portugal and has lived and worked in the U.S., Singapore and the UK. Gaby started her career in equity research, covering the Latin American electric utility sector at Lehman Brothers. After business school, she moved into the buy side, where she worked at greenfield project finance and M&A at energy developer AES Corporation and as an Executive Director at GE Capital’s Energy Financial Services team in London.
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