The clean energy sector has lately been struggling, with higher interest rates and a weakening economic outlook outweighing considerable backing by the Biden administration. The iShares Global Clean Energy ETF (NASDAQ:ICLN), the world’s largest green energy ETF and a catch-all bet on clean energy, has lost 4% in the year-to-date compared to a 10.3% gain by the S&P 500. The solar and wind energy benchmarks are not faring much better, either, with Invesco Solar ETF (NYSEARCA:TAN) down 2.9% YTD while First Trust Global Wind Energy ETF (NYSEARCA:FAN) has only gained 2.6%.
Clean energy projects tend to be highly sensitive to interest rates because they require developers to borrow lots of capital up front to build projects. To make matters even more complicated, the cost of electricity generated from renewable energy tends to be impacted much more by rising interest rates compared to electricity generated from fossil fuels. Indeed, a 2020 analysis from the International Energy Agency found that a 5% rise in interest rates increases the levelized cost of electricity from wind and solar by a third but only marginally for natural gas plants. These are the main reasons why cash poured into companies focused on renewable energy, electric vehicles, batteries and hydrogen producers when interest rates were low but the funding gusher has lately slowed to a trickle as interest rates continue increasing. Startup electric-vehicle makers such as Lucid Group (NASDAQ:LCID), Fisker Inc. (NYSE:FSR) and Rivian Automotive (NASDAQ:RIVN) have been particularly hard hit with their shares tumbling this year as the companies scramble for market share in an increasingly crowded space.
The renewable sector has not been helped by the sudden collapse of Silicon Valley Bank.
SVB was popular in the renewables world for its crucial role in supporting small-scale projects, including community solar projects which other institutions shunned due to the onerous legal and tax paperwork required to advance them loans.
“Since deposits were guaranteed, the risk has moved from small, early-stage companies that might have struggled to make payroll, to those that might be reliant on the bank’s credit facilities for infrastructure projects,’’ Mark Daly, head of technology and innovation at BloombergNEF, has said. According to BloombergNEF, it’s not yet clear how much financing SVB was offering to community solar developers. However, SVB’s website says it has committed $3.2 billion to innovation projects in clean energy, was leading or participating in 62% of financing in U.S. developments and had more than 1,550 customers in the broader climate technology and sustainability sector. Related: Small Oil Moves In Where Big Oil Moves Out
BloombergNEF has estimated that between 2020 and 2022, SVB financed ~$357 million of residential solar, excluding community solar, by no means an insignificant amount.
But it’s not all doom and gloom, with the clean energy sector enjoying a period of ample government backing.
Last August, the United States Congress passed the Inflation Reduction Act, hailed as the most important climate legislation in United States history. A major goal of IRA--the largest federal government spending increase on alternative energy in U.S. history--is to strengthen energy independence, reduce dependence on Chinese imports, and reinvigorate the industrial sector.
“The act will immediately spur private investments in production capacity across the solar supply chain, including batteries, helping to create thousands of manufacturing jobs and support our energy independence," Abigail Ross Hopper, president and chief executive of the Solar Energy Industries Association, said in written remarks after the act was passed.
The IRA is expected to provide some $1 trillion worth of incentives for clean technologies, and drive trillions more in investments. According to the American Clean Power Association, IRA could more than triple clean energy production, cut emissions by 40% by 2030, and create 550,000 clean energy jobs.
But the economic impact is even bigger: the Blue Green Alliance has predicted that the IRA could add 9 million jobs in the next ten years while Energy Innovation modeling projects the IRA will increase GDP nearly 1% in 2030. Meanwhile, Credit Suisse has predicted that the legislation could become America’s most significant investment in clean energy manufacturing and leverage tax dollars to generate roughly $1.7 trillion in new investment within a decade.
“Capital is very much still flowing into quality companies,” Shayle Kann, a partner at Energy Impact Partners. Has told the Wall Street Journal.
The Biden administration has also continued to support the domestic solar industry.
Last June, Biden waived tariffs on solar panels from Thailand, Vietnam Cambodia and Malaysia in a bid to create a "bridge" while U.S. manufacturing ramped up.
The White House is firmly opposed to the attempt to overturn the waivers by Congress, pointing to an increase in domestic solar production as a sign that Biden's policy has been successful.
"This legislation would sabotage U.S. energy security. It would undermine our momentum in creating a massive new domestic industry. It would sideline workers who are fired up to build these projects and operate them across the country," Ali Zaidi, Biden's national climate adviser, has told Reuters.
The United States is on track to grow domestic solar panel manufacturing capacity 8-fold by the end of 2024, an official has told Reuters, adding that Biden will not issue an extension on the tariff waivers because domestic manufacturing has taken off.
"Given the strong trends in the domestic solar industry, the President does not intend to extend the tariff suspension at the conclusion of the 24-month period in June 2024," the White House said in a "Statement of Administration Policy" obtained by Reuters.
Republicans in Congress, sometimes with the support of Democrats, have frequently used the Congressional Review Act to block Biden administration regulations. Both chambers passed a resolution this Congress to eliminate a rule from the EPA and the U.S. Army Corps of Engineers to define the waters that fall under protection of the Clean Water Act. Biden vetoed that measure, and another about investment and the Labor Department but signed in March a resolution to block Washington, D.C., from overhauling its criminal laws.
Meanwhile, a growing boom in EVs and the lithium-ion batteries that power them is showing no signs of slowing. Some 47 major new EV projects adding up to an estimated $49 billion in capital investment in the United States have been announced since the IRA was passed. Global EV sales are expected to continue expanding at a brisk clip, with the International Energy Agency estimating 35% growth for the current year.
By Alex Kimani for Oilprice.com
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