Reading a handful of things over the weekend led me to a couple of thoughts for today’s note.
A common refrain is “Renewables are just virtue signaling. They’re not economic without subsidy.”
Actually, there’s a reason that the vast majority of 2020 new capacity build was expected to be renewables – ~78% to be more precise – according to the US EIA. And it’s not that utilities around the US (including MidAmerican Energy, Berkshire Hathaway’s energy business) are virtue signaling. They’re looking at the economics and realizing that they’re compelling.
And this reduction of the installed cost of solar year-over-year shows no signs of abating according to Woods Mackenzie – especially in the utility-scale solar segment – though the dramatic reduction in panel prices is likely mostly in the rear view mirror.
While “green” investments grew in 2020 by 9% despite the pandemic, the aggregate USD invested in renewable generation actually fell by 20% to $49.3B according to Bloomberg NEF in their annual review. China was at the top of the league tables for dollars installed with the US a distant second. In an ironic twist, the import tariffs on solar panels from China has led China to add new renewable capacity at almost twice the rate of the US. It’s perhaps noteworthy that the Chinese economy reportedly grew at 2.3% while the US contracted at -4.3%. Conversely, if the tariff were to be taken off, there’d be an immediate .20/W drop in delivered panel costs that would drop almost entirely to the bottom line of any project.
The dollar amounts invested are misleading in that the cost per MW installed of renewable power declines by a nominal amount every year so comparing year-over-year dollar amounts obscures the MWs installed. With that said, the US market clearly contracted during 2020 due primarily to a struggling onshore wind industry. In a sense, solar continues to eat the renewable world though off-shore wind is putting up a decent fight.
On the other side of the calculus from our perspective, EV vehicles & infrastructure have exploded in the last year. Nikola, Chargepoint, and Proterra, Rivian – just to name a few. While there’s a lot of opportunity in the electrification of transportation, it’s not immediately clear to us whether these valuations are well supported or merely aspirational. Hopefully, companies will grow into their valuations in short order.
Merging Environmental & Social Goals
Reading this opinion piece on CNN over the weekend – This town powered America for decades. What do we owe them?
Got me thinking about all the places that are in desperate need of economic revitalization. We have the tools to build back better the economic engine of places like Gilette, WY. Even as it takes a while for things like 3D printing to propagate through society to help ameliorate job losses like those suffered in coal country, good stewards of investment capital can help catalyze that change. While we driven by financial returns first and foremost, our conviction is that aligning investment capital with both ESG and SDG goals ultimately leads to higher risk adjusted returns.
So in the context of Gilette, we see a chance to bring investment expertise to bear in improving the lives of marginalized Americans who are looking for a better job and a better future for both themselves and their children rather than the status quo. We think these opportunities are abundant at this pivotal moment in America’s history and that they will prove to be the turbo-charger that propels the US into it’s next growth phase as we rebuild our aging infrastructure.