Season 5, Post 8: “There’s a piece for everyone”

These were the words used by Mark Widmar, Chief Executive of First Solar, when talking recently about the opportunity that the US Inflation Reduction Act (IRA) offers alternative energy businesses. Roughly a year on from Russia’s invasion of Ukraine, energy security remains front of mind for almost all governments. It is being reflected in policy and progress is encouraging, but much still needs to be done.

Last year saw global capital expenditure on solar and wind assets exceed investment in new oil and gas wells for the first time ever (per Rystad Energy, a consultancy). At the same time, the International Energy Agency (IEA) recently revised upwards its renewable energy forecasts, predicting that an additional 2400GW of capacity would come online over the next five years, 30% higher than last year’s five-year rolling forecast. First Solar says its capacity is sold out at least until the end of 2025, while within the wind arena, Vestas has a €49bn+ backlog. If it’s not energy security that’s driving demand, then it’s environmental considerations. Countries equivalent to 90% of the world’s economies have now committed to net-zero targets.

What’s not to like then? Henrik Andersen, the Chief Executive of Vestas called for “long-term policy certainty” and a “simple and fast permitting process” on the company’s recent quarterly earnings call. Anecdotal evidence suggests that over five times as much wind capacity is waiting for permits in some European countries as is under construction currently. The IEA suggests that renewables generation could rise by 25% by the end of this decade were bureaucratic and financing barriers removed. The solar industry faces some similar challenges, with proposed solar interconnection plans in the US now reportedly taking twice as long as they did a decade. Several businesses, including First Solar, note that not all the incentives embedded in the IRA are fully clear yet, which may impede alternative energy progress in the near-term.

Change takes time and often longer than even the most optimistic may be willing to believe. Against this background, we see it logical to embrace a range of energy solutions – including liquefied natural gas – in the near-term, a stance we have advocated consistently since 2011. Bigger picture, do not forget the sobering statistic from Bloomberg-NEF that in order to get to net zero by 2050, the world would need to spend annually about ten times more than current levels on carbon-free energy solutions.

3 March 2023

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The above does not constitute investment advice and is the sole opinion of the author at the time of publication. Heptagon Capital is an investor in First Solar and Vestas. The author of this piece has no personal direct investment in the business. Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise