Rates + Regulatory Overhang Weighing on Cleantech Stocks

Given recent cleantech weakness across the globe, I thought it made sense to summarize some of the key trends/themes here. None of this is investment advice, simply market observations and all views are personal.

The two points I’d emphasize are the two Rs:

1. Rates overhang: Higher rate environment coupled with decelerating demand (depending on market) has meaningfully compressed valuations and weighed on performance globally
2. Regulatory overhang: IRA repeal looks unlikely but aspects of the bill that will be scaled back under republican leadership are namely federal loans/grants, other legislative impacts (UFLPA, AD/CVD, etc.) can also have impact trajectory of industry growth

Rates & YTD Performance

• Rising interest rates, risk-off sentiment, and incrementally negative data points out of recent investor conferences are weighing heavily on clean tech stocks. Even though many of these companies remain secular beneficiaries of legislation and broader energy transition tailwinds, names have fell out of favor due to near-term headwinds (e.g., channel inventory issue in residential solar in US and Europe, anticipated EV demand weakness in China impacting lithium spot prices, etc.).
• To look at performance/valuation metrics, I’ll use the top clean energy ETFs/Index
  • iShares Global Clean Energy ETF (ICLN) based on the underlying index of S&P Global Clean Energy Index (STRGTCED)
  • Invesco Solar ETF (TAN) based on the underlying index of MAC Global Solar Energy (SUNIDX)
• Top clean energy ETFs vs. the 10YR and 30YR are plotted below:
  • Falling rates led to a rapid rise in price from 2018-2020
  • As rates rose, prices have since declined rapidly 2021-2023

• Looking back over the past 5 years, FY+1 valuation multiples expanded greatly in the period after COVID to meaningfully above index multiples, and have now compressed to at/below index multiples
  • FY+1 P/E went from >30x in 20/21 to ~<15x now
  • FY+1 EV/EBITDA went from >15x in 20/21 to <10x now

Regulatory Overhang

• This section/area is more US-specific. Other factors playing into weakness might be the upcoming 2024 presidential election and the chance of Republicans taking back the presidency and senate. This prospect has also made investors more hesitant on the sector given concern around a potential repeal of the IRA tax incentives that meaningfully benefit many the growth profile of cleantech companies exposed to the technologies that receive benefits (e.g., solar, hydrogen, CCUS, SAF, etc.)
  • This explains why even clear beneficiaries of the tax incentives (e.g., FSLR and ARRY) are flat on the year despite positive outlooks assuming they receive the tax incentives
• By way of background, The White House reports the IRA + CHIPS + IIJA acts resulted in $221BN towards EV & Batteries and Clean Energy (mostly solar supply chain manufacturing facilities); state fact sheets here

• I view a full IRA repeal as unlikely near-term, due to several factors:
  • Biden presidency and democrat-controlled senate through 2024
    • Republicans would likely need to also flip the senate in 2024 to do a broad-based repeal
  • Many of the IRA benefits have flowed to Republican states, meaning that to do a broad-based repeal, republican members of Congress would need to claw back announcements/jobs in their districts. See below visuals:
    • Sep-23 Generation Impact Report: Operational + Announced Plants to Produce Batteries for EVs

• May-23 Climate Power: Clean Energy Investment & Jobs by State (snapshot)

• Feb-23 Guardian: IRA Climate Investment Per Capita – By State

• Jan-23 WSJ: Utility-scale Clean Power Capacity in Congressional Districts, by Party

• Aug-23 Navigator: Sample poll where IRA themes remain popular amongst Americans
  • One can definitely nitpick the nature of the poll question below vs. true support for total federal outlay on these topics

• Other regulatory overhangs impacting cleantech include:
  • Enforcement of the UFLPA, which has resulted in prevention of imports of solar panels and batteries from certain Chinese entities/regions
    • Continued enforcement and expanded efforts may result in Chinese imports of solar and batteries to drop off in future years
  • Residual impacts from the Department of Commerce Anti-Dumping/Circumvention investigation which impacted module imports from several Southeast Asian nations
    • As a reminder, Biden vetoed congressional efforts to overturn his 24-month solar tariff waiver earlier this year and that can reverse under Republican leadership

US Ticker List and YTD Performance:

• I’ve bucketed some ‘Cleantech-exposed’ names in the US by category – these are admittedly broad and not exhaustive. I could debate inclusion/exclusion but showing for illustrative purposes and to show YTD performance
• Performance varies greatly by subsector:
  • Electrical equipment, EPC/Construction/Engineering, and Water have performed well (exposed to other sectors beyond cleantech)
  • Renewable Developers/Utilities/Infrastructure, Solar broadly, Storage, Lithium, have performed poorly (more uniquely focused on cleantech)