Why we like it
First it’s important to note that if renewable energy projects take off, increased battery materials demand will follow, which is why we are following this macro theme closely.
In addition to the transition to electric vehicles, the global transition to renewable energy forms part of our belief in the boom of battery materials.
We believe the global “energy transition” to renewables is just as much about energy security as it is about the environment.
In 2022 the Albanese government legislated for Australia to reduce its carbon footprint by 43% by the end of the decade - to do this Australia will need to have an ~80% renewable energy mix.
Other countries around the world, in particular in Europe and Asia, have committed to similar renewable energy targets.
We believe that in order to achieve these milestones, renewable energy projects that are at or nearing development will need to be fast tracked, funded and brought online.
In 2023 we are expecting tax concessions, government funding, legislative support and permit approvals to be issued in the year to meet the ambitious targets - helping renewable energy projects progress.
We think that in Australia in particular, renewable energy projects provide an attractive opportunity for investors riding the coat-tails of big institutional capital that have mandates that require them to invest in renewable energy projects.
That said, with the cost of capital increasing, investors will need to be more selective about the projects that get funding and consider the inflationary effects that increasing commodity prices have on the ultimate economic viability of the projects.
What the analysts say
Albert Cheung, Head of Global Analysis, BloombergNEF says that the signs are good for 2023 and beyond.
We know the transition is going to accelerate. We know the capital is there (albeit pricier than it used to be), and policy makers are shifting their attention away from vision and goals, towards execution and delivery.
However, he does highlight that the move to renewable energy now exists under the backdrop of “energy security”.
Long term, renewable energy aligns with energy security goals, but short term, it is fossil fuels that provide the reliability needed for a secure energy supply chain.
Cheung argues energy security will accelerate the transition to renewable energy but notes that companies will move operations to wherever the energy is cheapest with multiple companies downsizing European operations due to energy costs (source).
Black Rock, the leading hedge fund leveraged to the renewable energy transition, suggests that the global transition could accelerate, citing the Inflation Reduction Act and RePowerEU plan as key drivers of investment.
However, the fund does recognise that if the transition between fossil fuels and renewables creates energy shortages (as seen in Europe) it could cause volatile inflation (source)
What is the Bear Case
Renewable projects, in particular solar and wind, require massive amounts of land. This means that projects will need to secure important environmental approvals and ‘social licences to operate’.
There have been a number of projects that have been delayed or cancelled altogether due to environmental concerns - which put governments in a precarious position to achieve net zero targets.
Recently, the CEO of Rio Tinto described this dilemma at the World Economic Forum in January:
“You actually first have to acquire the land, you have to get working with Indigenous people, you have to go through the cultural clearance of sites.
“We’re used to big sites in mining, but quite frankly mining sites are small compared to the scale of these parks; and the world has not really done this at scale yet.
“That’s why I think sometimes we’re fooling ourselves a little bit on the timeline. It’s going to take time.”
We have seen two major renewable energy projects in Australia falter in the last few months, with the collapse of Twiggy Forrest's Sun Cable, the ambitious solar farm to power Singapore (source), and further delays in the Snowy Hydro 2.0 project (source).
With the increasing cost of capital, and inflationary pressures from increased commodity prices, there is always a risk of a slowing of expenditure on renewable energy infrastructure projects.