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December 6, 2021
As December starts, it is time to review the year and look ahead to 2022. One of the most relevant events of 2021 was the Conference of the Parties in Glasgow now that the US is back to Paris Agreement and 90% of the world’s GDP has committed to Net Zero. COP26 will be remembered as the COP where the private sector stepped up to the plate. There were three ways this was very visible.
Firstly, was the emphasis on innovation. I was invited to present at the Blue Pavilion, invited by Mission Innovation. The United Nations Framework Convention on Climate Change wanted us to share our findings on the relevant climate change solutions and our quantification in terms of annual potential avoided emissions. The private sector was very well represented, discussing “how”, committing to milestones. A second striking piece of evidence were the commitments made by the finance sector. Mark Carney had a big role in this. The former Governor of Bank of England launched the Glasgow Financial Alliance for Net Zero (the G-FANZ), a consortium of over 450 financial institutions that are aligning their lending and investing processes, committing to finance over $100 trillion in investments. Please remember this figure: $32 trillion is the amount estimated as needed in the next 10 years. A third piece of evidence was the focus on data. Mark Carney also announced a much needed standardization of disclosures and reporting. The International Financial Reporting Standards Foundation (IFRS), is establishing a new International Sustainability Standards Board (ISSB) which will have mandatory rules on climate change disclosures. Data is key, as the saying goes, what gets measured gets managed. This is also a very relevant development with huge implications for the private sector.
As momentum has been built, a big consequence for 2022 is that it will be the year where we will see a massive acceleration of the transition. Let me further elaborate on what we think is likely to happen:
1. 2022 is the year that marks the “end of the beginning” and the “beginning of the end”: The US Infrastructure and the Building Back Better bills are part of the momentum creation, as well as the commitment of India and China to reach power sources from renewable energy of 50% and 25%, respectively, by 2030. 2022 will mark the end of the beginning for the green growth companies. No longer seen as concepts or niche solutions, but proven technologies that will grow exponentially and replace and substitute the brown BAU predecessors. So that means 2022 is also the beginning of the end for fossil fuel.
2. The most unprecedented value creation phase will start: Climate Policy Initiative has the best tool to track investments towards climate change solutions. CPI estimates that $632 billion were invested in 2020. Therefore, we do expect to see a massive jump to the $3.2 trillion annual investment level that GFANZ is committed to finance. This will translate into an unprecedented value creation. As a reference, the post World War II Marshall Plan was a $114 billion in 2020 equivalent dollars and pales in comparison. So what does this mean? Two things. First, the expansion of the value of the companies that sell low carbon alternatives. This higher annual investment will expand the market cap of the companies that provide climate change solutions. Our iClima Decarbonization Enablers Index is currently at a $3.7 trillion total market cap. We estimate that this universe of climate change solution providers can be worth above $100 trillion in 10 years, a 25x growth. Second, the multiplier effect of spending can create global economic growth, support a sustainable green GDP growth that has the potential to benefit economies in a more equitable way (more on de-globalization below).
3. Next year many climate change solutions will move up in the “S” shape curve: Many companies are moving from emerging phase to growth phase in terms of the so called “S shaped” adoption model. The implication is that several companies will get closer to the important milestone of posting positive EBITDA numbers and more robust profitability levels.
4. Having said that, the coexistence of green growth and brown value will persist in 2022: The market cap of the top global 160 oil & gas names adds up to almost $6 trillion. These companies trade at an EV/EBITDA of 8.5x, a PE of 17 and have a dividend yield of 3.7%. A lot of investors see oil & gas companies as cash cows that can distribute a lot of dividends in the next few years and also deploy material capex and reinvent themselves. We think there is great risk in betting on the incumbent fossil fuel names and 2023 will be the year where it will become very clear what companies are succeeding in transforming themselves and those that will fail. In 2022 we will see the intensification of the clash of the titans, as big oil fights with big grid for market share of electrification. Again, our view is that the real winners will be the new, pure green players.
5. Deflationary long term benefits of the two key technologies, namely solar panels and batteries, will continue: In 2022 we will see EV achieve parity to ICE and will see Lithium Ion pack price batteries in the $90/kWh range. On the other hand, brown inflation is likely to continue. NatGas, coal and oil will continue to go up. Jeff Currie at Goldman Sachs expects around $100/barrel for end of 2022, so more price pressure from current $77/barrel.
6. 2022 is the year we will see massive investments in the West: China as we know has been leading the infrastructure and manufacturing investments in the last 30 years. Green transition will bring a DE-globalisation, and more western countries will invest heavily in key green technologies, from battery manufacturing to green hydrogen. China produces around 70% of all solar panels and also over 70% of all lithium ion in the world. On a stand-alone basis that figure leads to the erroneous notion that China is decarbonizing the West. In reality, around 50% of all renewable energy installed capacity on the planet is in Asia. China is also where close to half of the EVs on the planet are sold. China first and foremost is decarbonizing China (and Asia more broadly). As the west is more investible than China, the increase in investments in green technologies that we expect to accelerate in 2022 will be good news for investors.
2022 will be the year that marks both the “end of the beginning” and the “beginning of the end”
Having said that, the coexistence of green growth and brown value will persist in 2022
Five New Acronyms That Will be Much Talked About
A few acronyms will become household ones, in particular in the US. Let’s look at the intuition behind the key trends. Uber, Lyft and Airbnb disrupted large industries in a short period of time. These companies created entirely new revenue opportunities for people who owned cars and properties and had no way to monetize those assets. These three cases make a compelling parallel to some companies that we are very excited about for 2022. Why? Because the companies that we think will have a particularly exciting year are companies that are optimising other existing assets for the asset owners, namely solar panels, electric vehicles, and stationary batteries.
Let me start with V2G, Vehicle to Grid. As you can see in our Infographic, around 90% of all current battery storage is mobile, inside cars. That is why California has passed legislation, the State Law 676 that calls for the maximisation of feasible and cost effective EV & grid integration by 2030. California, always leading in cleantech driven solutions, wants to unlock EVs as a strategic grid source. California based Nuvve is the only listed pure player in the V2G space. Nuvve entered into a partnership with BYD, the giant in electric mobility with 65,000 electric buses deployed worldwide, also in our universe. Together they are targeting medium and heavy duty V2G-enabled BEVs, starting with transit buses and coaches and school buses. School buses is an exciting application and that is part of the reason we also see tremendous opportunity in 2022 for Proterra which is also Calfornia based. Proterra is a 10-year-old company that has sold over 1,000 buses in North America. Proterra offers turnkey solutions, so a lot of high margin software based services wrap the commercial bidirectional electric vehicles and the high power charging systems.
EVCN, Electric Vehicles Charging Network and VGI, Vehicle Grid Integration will be much talked about in 2022. EV charging networks are a key piece of infrastructure for the 21st century. Our Distributed Generation index is the only index that represents charging networks as a source of optimization of those mobile clean energy assets (that as we saw, will amount to above 70% of all batteries on the planet). EVgo, Chargepoint and Blink are all US players in the space and part of our benchmark.
Virtual Power Plants or VPPs is another acronym that will be very popular in 2022. The same way Nuvve aggregates mobile clean energy storage, companies like Sunrun are starting to aggregate the behind the meter stationary storage assets. In other words, the owners of solar rooftops + battery systems can monetize those assets and make money by making their dispatchable clean energy available to benefit the grid. Tesla is not yet a massive green energy player (energy is around 9% of total revenue) but it will become the largest global distributed energy company, as Tesla has both behind the meter and in front of the meter solutions, hardware to software. For example, in July Tesla partnered with Brookfield Asset Management, the Canadian group where Mark Carney is Vice Chairman & Head of Impact Investment, to develop a new neighbourhood in Austin, Texas, where all homes will have Tesla solar roof tiles and Tesla Powerwall battery storage. Tesla has entered the Texas market as an energy provider and will be optimizing the energy assets of this new Austin development.
Long duration energy storage (LDES) refers to the ability to store energy above 4 hours. Stem is a company with both in front of the meter and behind the meter LDES solutions. Stem’s key product is a software that uses Artificial Intelligence to optimize energy use and maximize the value of distributed renewable energy that their clients own. The company is already focusing on integrating LDES to the benefit of their clients. Solving intermittence will not only be about lithium-ion batteries, that is why we are excited about Bloom Energy, a company that designs micro grids based on fuel cells, already a hydrogen based solution example.
Massive Tail Winds for this Massive Megatrend
In conclusion, we could not be more excited about the monumental value creation that the acceleration of the transition to a low carbon economy will bring. The ideas we provide above and the evidence of what is to come, as well as a few names that are leading the transition and are likely to be much talked about in 2022, gives a glimpse of the uniqueness of this investment opportunity.
We believe our methodology and the laser focus of the research we do allows us to find the true winners of this transition. Please stay tuned for more of our research and views.